Wait, are our customers actually solvent?

by David Frankel

Humble founders often think that their customers are way stronger and more stable than their own “little” startup. That could be a false assumption, particularly now. Plan accordingly.

“Cut your burn” and “shore up your balance sheet” have become conventional startup wisdom over the last few weeks, but it’s imperative to think through the consequences of falling revenue as well. The quality/dependability of your revenue has never been more important.

The first thing you need to do is assess your customer base, no matter if it is:

📉 Blue-chip NYSE stalwarts

🦄 $1B+ startups

🏥 Health care orgs

🏛️ Government procurement

🚚 SMBs

Each will be faced with tradeoffs in a down market.

Some thoughts on how to prepare:

🎉 Don’t believe the funding hype

If your startup serves other startups, you need to prepare for tough times. The fact that a startup raised a billion dollars six months ago doesn’t mean they are flush or will continue to pay you if times get tough(er).

Also, announcements can lag funding, so a startup’s runway may be shorter than it appears. To the extent you can, try to get back channel information about your customers to help gauge the dependability of your revenue.

🌆 Big companies have different risks

Legacy corporations may not be a safer bet. With the increased scrutiny they operate under, calls to slash costs can come quickly, go deep, and your contract may become collateral damage in a single earnings call.

In much the same way all companies focused on travel had a tough time during COVID, companies that have built their business models on the presumption of low-interest rates may suffer in the coming period. Prepare accordingly!

⌛️ Plan for the worst

Your actual runway is your bank account/burn rate. Growth projections and even maintaining your baseline are upside scenarios in the face of a prolonged contraction.

Don’t panic, but start preparing contingency plans for what you’ll do if revenue drops by 25%-75%. Hopefully, it won’t come to that, but planning for disaster is a worthwhile exercise.

Once you have a handle on the risks your customer mix creates, the obvious question is what you can do about it. Here are a few strategies to consider:

🏴‍☠️ Diversify or die

You are at significant risk if one customer accounts for more than 20% of your revenue.

Products that serve a single vertical market are also more susceptible to sudden corrections.

Forecast accordingly.

🎁 Overdeliver

First, no matter your size or customer mix, this is the time to deploy white-glove service. Do not give customers the slightest pretense to scale back. Pay close attention to your account execs.

📈 Make yourself indispensable

The most important thing you can do at this moment is to demonstrate *quantitatively* how you create value for your customers either by cutting costs or delivering revenue.

If it is possible to provide your customers with a dashboard that enumerates how much they save by using your offer, get that on the product roadmap ASAP if it doesn’t already exist. ROI is the best insurance against a RIF.

⚔️ Find more champions

B2B startups often have a single advocate within their customer’s organization. This is a major risk. If that person is let go, your deal might go with it. Even if they stay, they may have to make drastic budget cuts.

Once you have a champion in an organization, try to “land and expand.” Do everything you can to make sure your sponsor’s boss understands the value that you deliver. Make yourself known and perceived as valuable to horizontal stakeholders.

🎯 Target smarter

Now is *not* the time to bring on high-churn customers. Instead, make an extra effort to target your sales efforts towards the highest ROI customer profiles. Quality of revenue is more important than quantity at this point in the cycle.

These are trying times. Do yourself the favor of finding the customers who are most likely to help you make it through this period and dedicate yourself to finding ways to help each other thrive together.

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