Who cares how fast we can scale if we’re not around long enough to do it?
That was our motto at Startups.com since Day One. While it’s a ton of fun to think of grand growth strategies to take over the world, it kinda helps to be solvent enough as a company to see them through (at least that’s what we’ve heard). What we’ve developed over the past decade are essentially two strategies for every major initiative — a “Downside Strategy” where we plan out the worst that could happen and an “Upside Strategy” which considers growth.
Most startups don’t actually do this. Instead, we have basically a growth strategy and then in the back of our minds, we sort of formulate this “Oh Shit! Strategy” which loosely envisions what could happen if this doesn’t work!
The reason a single “upside-only” strategy is such a disaster isn’t that we’re not optimistic, it’s because managing upside is only an option if we’ve already got the downside figured out! Here’s how we approach these.
The Downside Strategy
This is where we start. We’ve acquired 6 funded startups in our history and have done diligence on nearly 100. Every startup has its own set of issues, and when you’re acquiring one, all of those issues become yours overnight. No matter how much diligence you do, you’re mostly blind to what’s really going on until post-acquisition. Therefore, we’ve become particularly adept at formulating really detailed “downside strategies” for what to do when the real $#@! comes to light!
Our downside strategy starts with this question — “If everything goes to hell, what’s our worst-case scenario on cash burn, capital cost, and future opportunity?”
If we launch/buy a startup, we need to know if revenues plummet, or all of our “reasonable” assumptions are false, how much can we absorb in net operating losses, and for how long? What costs (if any) can we cut to get close to break even if we have to? Can we run this thing on a skeleton budget/crew for long enough to figure out our mistakes and restart? If not, that’s a huge problem.
The Details ARE the Strategy
Sadly, most Downside Strategies are just a catch-all “We’ll cut costs.” That’s not good enough. In our forecasting for the downside, we list out every possible cost, every potential impact, and perform a post-mitigation assessment of whether or not we’ll be fit enough to continue if we have to go down this road.
Very often these cost-cutting measures impact people (salaries) and growth capital reserves (marketing) that, if cut, may actually prevent us from getting another shot at this business. Therefore the strategy has to contemplate what our “Re-Growth Strategy” would be to get back in the game with limited resources. Many startups grow and die a few times before flourishing. This is all part of how this crazy game works.
We often overlook this part of the strategy because it’s not fun. No one is crowding around a whiteboard pumped up to talk about what happens when we all get fired! Instead, we want to focus on isolating exactly what our potential challenges are, so we’re not all worried about some amorphous black cloud – we want to know exactly what we’re going to be dealing with if shit hits the fan – and how we’ll make it right.
The Upside Strategy
Even the Upside (Growth) Strategy becomes far more sober when we start to apply some Downside Strategy modeling. Now we start to consider how different variables become a hell of a lot more real. For example “If we have a reasonable acquisition cost, great conversion on our Web site, but can’t get anyone to recur after Month 1, here’s what the business will look like, and here’s what we’re going to have to do about it.”
That latter part “Here’s what we’re going to do about it” is the real strategy, and very few startups think that far ahead. It’s more of a “Here are all of our goals which we hope to hit, and if we don’t, that’s a problem.” That’s not a strategy, that’s just a statement.
A well-planned startup isn’t just about reacting to what might happen, it’s about planning multiple strategies so that when weird stuff happens (it always does) we already have a running start on how to react. A well-crafted downside is the key to having a wildly ambitious upside.