Just a few years after founding my first startup in 2004, and bootstrapping it into a revenue-generating business with about 15 employees, the Great Recession descended on us. Miraculously, the business survived, and I remember thinking to myself when I sold it in 2016, “Hopefully, I won’t have to manage a team through such an incredible downturn ever again.”
Unfortunately, I’m now in the midst of navigating through a period that, in many ways, is even more unpredictable than the one my last company faced more than a decade ago.
The company I cofounded in 2018 just raised $3 million in funding. In a lot of ways, this was lucky timing. Entrepreneurs who are currently fundraising and have limited cash reserves face an enormous challenge. We had plans to open our first brick-and-mortar space, expand beyond our Boston pilot, and hire aggressively. All of these priorities have to be reexamined or delayed as we all hunker down for a while.
As I’ve navigated our team through an extraordinary March, I’ve thought a lot about how I led my last venture through the Great Recession more than 10 years ago and came out stronger on the other side. Here are a few of the lessons I’ve kept in mind from that experience, which I hope can be somewhat helpful to the many founders and CEOs who are considering the best next steps for their startups in 2020.
Make decisive budget cuts, even with significant cash reserves
In the months leading up to the Great Recession, I thought my company was in a financially sound position. The business was funded solely through its revenue, and I made sure we had plenty of cash in the bank.
When I went to the board and presented what I felt was a strong financial position, they laughed. They told me point blank that I hadn’t done nearly enough to prepare for a significant slowdown. Specifically, I hadn’t moved on cutting expenses. I was advised to, “Toss people out of the lifeboat.” I proceeded to make the very difficult decisions that come with slashing budgets.
It turned out my board was right. Even with these cuts, we had some weeks during the Great Recession where we barely made payroll. We were able to survive only because we took decisive action even when it looked like we were in a good position financially.
At my current company, we’re very fortunate that we just closed a round of funding. This doesn’t mean that the business can continue spending at its current levels. While I don’t know how long the current economic turmoil will last, I do know it will have a significant impact on our business in the months ahead. With that in mind, our team has already made significant cuts to every aspect of our budget in the short term in order to ensure long-term viability.
Find a way to keep your superstars
Great people are hard enough to find. Hopefully, your entire team is made up of the best of the best. Keep your superstars. If they’re really on board with your mission, they want to find a way to stay, too.
At a startup, cutting your budget doesn’t necessarily have to mean making incredible layoffs. Between 2007 and 2009, I was able to negotiate with some employees on taking temporary salary reductions in exchange for more equity in the company. At my current company, we’re working on the same efforts.
Taking a temporary pay cut is hard for anyone, but in extraordinary circumstances—like the one we’re currently facing—it may be the only way that you can both hold on to your best talent and ensure the long-term viability of the business.
You can’t ask your employees to take a pay cut and not do the same yourself. Leading by example here is critical for keeping everyone engaged as your business moves forward.
Focus on projects that will position your startup for long-term success
The company I led through the Great Recession sold software to real estate brokers. During that time, we realized that we could push as hard as we wanted, but sales just weren’t going to speed up until the economy started to grow again. We refocused our time on a big project that none of us ever had the bandwidth for when the economy was humming: building a software-as-a-service (SaaS) version of our application.
We launched this product coming out of the Recession, and it turned out to be the flagship product for the entire company. Being able to sell the business in 2016 was, in large part, due to the product development work our team did during the economic slowdown.
At my current company, we’re similarly looking at this unexpected time as an opportunity. I’m confident we’ll do some of our best work over the next few months, and will come out of the downturn stronger than before.
David Friedman cofounded Knox Financial, a fintech company, in 2018. Prior to Knox, Friedman founded Boston Logic and served as the company’s CEO for more than a decade.