Managing a Startup in Lean Economic Times: To Expand or Not to Expand
May 11, 2023
“Panoramic has a long history of building category-leading companies and creating significant equity value during lean economic times. We have seen that the decision about whether to expand in lean economic times should be based on a deep understanding of the company’s product-market fit and its competitive positioning.” (Mark Buffington)
Managing a startup during lean economic times can be a daunting task.
There’s less funding available, which makes it harder to sustain and invest in operations, products, services, people, and growth. And as the pie gets smaller, the competition for resources becomes fiercer. Startups have to work harder to differentiate and connect with audiences.
Nonetheless, it’s also an opportunity for growth and innovation. When resources are scarce, many startups figure out ways to be more efficient and creative, which can result in new innovations. And because startups are so much more agile than corporate enterprises, it’s possible they can disrupt traditional industries and markets while the ‘big guys’ are figuring out how to steer their enormous enterprises through rough waters.
Knowing how your startup in the current market and competitive context is the critical first step for building the right strategies and tactics to weather the storm and even emerge stronger once the economy bounces back.
The Question of Cash
One of the key questions that many startups face during lean economic times is whether to expand or conserve cash. There is no one-size-fits-all answer to this question. Determining whether to expand aggressively or “pull the reigns” ultimately depends on the company’s product-market fit and its competitive position.
Product-Market Fit is how well a company’s product or service meets the needs of its customers. Companies with strong product-market fit enjoy all sorts of competitive benefits, including revenue efficiency (direct cost to generate $1 of sales), high revenue growth, high win-loss rates, and strong customer retention.
Competitive position is a measure of how a company is positioned in each market vis-à-vis its competitors. Companies with stronger competitive positions generally have higher growth rates, higher win-loss ratios, better customer retention, better pricing leverage, and more financing optionality relative to their competition.
If a startup has a strong product-market fit and is in a strong position relative to its competition, it may make sense to capitalize on opportunities to expand while others are struggling.
The three main strategies for expanding a business in lean economic times include:
- Increasing sales and marketing efforts while competitors pull back spending in these areas
- Investing in R&D to improve product-market fit, expand the value of a product or service to customers, or open new growth markets in the future
- Investing in Strategic M&A to acquire complimentary product features, reduce competitive pressures, and presumably buy growing assets at lower multiples in lean times.
If a company has limited competitive advantages and limited product-market fit, it makes sense to conserve cash. The company should plan to be conservative at least until it can improve its value proposition and relative competitive positioning.
There are several strategies that startups can employ to reduce burn and extend the cash runway:
- Cut costs by renegotiating contracts, reducing non-essential expenses, and finding more efficient ways to operate
- Reduce headcount (even if it is tough to do)
- Plan for extended sales cycles by focusing on building relationships and nurturing leads over time, rather than relying solely on quick wins
- Focus on retention with discounts and other offers, as this can help to keep customers engaged and loyal during challenging times
- Make tough decisions related to strategy pivots, even off-boarding customers that are not in your long-term Ideal Customer Profile
Even if the startup is well-managed, if it lacks a discernable competitive advantage or has limited product-market fit, it should extend its runway to survive during and through an economic downturn. If the startup is a great company with clear competitive advantages, it should use an economic downturn as a window during which it focuses on expanding in significant ways and capturing market share from its competition.
Lead to a Position of Strength
As Sun Tsu said, “Every battle is won or lost before it ever begins.”
As the leader of a company, it’s important to understand how well your product or service meets a marketplace’s needs. You also need to know how well-positioned you are against your competitors. Great business leaders anticipate competitive moves. Average managers react to the news that they could have known before they received undesirable market feedback (e.g., low sales results or high churn).
Managing a startup during lean economic times is no easy task. Keep in mind that it is as likely to present opportunity as it is to give you something to fear. The way to know where you’re leading from is to have clear, objective knowledge of where your company is positioned in its marketplace.
Which do you think is more important for managing a startup in lean times – product-market fit or strong competitive positioning? Why?