Bursts of Color - A Tale of Two Startups

Some of you know that I was at startups during the last two market downturns: Voter.com in 2000 and Yelp in 2008. Voter.com reacted slowly and imploded. Yelp reacted quickly and survived. Of course there were other differences, but reaction time was a big one.

In April 2000, Voter.com had raised $20 million, employed 100 people, and had meaningful revenue and user traffic. We were negotiating a lucrative Series C term sheet. That term sheet was pulled when the market crashed, but prominent investors continued to circle the company and make verbal offers, so we remained optimistic… and continued to grow headcount and multi-year marketing commitments for several months. We finally changed course that fall as cash got tighter: we laid off maybe 20% of staff and tried to re-negotiate partnerships and leases. It wasn’t enough. A couple months later we laid off another 20% and stopped paying some bills. Still not nearly enough. By year-end we were almost out of cash, so most of the remaining staff (including me) left. A skeleton crew stuck around to wind the company down and sell its assets in early 2001. Oh, what could have been.

In September 2008, Yelp opened our first remote office in New York… on the same day that Lehman Brothers collapsed. Ouch. Within a week we sensed revenue pain, as new sales declined and customer churn increased. We immediately implemented a hiring and expense freeze throughout the company. We also prepared a detailed Plan B and Plan C, in which we would enact big expense reductions if revenue and/or runway dipped below certain pre-agreed trip points. We proceeded in a hunkered-down mode for about six months, and then gradually accelerated hiring and spending again as metrics improved. By pulling back in the short-term, the company lived to fight another day.

Most of you already have a thoughtful financial forecast. If you haven’t already, now is a good time to create two new scenarios in that forecast:

I’d suggest playing with the various inputs (e.g., expense cuts, new revenue, alternative capital) in order to answer the question: “what will it take to extend runway beyond 12 months?” in each scenario.

If you already have a strong ops or finance lead who can lead the effort on this modeling, great! If not: