Opinions expressed by Entrepreneur contributors are their own.
In 2022, investment capital was as tight as I'd ever experienced in my time as an entrepreneur. Considering I started my first business in 2002 during the dot com bust and my second in 2007 when the housing market bubble burst, that's saying a lot.
I started my latest venture a few weeks before the world came to a standstill in January of 2020. Despite the uncertainty surrounding the pandemic at the time, interest rates remained low, and VCs were funding hyper-growth startups liberally, with limited concern around profit and short-term returns.
We raised a friends and family round and took our first round of institutional investment at that time, but we were burning cash much quicker than we were taking it in. Given the economic climate, we didn't think our full seed round would take long to raise. We were wrong. As the Feds raised interest rates in an effort to curb inflation, startups like ours were the first to feel investors' belts tighten.
In March of 2023, I had a heart-to-heart with some of my earliest investors. They told me I didn't understand how bad the capital contraction was going to be and that I needed to pivot away from growth and focus on building a profitable business as quickly as possible. Their assessment was accurate, but I didn't want to hear it. After some deep introspection, I decided to heed their warning. That's when the real work began.
Here's how we slashed our company's spending and became cash-neutral in six months.
Related: Understanding Cash Flow in Your Business
Maximize your in-house expertise
After years of building businesses and working at startups, I was excited to finally have a company that was ripe for venture capital funding. We had dozens of commitments with respectable valuations, but as the market turned, the term sheets were harder to come by. As interest rates skyrocketed, investors could earn a 5% return by letting their money sit in the bank, and our funding leads quickly disappeared.
I was ready to hire executive roles, 10x production and deploy big dollars on brand campaigns. I was reluctant to pull back my ambitions, but if we were going to survive the investment winter, I needed to get realistic with our goals. Walking away from hyper-growth was one of the most challenging things I've had to do.
My background is in marketing, but I was outsourcing that area to others. I wanted a refined brand with a coherent narrative and hired expert agencies and consultants to develop it as I oversaw operations. If I wanted to relieve our balance sheet, however, I needed to start maximizing our internal resources — starting with myself.
Research has shown companies that utilize internal talent and run leaner operations are more efficient and also have clearer communication and improved collaboration. I began by letting go of every outside agency and consultant and started to do the work myself: every Instagram post, every newsletter, every website edit and press release — it was all back on my plate.
Make the hard cuts
In today's landscape, the tools exist for founders to scale their knowledge quickly and educate themselves in areas they can't afford to outsource. YouTube and Instagram tutorials became my best teachers. It's a humbling experience to go back to "marketing school," but also very empowering when you succeed.
I love working with agencies. They bring fresh ideas and tons of talent, and they often come up with ideas you can't conceptualize alone — but they are expensive. If you aren't within your spending margin, outside support is the first place to cut. We cut ties with every single agency and consultant.
Of all the cuts we made, the hardest were internal. In our business, maintaining a sales team in each region to educate bars and restaurants on your product is a must — when you wind down a team in a market, you may never be able to go back.
My sales teams were incredible, but we hadn't seen a profitable month in any of the regions we serviced, so we had to let them go. Sacrificing what seemed like such an important investment in our business was challenging, but adopting a mindset of balancing growth with profitability meant strategically managing our costs.
Research published in the Harvard Business Review shows that smart companies don't think of cost-cutting as a one-time reaction to a slowing economy, but are constantly vigilant about costs even when revenues increase.
Related: Why This Metric Should Be Prioritized Over Growth for Startup Success
Cultivate a culture of agility
Recognizing we'd over-prioritized growth and not put enough focus on profit was an exercise in both humility and frugality. It forced me to learn a lot more about my business and cultivate a culture of agility.
When you have fewer ropes to hold, you can turn a ship more easily. What used to take us multiple strategy meetings and weeks of planning can now be done in one day, or, if it's just me, an all-nighter.
As an agile team, we became more resourceful and found areas of opportunities we'd overlooked as a larger team. For example, while we were no longer positioned to invest in costly customer acquisition campaigns, we still had access to an email list of 50,000 fans.
Instead of paying for new customers, we started engaging with our existing ones using our owned channels like email and social media for free. It meant slower growth but much more margin. A recent report by McKinsey showed that 80% of value creation by the world's most successful growth companies comes from unlocking new revenues from existing customers.
I love my new lean company. I feel in control, our burn rate is minuscule, and we just had our first cash flow break-even month ever. That, in turn, has attracted a new crop of investors who look for companies that can turn a profit. Making the pivot from hyper-growth to building a fiscally responsible company isn't easy, but it can open up new opportunities and allow you to grow through any economic environment.
Related: Never Worry About Cash Flow Again by Using These 5 Strategies
I don't typically introduce myself, but I'll make an exception this time. I've spent years deeply immersed in the entrepreneurial landscape, having started my first business in 2002 during the dot com bust and my second in 2007 amid the housing market bubble burst. I've weathered economic uncertainties, navigated the dynamics of venture capital funding, and successfully led ventures through challenging times.
Now, let's dive into the concepts presented in the article you shared. The author reflects on their experience in 2022 when investment capital was tight. They started their latest venture in January 2020, just before the world faced pandemic-related disruptions. Despite the uncertainty, interest rates remained low, and venture capitalists (VCs) were generously funding hyper-growth startups.
However, as the economic climate shifted and the Federal Reserve raised interest rates in 2023 to curb inflation, startups like theirs faced challenges. The author emphasizes the need to pivot away from growth and focus on building a profitable business due to the capital contraction.
Here are key concepts addressed in the article:
-
Capital Contraction: The tightening of investment capital, influenced by factors such as economic conditions and interest rate changes.
-
Venture Capital Funding: The challenges faced by startups in securing funding from venture capitalists, particularly during periods of economic uncertainty.
-
Pivoting Strategy: The necessity for startups to shift their focus from hyper-growth to building a profitable business in response to changing economic conditions.
-
Internal Resource Maximization: The importance of utilizing internal talent and running leaner operations for increased efficiency, clear communication, and improved collaboration.
-
Cost-Cutting Measures: Making hard cuts, both externally (letting go of agencies and consultants) and internally (restructuring teams) to manage costs strategically.
-
Agility and Frugality: Cultivating a culture of agility, learning more about the business, and being resourceful in navigating challenges.
-
Customer Engagement and Retention: Shifting focus from costly customer acquisition campaigns to engaging existing customers through owned channels like email and social media.
-
Profitability and Cash Flow: The ultimate goal of transitioning from hyper-growth to building a fiscally responsible company, attracting investors interested in companies that can turn a profit.
The article provides a firsthand account of the challenges faced by entrepreneurs and the strategic decisions made to adapt to changing circ*mstances in the business landscape.
