Why Founders Need To Build Super Lean In The Wake Of COVID-19

Founders seeking their first round of external capital need to rebuild their business plans. We have flipped from a founders’ market to an investors’ one in only a few months. Investors are cutting smaller checks, less frequently. Funds are nervous. They worry about the increased likelihood of portfolio company failure, the inability to call down funds from their limited partners and the uncertainty of the macro economic environment when life returns to (the new) normal.

With this backdrop, it is no wonder founders are finding it harder to raise. Most advice centers on the strategy of the round. Delay until 2021 if you can. Do extra groundwork figuring out which funds are still writing checks before approaching them. Ask searching questions to ascertain if they are actually deploying into new rounds to save wasting time. Refactor your financial model to reflect COVID-19 impacts with appropriate scenario planning. Practice looking slick on video calls.

This is all sensible advice, but what is really required is a fundamental rethink about how to build a capital efficient business. We all need to adjust to a world in which capital is no longer abundant. A nip and tuck here and there are not enough. Founders need to take it back to the studs and work through how their business is going to be one of the winners in a capital constrained world.

Every line in a financial model should be interrogated and trimmed. Here are the four big ones.

Founder salaries. These have been creeping up in recent years. Salaries for early stage founders should be enough to cover their overheads and not be worried about where they are going to live. No more. Lower salaries create alignment with your investors and give them confidence you believe in building a big company. Wealth creation in startups is primarily focused on the capital gain on an exit.

Hiring plan. This should be flexible and tied to clear milestones or revenue targets. Avoid wage inflation by rewarding employees through a well-structured option scheme with a vesting schedule. Look beyond your city or even your country to find the right level of talent at the best price. All remote and hybrid teams were already gaining acceptance before the lockdown made it normal. 

Office space. Post-lockdown paying rent on a large office space will be seen like driving down 5^th Avenue in a Lamborghini in fall 2008. It is out of step with business sentiment. And whilst it might be fun to get together in the office, the past few months have shown that with most tech companies it is not essential. If you do need office space, hold off. Prices are only going one way.

Travel policy. Expensive travel, particularly overseas, should be reserved for key relationship building meetings. Every trip needs to have a target ROI with a feedback loop to improve decision making around future trips. Continuing to use video calls as a primary form of communication, rather than travelling long distances to meetings, makes economic and environmental sense.

Founders should be wary of falling into one trap though. Scrimping on the things that make the team feel valued and engaged is a false economy. Put together a thoughtful package of events, activities and benefits. Some items will constitute unavoidable expenses, but often there will be inexpensive substitutes that generate a disproportionate amount of goodwill. Personalization is key.

Building super lean in the wake of COVID-19 is essential. It not only gives startups the best chance of raising capital. It also gives them the best chance of finding product market fit before they run out of money, raising further growth capital and building a profitable company in the long term.