Friday marked the second installment of FUEL’s dedicated webinar series on navigating the COVID-19 crisis. General Partner Leah Solivan invited thredUP CEO James Reinhart to discuss building a business during a time of crisis. Both Leah and James started companies on the heels of the 2008/2009 financial crisis, and came ready to talk candidly about their decisions, learnings, and mistakes during that time.
The conversation proved to be a revealing look inside two companies that managed to navigate through the uncertainties of the Great Recession of 2008/2009. Approaching team restructuring, communicating with investors, and finding the opportunities hidden in the chaos are all topics that came up during this spirited hour-long session.
You can listen to the full webinar by clicking below:
Many relevant and actionable learnings came to the forefront - here are the big ones:
#1 Playing into shifting consumer behaviors can be a winning strategy.
In times of crisis, all bets are off. This is why some of the most disruptive businesses in the world start in uncertain times. When things are suddenly not going well, people start to rethink everything: how they work, how they interact, how they engage with other people. Consumer behaviors change. For founders, this can be an incredible time to start a business. New ideas can arise from asking yourself, “How can my business contribute to the behaviors of the future?”
For James, this question came after the Lehman Brothers collapse in 2008. With his peers losing jobs all around him, he was overcome with the reality of his dwindling cash and compiling debt. The narrative in his head was a simple one - “Don’t have money, must find ways to make money” - that led him to try to sell some clothing to a consignment store. When that store didn’t take even his valuable items, he realized an opportunity existed to solve a problem for other people needing to make ends meet. thredUP was born.
Having quit her secure position at a stable company just a few months before the collapse, Leah found herself in a different scenario. She was already building TaskRabbit when the markets moved. She needed to adjust, and fast, to a major change in the way people thought about work. After having the rug pulled so brutally out from under them, many people wanted more control over their income. There was an increased demand for a way to make money reliably, quickly, and on one’s own terms and schedule. The new economic reality had resulted in a behavior shift that could be leveraged.
#2 Scrappiness is a virtue.
During thredUP’s first year, James ran the entire business on a budget of $70k. Practicing that sort of financial discipline in the early days bakes it into your operational DNA. The resilience entrepreneurs build during lean times helps create long-standing businesses and platforms. What’s more, the perspective you get from having survived such a crisis stays with you. “Over the last ten years as we’ve had ups and downs,” says James, “whenever we had those down moments I was reminded that it was never as hard as it was back then.”
There’s another upside to scrappiness - it gives you a competitive edge against incumbents. If you are an early stage company, your revenues aren’t that big yet. And if you are challenging an incumbent industry, chances are those competitors are having a much tougher time than you are right now. You’re the nimble upstart - you have to figure out how to grow 50%. The incumbent isn’t thinking about growth, they’re thinking about how NOT to shrink 50%. These are wildly different numbers. It’s also easier for startups to adjust more quickly to changing customer behaviors - putting you in a better position than those incumbents to thrive on the other side of this crisis.
#3 Recalibrating as quickly as possible is essential.
Your value proposition is an evolving process. If you’re paying attention to changing consumer behaviors and watching where the customers go, you need to pivot your value proposition quickly to keep your edge. Both Leah and James expressed regret at not moving fast enough when it came time to recalibrate.. “Our pivot took 18 months when it should have taken 8,” said James. “I wish someone would have beaten it into me to pivot faster.” The learning? If you know where you need to go, get there as fast as you can.
It’s also important to pay attention to changes in consumer behaviors that don’t relate directly to the crisis. For Leah and TaskRabbit, the missed opportunity to recalibrate was mobile. “We missed the boat on mobile,” says Leah, who saw multiple mobile-first competitors pop up then shoot by TaskRabbit. “They would eventually flame out, but we could have gotten there first.” While both companies out-flanked competitors to make it to the other side, both founders still lament the time (and opportunities) lost to delay.
#4 You can survive anything except running out of money.
