Asheem Chandna | Leveraging the Downturn

Hi everyone. Welcome to Gray Matter, the podcast from Greylock, where we share stories from company builders and business leaders. I'm Heather Mack, head of editorial at Greylock. Today's episode is the audio version of Greylock general partner Ashim Chandna's essay entitled Four tasks for CEOs in 2023 leveraging the downturn. This essay originally appeared in Forbes. You can read it there or on the content section of the greylock website@greylock.com blog. And if you aren't already a subscriber to the Gray Matter podcast, you can sign up on your favorite streaming platform. Four tasks for CEOs in 2023 leveraging the downturn the signs of a looming economic recession are everywhere. The layoffs and lower guidance announced by the large tech companies only confirm what I recently heard a prominent enterprise software CEO say. Every chief executive has to be in sales mode now, getting on the phone and talking to customers directly. The early stage software industry will not be immune from this environment. Indeed, many startups watch with alarm as prospective enterprise customers furiously tighten spending and reduce their appetite for risks. What then, should an entrepreneurial company do? The most common advice is embrace rigorous cost cutting and extend cash runways. But the genuine need for belt tightening should not obscure the chance for startup leaders to take specific steps to reset their companies so they're positioned to seize the advantage and emerge even stronger when growth resumes in 2024 or beyond. Economic recessions wipe out many promising enterprises. Yet they also open opportunities to reset a business that, in the midst of managing hypergrowth, no one had time to implement. Here, I list a few activities that should preoccupy early stage company CEOs during the current slowdown. Rationalize Products Everyone acknowledges that we are shifting from a period of fat startups to leaner ones. Where does a CEO start? Most startup companies over time, develop product and feature creepy added capabilities that stray from their core and have marginal added customer value. During hypergrowth, startup engineering teams can't resist the allure of working on the next shiny object. The current economic conditions should prompt CEOs to re rationalize their product roadmaps and develop tighter, more persuasive key customer use cases, dropping things that might be perceived as marginal heading into 2023. One is to assume that most enterprise buyers will only be shopping for vital painkillers. Software vendors have to refocus their offerings back to customer use cases that are clearly indispensable. Then there is the use of cloud services. The cloud offers easy ways to quickly add and deliver new features in Most software startups cloud has rapidly grown to become the single business cost after headcount during a period of fast growth. No one is bothered by the price yet the costs accumulate and they can be breathtaking. At some point, rapidly growing startups have to come to grips with the fact that sometimes they are really just cloud resellers masquerading as software innovators. The downturn is the moment to take on the drudgery of optimizing cloud spending. Many software, product and engineering leaders resist this work because frankly, it is less interesting than adding new features. But CEOs have to confront how to make the cloud perform at the right price points for their innovation flywheel and start the march back towards the holy grail of all successful software. High growth Margins Dig in on GTM costs When pushed Most early stage companies don't really know whether they're underspending or overspending on their go to market efforts. In an era of growth at any cost, few even bothered to ask now. In less certain times, startups must understand how continuous gains in sales and marketing efficiency have a huge impact on operating leverage. Defining the right GTM metrics is rarely obvious. In the coming year, business leaders ought to dig in and understand what should guide decisions on whether to expand sales capacity. Is it minimum ARR and contribution margin per sales rep, minimum payback periods and retention of acquired customers? As companies start to plan for their next round of funding, these measurements will become increasingly important and increasingly scrutinized by investors. Top line revenue growth alone will be less persuasive. Then there is a matter of the sales reps themselves. In a small company with say 8 to 10 sales reps, losing even two of the best performers can be a significant setback. Company leaders have to set aside time to understand what it will take to keep the best members of their sales team. To keep them from bolting to the next startup, a plan needs to be developed to use cash, equity and any special consideration to keep them on the team. Recruit executive talent for your next stage the downsizing underway across tech firms has brought a rare surge of talent to the jobs market. But in a recessionary environment, small companies may not be able to simply boost the ranks of their teams. Instead, they should use this moment to look ahead and consider what kind of executive talent they might need for this next stage of growth. In a company still in early evolution, thinking about stage appropriate teams is difficult. It requires accepting the fact that some of your current leaders might not be the ones to lead a function. As the company approaches its Next growth milestone Today's less than tight talent market creates a rare opportunity to engage with prospective leaders who are the right fit to help scale a company from 0 to 20 million, 20 million to 50 million, 50 million to 100 million or beyond towards an IPO. The same is true for boards. Startup leaders should start thinking about the kind of independent board directors who can bring relevant experience and perspective as the company grows. Conversations with the directors who might join in 2024 should start now. Deepen relationships with future investors. Active conversations will also be vital to build towards the next rounds of funding in 2024 and beyond. For many early stage software entrepreneurs, this is unfamiliar territory. Over the last few years, they've become accustomed to less discerning investors who sought them out and initiated fast funding rounds. The current environment requires more work and a different approach. Even founders whose companies show steady revenue and a growing team will need to launch proactive outreach efforts to investors who might consider coming on board in 2024. Much of this work requires personal connection identifying a small list of investors with whom you can forge a relationship, introducing them to technology and the business plan, and keeping them updated on progress. Investors are likely to scrutinize the business evaluation more carefully, ask difficult questions, and feel less pressure to be rushed into an investment decision. But in 2023, nurturing these relationships may prove to be a rewarding use of a founder's time. Recessions create opportunities, not just hazards. Startups that take the right steps now will not only survive the downturn, but emerge stronger and better positioned when heady growth resumes. That concludes this episode of Gray Matter. This essay was originally published in Forbes. You can read it there or on the content section on our website@greylock.com blog. And if you aren't already a subscriber to Gray Matter, you can sign up wherever you get your podcasts. I'm Heather Mack. Thanks for listening.