In 2019 our growth portfolio companies collectively grew revenue by 73% and the whole of the budget conversation was about the challenges of growing fast. These included recruiting, onboarding, industrialising sales, growing customer support and developing product. Then as the COVID crisis hit in 2020 a whole new set of risks and opportunities emerged that we hadn’t anticipated – who had planned for lockdowns? There were major changes to spending plans and headcount and the focus became much more tactical than strategic as companies made sure they could weather the storm. Things have stabilised since then but in today’s highly uncertain environment how should you think about the budgeting process? You need to guard your cash, invest selectively in what helps you grow and communicate a positive message to your teams about an efficiency focus.
The only way to fail as a business is to run out of cash. It’s not always fashionable to remind people of this but positive cash flow ultimately is your only important output. Given most growth companies raise money every 12-24 months, as the COVID crisis unfolded in 2020 whether you had a warchest or a piggy bank was largely down to luck about when you last raised. Amazon raised $672m of convertible debt just before the dotcom crash, without which it might well have gone bankrupt when the market tanked. In a similar way, during 2020 the question of which companies survived was also in part a question of luck. Each time there is a recession the startup industry collectively remembers that it needs to make money and have solid metrics to survive. Exiting the recession the companies that do best will be the ones that retain this lesson.
In 2020 especially in the most negatively affected sectors of travel, retail, hospitality and events there were major reductions to spending plans and emergency funding rounds. At the same time every company involved with tele-anything, logistics or healthcare had to deal with an explosion of demand and significant revisions to their plans. There remain significant unknowns, such as how fast vaccination will reduce transmission and deaths or how much new strains of the virus will increase them but the impacts of the associated lockdowns are now clearer. How should companies approach 2021?
Venture backed companies raise cash for growth and not investing it has a real cost, many companies have successfully adapted to a new way of working and selling – allowing them to perform brilliantly despite events. You don’t want to choke off your sales teams when they are performing well and if they continue to do so it will inevitably bring strains onto the rest of the company without investment. I have seen a few teams now where the pressure is in the customer success teams where costs were controlled even as sales resumed. You can stretch those teams for a while during a crisis but they will need to grow if you don’t want things to break.
At the same time if the environment worsens you can’t afford to run out of cash. Take advantage of what you learnt in 2020 about what spend was essential and don’t let the fat creep back in. If you have grown your customer base by 50% in 2020 then it is reasonable to grow the customer success team to make sure retention and upsell stay where they should be. However, don’t let all of your spend grow as it would have done before the crisis and take the chance to re-examine what really is needed to help you grow. Companies always manage to hit their budgeted spending so be careful about what you put in the plan. Make sure that you are equally confident about the budgeted new sales and renewal figures that will drive your incoming cash flow.
Make your base case budget one that would allow you to survive a replay of the worst parts of 2020 but identify the 2-3 areas you would invest more in if you see that customer acquisition teams are performing. In ordinary times growth companies often hit a phase after a growth funding round where the culture shifts and most of the company remembers only the days of plenty rather than the early leaner days. For example, in the early startup days people are happy to get instant coffee because they remember buying their own coffee for work but at some point employees who join a well-funded startup start to complain about the quality of the free coffee machine. A recession is a good opportunity to rekindle the spending discipline of the early days, use this crisis to hone in on what investment really helps the company grow.
Done well the budgeting and goal setting process for teams and individuals ensures top down growth strategy joins the bottom up reality of what each individual delivers for the company. Use this year for a re-examination from top to bottom of how to grow even faster, better and more efficiently than you were doing before the COVID crisis. Make sure you budget so you will not run out of cash if the crisis extends or events worsen and do this based on cost control rather than optimism about sales. Keep a very close eye on sales performance and be ready to incrementally allocate capital to growth teams once you are sure they are delivering. Finally, communicate to your teams about the value of spending discipline this year and be positive about what it means: Your business has the cash for whatever new events come, you are investing where it helps growth and you will build a better company as a result.