Uncertainty is a constant for startups.
Turbulence comes and go. But since 2020, startups, like all organizations, are facing a lot more turbulent times. Markets are down, great resignation continues, Covid waves come and go, inflation is heating up and likely to stay, and a big war is raging without a clear resolution or finish date.
Now, not a few minutes pass before another CNBC commentator talks about buying (or staying with) companies with stronger fundamentals and buying defensive stocks.
What attributes makes startups defensive and growth private stocks?
Based on my experience, the attributes that make a private tech stock defensive are the same that lead to an investment.
- Solving a relevant and impactful problem. The company is solving a problem that matters for this planet. No matter how turbulent the environment is, the problem is big enough that it needs breakthrough or innovation solutions. Match value and need with those of your target customers.
- Strong team (not necessarily a big team) that are committed to the same mission at all times. They are A+ players (FT, PT, contractors) who can zoom in and zoom out and come to work with full set of energy, focus, passion, and camaraderie. Focus on the priorities and deliver on those priorities with high quality outputs.
- Performance-based and empathetic culture at the same time. Performance is important and having empathy toward your employees in a performance-based culture is even more important. When employees (FT, PT) know the management understand their mentality, challenges, motivation in good and turbulent times, they are more committed and aligned because they know you care about each one of them.
- Focus, focus, focus. Focus on customers, users, employees, real opportunities, real priorities, and reducing complexity. Focus on what moves the needle and what truly matters.
- Cash management. The startup may have raised a massive round but managing cash burn is always a strong fundamental. Cash is a life blood of startups no matter how much cash there is, and it is always a good idea to have a comfortable cushion to ride through the downside forecast scenario, even for the most successful startups out there.
- Strong financial leadership. Many CEOs, especially in early stage companies, do not think financial leadership is important. A strong finance leader can make a huge difference in terms of the company’s financial health and capital allocation strategy, margin improvements, financing scenarios, procurement (if a hardware company), vendor management, HR, legal. A strong financial leader uses data insights and operational excellence to help prioritize, foster collaboration, manage risks, and synchronize and optimize across all areas. A strong finance leader is capable to give CEO time back to focus on sales, marketing, and customer success. A strong CEO gives the CFO or finance leader to mandate to operationalize the budget and hold all functional areas and leaders accountable.
- Scenario planning. In good or more turbulent times, it is always a good idea to have a plan B and plan C if actual performance turns out to be worse than budget, if a key hire leaves, or if supply chain chokepoints get worse, or if your prospective investors are not ready to invest tomorrow. Focused on implementing Plan A but have the mindset and skills to move to Plan B or Plan C quickly if needed.
- Everyone in the company is an ambassador with deep appreciation of the problem that your company is solving and nurtures your community of customers and users. Everyone (including the CEO) in a startup, depends on the hour and opportunity, works for sales and marketing. It shouldn’t just be the quota-carrying reps who sell. Everyone can and should ramp up and sell and be an ambassador of the company.
- Speed. Speed doesn’t mean lower quality of output or more quantity of lower quality outputs. Speed means bias toward action after critical thinking is applied and feedback is taken. Recognize the tradeoffs, implement (thoughtfully), and iterate, otherwise your competitor or an adjacent player is going to capture market share and mindshare while you are still analyzing.
- The product works well and does not waste your customer’s time whereby your customers have to spend unnecessary time to figure out how to use a feature, where to click, where to download, where to integrate, and where to call. Your product doesn’t have to be the sleekest but it has to be value-add versus value-subtract. Your customer does not have more mental power or time to figure out how to use your product. Make it easy for them!
- Customer success. Your customer remembers how they have been or are being treated. Customer success is making sure you are not reactive to customer needs but are proactive. Customer success starts day 1 of signing a new customer and is an ally to the customer 24/7 everyday. Customers need even better customer service during turbulent times because they are dealing with a lot too. While most startups have customer success, CEOs are the ultimate head of customer success.
- Surface and fix problems before they fester and be transparent about the problems. If churn is occurring or trending in the wrong direction, form a squad team and fix it quickly. If recruiting is not going well, re-evaluate your job req, recruiter caliber, interview process, compensation structure. If the company is not happy about customer closure rate or a key metric of the sales funnel, pull sales, marketing, and product together to identify potential root causes, experimentation paths, and improve.
- Communication with your Board of Directors. It is better to over communicate than to under communicate. Your Board wants the best for the company, and especially in turbulent times, the board should be your most reliable sounding board (pun intended).
- Stay positive and grounded. Positivity begets positivity. Positivity helps with innovative thinking, nimbleness, collaboration, meaningful connections, openness, and long-term individual and team performance.
