How to Survive (Perhaps Even Thrive) as a Consumer-Focused Startup Today
Record new jobless claims and unemployment levels. Consumer spending falling faster than ever. Fears of a second wave in the fall. Forecasts for one of the deepest recessions in generations.
How can a consumer-focused startup survive the headlines, let alone thrive in the associated downturn?
This is the conversation I've been having with nearly every consumer-focused company I support. And while we don't know how the current pandemic and associated economic and consumer confidence downturn will play out, there are a few lessons from the recent and not-so-recent past that we can look to for insight. Here are some thoughts and recommendations I've been sharing with the companies I support:
How to survive the downturn: Keeping the lights on is Priority #1
Conditions to support a round of funding from new investors could be 12-18 months away. This means that finding a way to extend your runway at least 12 and ideally 18 months is critical.
Much as we saw in the downturns of 2001 and 2008, many investors are likely to use their available funds to support their existing portfolio companies through the downturn and be extraordinarily selective with new investments, especially early-stage investments.
Many startups that had planned to raise a new round this year are going to wait until market conditions improve to raise, leading to a flood of startups seeking new investment when market conditions do improve. If your company makes it to the point where market conditions are improving, but your bank account is nearly empty, it's going to be hard to have any meaningful leverage when negotiating your next round's terms.
With a possible 12+ month horizon for raising the next meaningful round, the focus shifts to profitability / cash flow management as an urgent priority, with growth a secondary (but still important) priority to support future fundraising efforts. This priority shift leads to the quandary of how to grow while necessarily reducing spend, which in turn leads to a hyper-diligent focus on efficiency. Some areas to explore and consider:
Sales / Channel strategy
This is the time to put our good friend Pareto's 80/20 rule to work. Many consumer-focused companies realize a majority of their sales, and an even larger share of their profit, from a relatively small share of channels.
Scrutinize every channel to understand the share of revenue and contribution each represents. If your direct sales, Amazon, and one or two big box retailers represent 70%+ of your sales, focus on growing these channels and finding ways to make them more profitable. Now is unlikely to be the time to expand distribution into a multitude of unproven channels or territories.
This same logic applies to marketing. Now is the time to similarity scrutinize every marketing dollar for efficiency and efficacy. Lower-funnel activities such as digital marketing and direct response campaigns tend to enjoy higher ROI and frequently are more readily measurable than higher-funnel activities such as investments in traditional media.
This doesn't mean turning off top-of-funnel activities entirely though, as some activities such as PR and social media can generate highly efficient earned media exposure. It’s also important to keep in mind that momentum (both positive and negative) takes time to build – supporting activities that drive some degree of organic awareness will help keep the flywheel spinning so that you can ramp it back up when conditions warrant.
Think about whether there are ways to refine your products' positioning in the market to take advantage of consumers' new priorities (more on that below).
Manufacturing, Operations and Logistics
Are there efficiencies to be gained or costs that can be reduced in your supply chain or operations? My colleagues Marcy Alstott and Andre Neumann-Loreck have shared posts outlining strategies for achieving savings and efficiencies in manufacturing, operations, and logistics.
As efficiency and flexibility become paramount, what activities can be more efficiently outsourced and managed with a smaller internal team? Doing so can increase flexibility, lower fixed costs and free up internal personnel to focus on initiatives to drive growth.
How to thrive in the current downturn: Refine products' positioning to meet consumers' new priorities
Undoubtedly, consumers' needs and associated spending behaviors have changed dramatically in the past few months. Purchases of consumer discretionary products have fallen significantly, while spending on staples and products that help people navigate the challenges associated with working, living, teaching, and doing most everything at home has risen.
A handful of companies that my broader team supports have enjoyed significant growth by repositioning themselves to take advantage of consumers' new priorities. Categories that have seen meaningful growth include those that support working from home (Owl Labs, Sense, Mevo, Upright), learning at home (Osmo), and staying healthy and happy at home (Eargo, Embark, Upright).
Are there ways to refine the positioning of your company's products to support consumers' newfound need to stay healthy, happy, and safe while spending more time working, teaching, and playing at home?
While the pandemic one day will end, and consumers' habits undoubtedly will change, many behaviors that are becoming ingrained now are likely to outlast the virus itself, as will many of the structural changes. Finding ways to address consumers' needs and behaviors now is likely to pay dividends even as we move past the immediate crisis.
On Tap Consulting is available to help you weather this COVID-19 storm. In times like these, experience matters. Our team of experts has been through multiple market disruptions, and while this one has no precedence, there are lessons we’ve learned which are applicable. Let us help you in this “new normal” environment. Contact us for a free consultation.