The companies that make it to the other side of a major crisis have one simple thing in common: they didn’t run out of money. Now’s the time to take a hard look at your runway and figure out how to extend it. If we’re in for a protracted slow down, you need to give yourself the best shot at outlasting it. This means putting aside your pre-COVID plans (your Q2 plan for this year might end up becoming your Q2 plan for next year) and figuring out how to buy more time.
For most early stage start-ups, increasing revenue during this time isn’t a reliable option. That means the solution is to find ways to cut your spend. “If you really are going to cut costs, I implore you to go deep and don’t do it twice,” says James. Putting absolutely everything on the table is crucial, but the reality for most companies is that most spend is located in payroll and marketing budgets, which means this is inevitably where most of your cuts will have to come from.
Thinking through how to extend your runway also means resetting your expectations about what kind of money you’re willing to take. If you’re still getting interest from investors, be willing to do the down round. “Down rounds are definitely better than dying,” says James. If you can’t get to profitability, the question is - how can you get yourself 18-24 more months?
#5 Team restructuring will - and should - be unbearable. It can also bring opportunities.
You’ve heard it a hundred times before - the two jobs of a CEO are to hire great people and not run out of cash. When you spend so much of your time recruiting the talented people that have helped build the company you’re trying to save, layoffs can be very painful. Having been through several rounds of restructuring between them, Leah and James were in lock step about how to approach restructuring your team.
First, run the math. Look at your runway, look at your revenue projections, then ask yourself what type of headcount you can really support. Then go deeper than you think you need to. “Everyone who starts a company is optimistic,” says James, “but this isn’t the time to be an optimist.” Most startup teams understand the risk and can stomach a round of cuts - but do your best to make sure it’s just one round.
Some companies, particularly those with small teams, might find it useful to consider offering employees the option to trade cash for stock. This can put a couple months of runway in the bank without making cuts, and recognize the increased risks your founding employees are taking alongside you. Companies with particularly close-knit cultures need to keep morale in mind. During a major round of layoffs, TaskRabbit offered remaining team members the option of taking the same exit package, acknowledging the impact of so many people seeing their friends leave at once. “A few people took us up on it,” says Leah, “but the people that remained were the ones that really wanted to be here.”
Times of crisis also change the realities of recruiting. When every hiring conversation starts with, “I know you’re going to have to take a massive pay cut to come work here,” it makes it easier to find the true believers. When you have less money to offer, you have more opportunity - the ability for people to join you at a time when they can make a real impact. Leah and James both recruited some of their most important team members during hard times.
#6 Communicate often and in earnest to show investors the rigor in your thinking.
There’s nobody out there right now that can put together a 2020 plan with any real confidence, because we don’t know how long this is going to last. Nobody knows. Your investors aren’t looking for you to predict the future. They’re looking to see the rigor in how you’re thinking about your business. When it comes to communicating with your current investors and board, be upfront about what you don’t know. It’s completely fine to say, “Here’s what we’re doing today based on what we think is going to happen, and I’m probably going to change it next week.” It’s time to ramp up communication - reach out weekly with your updated thinking to share what you’re learning and how you’ve adjusted your thinking.
For companies in the midst of raising new money, investors want to hear that you’re thinking realistically. They want to see that you’re proactively taking a hard look at your models, ratcheting down the numbers, and adjusting to new information as it comes. They don’t want to hear that you’re out there hiring a bunch of new people or shooting for pie-in-the-sky metrics. Don’t try to play up expectations. A good thing to hear from an investor or your board is, “I think you’re being too conservative,” because you’re always in a position to outperform that.
#7 Don’t overlook the longview.
The market runs in cycles. We may not have seen coronavirus coming, but we all knew that we were at the top of the market and due for a correction. When you take the perspective that this is part of the market cycle, baking sustainability into your company’s DNA starts to become the obvious way forward. This type of thinking helps make you and your company resilient, and increases the chances that you’ll make it all the way up into the next cycle. We know that not every company will make it to the other side of this. But those who do will come out stronger and better - and in a position to create a long-lasting business that people will remember.