It is no secret that Europe and most of the world is heading towards a recession. As the market takes a down turn, many tech companies have received notes from their boards and investors to rethink their strategy over their coming months. The focus now is not so much about growth at all costs, but how these businesses can become profitable as quickly as possible.
According to Wall Street analysts, a variety of issues are putting a damper on the markets, including the highest inflation in 40 years, rising interest rates, and a strong US dollar, which hurts international corporations since they earn less when converting foreign sales into dollars.
As of May of this year, Big Tech has shed over $1 trillion in value over the last three trading sessions.
With revenue multiples in the tech sector having been reduced in half in the last six months and growth-adjusted multiples much lower, the market is migrating away from hyper-growth companies and toward companies that can create cash right now.
Here are a few ways you can ensure you're on the right track.
Let's start with the getting the basics right. This economic context means you'll need to focus on dimensions where you can actually have an impact on, i.e. internal dimensions.
Focus on your engaged, high LTV customers
Acquiring new customers in this market is not necessarily the right move. Instead, look after your existing customer base and take care of them. Explore strategies that can help you drive more revenue from incentivising existing users to be more engaged, instead of increasing your cost of acquisition for large numbers of new users who won't necessarily remain engaged in the long run.
Shift to Profitability
Vertically-focused B2B SaaS companies with satisfied customers, motivated workers, and consistent year-over-year growth will stand out - and have an opportunity to emerge on top of their competition at the end of the downturn.
Your focus should be on retaining your current customer base. If you lose them, new investments won't truly matter.
Working with customers to understand the challenges they're faced with will help both your business and customers to achieve their goals. How, might you ask?
Assume you don't have Product Market Fit
The market has drastically changed, it is a new world out there.
It is unlikely that shipping the same kind of stuff you did yesterday and will product expected impact. Just as it is likely you'll see your business health metrics negatively impacted.
You're now in a situation where you're keeping your cards close to your chest, trying to hedge your bets. You don't want to be immobilised by what's happening in the market, and here's how you can address that.
Experiment and optimise for confidence
Now is the time to look at how you can experiment (in its broadest sense) and get an increased level of confidence in direction of travel and returns.
This is where product discovery comes in, and building an efficient experimentation practice. Basically, you want to make it easy (and cost-effective) to test a concept, an idea or a change in your product before having a whole chain of people invest their time into building it.
Then play offence
At the risk of sounding counterintuitive, this is not the time to be investing heavily in sales and marketing. The downturn is an external force you cannot control. Instead, as a product leader, you should think about aspects that are within your control span e.g. product strategy, outcomes to prioritise, resource planning, etc.
Understand your capital efficiency
As the downturn sets in and there's higher level of scrutiny on how your business operates, you'll want to have your finger on capital efficiency. Put simply, how much money does your investments actually return.
In a post a couple of years ago, David Sacks put forward an interesting indicator for this: the burn multiple.
As Sacks mentions, this indicator focuses on burn by evaluating it as a multiple of revenue growth.
Having a close look at indicators like burn multiple mean you're focusing on what really matters to the business and ultimately dimensions that allow you to live to fight another day.
It's not all doom and gloom. Downturns are cyclical, and companies focusing on tackling compelling customer problems will secure long-term market differentiation. They’ll come out of this economic era in a much better position to grow sustainably.
Let's not forget that AirBnB and Uber are good examples of companies who were born out of the 2008 financial crisis.
Keep your team motivated
The downturn is certainly a time of uncertainty for the business, and it is also true for employees.
Here are 3 ways you can keep your team motivated through these hard times:
- Provide clarity on business & product outcomes
Have you heard of "power of repetition"? It's a thing!
Do not assume your team know where you're going and how to get there.
They might need you to clarify this, now more than ever.
Make the following super clear:
-> What are our desired outcomes?
-> How will the pursuit of these outcomes help the business thrive?
-> How will the product support these outcomes?
-> How does each team contribute to reaching the outcome?
-> What metrics do we use to measure whether or not we're doing a good job?
- Build out your career path and progression framework to retain your talent
2 things typically happen during these dark times are:
a. Your product talent might feel vulnerable and decide to look to areas less affected by the downturn
b. They feel that they're not equipped to deal with the new external forces at play
A progression framework helps individual team members understand what is expected from them in their current role and in the next levels. It provides clarity and enables team members on their growth journey.
- Provide the training your team needs to level up
Like a few other things here, this might also feel counterintuitive. However, investing in your people during a downturn is definitely the right move. At first, you might have to let go of some talented people for financial reasons, but the team remaining to lead the fight need to be empowered and given the right tools to produce the value you need to live to fight another day.
You might find that sending a team to upskill on a particular dimension ultimately makes a huge difference in your ability to execute and drive growth.