Four Tasks for CEOs in 2023
Leveraging The Downturn
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This essay originally appeared in Forbes.
The signs of a looming economic recession are everywhere. The layoffs and lower guidance announced by the large tech companies only confirm what I recently heard a prominent enterprise software CEO say: “Every chief executive has to be in sales mode now, getting on the phone and talking to customers directly.”
The early-stage software industry will not be immune from this environment. Indeed, many start-ups watch with alarm as prospective enterprise customers furiously tighten spending and reduce their appetite for risk. What, then, should an entrepreneurial company do?
The most common advice is obvious: embrace rigorous cost-cutting and extend cash runways. But the genuine need for belt-tightening should not obscure the chance for start-up leaders to take specific steps to reset their companies so they are positioned to seize the advantage and emerge even stronger when growth resumes in 2024 or beyond.
Economic recessions wipe out many promising enterprises. Yet they also open opportunities to reset a business that, in the midst of managing hypergrowth, no one had time to implement. Below I list a few activities that should preoccupy early-stage company CEOs during the current slowdown.
Everyone acknowledges that we are now shifting from a period of “fat” startups to leaner ones. Where does a CEO start?
Most startup companies over time develop product and feature creep – added capabilities that stray from their core, and have marginal added customer value. During hypergrowth, startup engineering teams can’t resist the allure of working on the next shiny object.
The current economic conditions should prompt CEOs to re-rationalize their product roadmaps and develop tighter, more persuasive key customer use cases, dropping things that might be perceived as marginal. Heading in 2023, one has to assume that most enterprise buyers will only be shopping for vital painkillers. Software vendors have to re-focus their offerings back to customer use cases that are clearly indispensable.
Then there is the use of cloud services. The cloud offers easy ways to quickly add and deliver new features. In most software start-ups, cloud has rapidly grown to become the single biggest cost after headcount. During a period of fast growth no one is bothered by the price. Yet the costs accumulate – and they can be breathtaking. At some point, rapidly growing startups have to come to grips with the fact that sometimes they are really just cloud resellers masquerading as software innovators.
The downturn is the moment to take on the drudgery of optimizing cloud spend. Many software product and engineering leaders resist this work because, frankly, it is less interesting than adding new features. But CEOs have to confront how to make the cloud perform at the right price points for their innovation flywheel – and start the march back towards the Holy Grail of all successful software businesses: high gross margins.
"Software vendors have to re-focus their offerings back to customer use cases that are clearly indispensable."
Dig-In on GTM Costs.
When pushed, most early-stage companies don’t really know whether they are underspending or overspending on their Go-To-Market efforts. In an era of growth at any cost, few even bothered to ask. Now, in less certain times, startups must understand how continuous gains in sales and marketing efficiency have a huge impact on operating leverage.
Defining the right GTM metrics is rarely obvious. In the coming year, business leaders ought to dig in and understand what should guide decisions on whether to expand sales capacity: Is it minimum ARR and contribution margin per sales rep? Minimum payback periods and retention of acquired customers? As companies start to plan for their next round of funding, these measurements will become increasingly important — and increasingly scrutinized by investors. Topline revenue growth alone will be less persuasive.
Then there is the matter of the sales reps themselves. In a small company with, say, 8-10 sales reps, losing even two of the best performers can be a significant setback. Company leaders have to set aside time to understand what it will take to keep the best members of their sales team. To keep them from bolting to the next start-up, a plan needs to be developed to use cash, equity, and any special consideration to keep them on the team.
"Defining the right GTM metrics is rarely obvious. In the coming year, business leaders ought to dig in and understand what should guide decisions on whether to expand sales capacity."
Recruit Executive Talent for Your Next Stage.
The downsizing underway across tech firms has brought a rare surge of talent to the jobs market. But in a recessionary environment, small companies may not be able to simply boost the ranks of their teams. Instead, they should use this moment to look ahead and consider what kind of executive talent they might need for their next stage of growth.
In a company still in early evolution, thinking about stage-appropriate teams is difficult. It requires accepting the fact that some of your current leaders might not be the ones to lead a function as the company approaches its next growth milestone. Today’s less-than-tight talent market creates a rare opportunity to engage with prospective leaders who are the right fit to help scale a company from zero to $20 million, $20 to $50 million, $50 to 100 million, or beyond towards an IPO.
The same is true for boards. Start-up leaders should start thinking about the kind of independent board directors who could bring relevant experience and perspective as the company grows. Conversations with directors who might join in 2024 should start now.
"Today’s less-than-tight talent market creates a rare opportunity to engage with prospective leaders who are the right fit to help scale a company."
Deepen Relationships with Future Investors.
Active conversations will also be vital to build towards the next rounds of funding in 2024 and beyond. For many early-stage software entrepreneurs, this is unfamiliar territory. Over the last few years, they have become accustomed to less discerning investors who sought them out and initiated fast funding rounds. The current environment requires more work – and a different approach.
Even founders whose companies show steady revenue and a growing team will need to launch proactive outreach efforts to investors who might consider coming onboard in 2024. Much of this work requires personal connection: identifying a small list of investors with whom you can forge a relationship, introducing them to the technology and the business plan, and keeping them updated on progress. Investors are likely to scrutinize the business and valuation more carefully, ask difficult questions, and feel less pressure to be rushed into an investment decision. But in 2023, nurturing these relationships may prove to be a rewarding use of a founder’s time.
Recessions create opportunities, not just hazards. Startups that take the right steps now will not only survive the downturn but emerge stronger and better positioned when heady growth resumes.