Get Your Business Ready for a Tougher Reality
Money is tight, and
patience among investors is in short supply. You need to get your business
aligned with the right customers--even if it means dumping some of them.
EXPERT OPINION BY HOWARD
TULLMAN, GENERAL MANAGING PARTNER, G2T3V AND CHICAGO HIGH TECH
INVESTORS @HOWARDTULLMAN1
APR 9, 2024
As the harsh realities
of the post-pandemic digital economy sink in, and the pressures for
demonstrating a clear and quick path to sustainable long-term operations mount,
it's becoming increasingly clear that the prospects of many companies returning
to the halcyon days of business as usual are highly unlikely. The sins, shocks
and black swans of the past few years have sobered many prospective investors
and tempered their enthusiasm, tolerance and patience.
The near-term future is
going to be much more about concrete profits rather than pivots and new
directions. Startups and developing businesses that plan to survive and grow
are going to have to find more ways to make sure that they can pay their own
way on a current basis rather than continuing to sell the dreams of a new and
distant future. Not every change will be the same, but every business will need
to change.
The winners going
forward will need to be proactive, aggressive, agile, and especially adept at
presenting, justifying and documenting their next steps. That's especially true
for any proposed pivots. The reason? While almost everyone
agrees that yesterday's means and models won't necessarily work today, it's
equally clear that beaten-down current investors are going to be very hard
sells when it comes to further funding for abrupt or radical changes in the
business, even when those remedies may represent the most viable and best next
steps. It's still okay to make a modest pivot or well-planned change, but you
can't be twirling.
Smart managers,
attentive boards and careful investors will expect their portfolio companies to
be performing every day while they are also transforming so they can pay the
bills, keep from losing a step to the competition, and preserve the company's
momentum, which is hopefully returning. It will be like playing Frogger on steroids all day long -
leaping from log to log, changing drivers midstream, crossing the
chasms on the fly - and trying to keep their heads above water.
New injections of
capital are going to be far less available to companies still burning through
their cash, either because they're waiting for their revenues to return or
because they're still looking to find their place in the market. Bank renewals,
loan extensions, credit lines and other accommodations are continuing to dry
up. Even coverage from the biggest insurers in the country can't be counted on when they're looking
first at protecting their own bottom lines.
Radical changes are
going to be required in two primary areas: (a) the character and quality of the
customers that a business will need to attract, serve, and retain; and (b) the
economics of the business's model, in which revenue stability and account continuity
will need to be prioritized over one-off hits, attractive, project-based
margins, and immediate profitability.
Preparing your business
for the new normal needs to start with cleaning up the customers. There are
three critical things to keep in mind as you audit and review your customer
mix.
First, we're still in a
post-pandemic place where very few companies are going to be in a position to
serve all comers - even if that ever really makes good sense. Whether it's
being short on skilled staff, being unable to source all the materials and supplies
you need to make your products, or other gaps in critical resources, you're
going to have to say "no" to some customers. And
that's never a nice place to be.
Second, as you're doing
your customer triage, you want to be careful to
make sure that you're holding on to the right, long-term clients and customers
and not simply going for the low-hanging fruit. This is a call that can't
really be left to your team members because many of them will have their own
incentives and agendas.
Finally, it's
essential to take a hard look at users who are not paying for your product or
service. Bragging about subscriber numbers or "customer" counts is
nice, but if you're not getting paid by these folks, the thrill wears off
pretty quickly. You start to realize that there are significant service and
support costs associated with these people that have to be offset in some other
way. Convincing yourself that sheer scale will eventually pay off is easy and,
especially in the world of digital products, there's not much incremental cost.
But that's not how the real world works in terms of dollars and cents. As
Steely Dan sings in Babylon Sisters, you should know by now
"like a Sunday in T.J, that it's cheap but it's not free."
The second critical
conversion has to do with migrating your business model. One of the most
difficult transitions for a company to make, particularly in real time, is
moving from a bespoke and custom service business - primarily operating on a
project basis where things are one-off, opportunistic, sporadic, and almost
always delivered under the gun - to a more predictable, normalized and
subscription based or SaaS model. That's one which is predicated on continuous
connection and use, regular recurring revenues rather than peaks and valleys,
and an annual commitment by both parties rather than an ad hoc relationship.
This kind of radical
shift is tantamount in many cases to a brand-new sale and also a shock to the
P&L. That's because the ultimate revenues may be more substantial, secure,
and stable - but they are almost always going to be spread out over a longer
period of time initially. These short-term bumps and pain are clearly worth it
in the long run as your business matures and grows with less churn, more
continuity, and a better bottom line because your operating and delivery costs
will be less, churn will be reduced and resource planning can be better
managed. And your marketing dollars can be focused on attracting new
business rather than reselling existing customers.
The bottom line is that
now's the ideal time to take a step back, catch your breath, and look out ahead
for a couple of years with the goal of being more proactive rather than
reactive even though everyone's racing mentally right now to just jump back into
business as fast as possible. The trick is to decide what kind of business
ultimately makes the most sense for you and is likely to be the most
successful. Of course, if you don't care where you end up, any path will
take you there.
