Entrepreneurs in Silicon Valley are always on high alert for potential tech bubbles. While the next one may not necessarily happen in the next 1-2 years, it is wise to prepare for the worst. Here are several strategic steps you can take if a tech bubble is indeed on the horizon.
Raise Money Now
The first and foremost action to take is to ensure that you have secured funding before a potential downturn. In good times, the competition for investment is fierce. In bad times, investors are choosier and less willing to invest, leading to higher dilution and fewer opportunities. Therefore, it is crucial to finalize your fundraising efforts now.
Key Takeaways: Secure your funding during prosperous times. Prepare for a reduction in investment during bad times. Be ready for increased competition for funding.
Beware of Inflated Valuations
Evaluating your startup's valuation wisely is another critical step. If you take on a valuation based on vanity metrics or limited revenue, beware of potential down rounds. Even companies that do not suffer from a downturn may still face a down round due to macroeconomic factors. This applies regardless of the broader economic situation.
Key Takeaways: Be cautious of valuations based solely on metrics. A void relying on nominal revenue figures. Understand the risks associated with inflated valuations.
Prepare to Acquire Startup Teams
During a downturn, the landscape can become more competitive, with more startups being acquired than in better times. Acquihires (acquisition of founders and teams) are likely to increase. It is essential to be prepared to acquire startup teams and hire entrepreneurs who did not raise funds in time. Capital will be scarce during a downturn, so being financially prepared to leverage stock swaps instead of cash can give you a significant advantage.
Key Takeaways: Identify potential acquihires and acquire them. Prepare to hire entrepreneurs who could not secure fundraising. Use stock swaps instead of cash for acquisitions.
Get to Stable Cash Flow ASAP
Another crucial step is to ensure your startup has a stable cash flow. During a downturn, capital will be harder to come by, and your next funding round will likely be farther away. While you do not need to be profitable, accurate revenue projections and management of spending based on cash flow are crucial. Relying on the timing of the next funding round can be risky and may lead to financial strain.
Key Takeaways: Manage spending based on cash flow. Ensure accurate revenue projections. Extend your runway by delaying funding rounds.
Take a Good Look at Your Customer Base
Your customer base is also something to consider. If all your customers are other tech startups, assess whether they will still be around in a downturn. Building a diverse customer base can help mitigate risks.
Key Takeaways: Assess the stability of your customer base. Diversify your customer base to reduce risk. Build relationships with non-tech companies to broaden your market.
Learn to Sell in a Recession
Finally, refine your sales pitch to adapt to a recessionary environment. In times of economic downturn, your product or service will no longer be viewed as a growth solution. Instead, focus on the cost-saving aspects of your offering. If your software or product can help companies save money, it becomes a more attractive option.
Key Takeaways: Adapt your sales pitch to emphasize cost savings. Position yourself as an alternative to existing expense-saving measures. Highlight the financial benefits of your offering.
In conclusion, while predicting when a tech bubble might burst is challenging, taking proactive steps now can significantly mitigate the risks for your startup. By raising money now, being cautious of valuations, preparing to acquihire, securing stable cash flow, and refining your sales approach, you can better navigate through any economic downturn.