Monday, April 21, 2008

Startup to IPO: Managing cash in a downturn

I guest authored a post for FoundRead this weekend at Carleen Hawn's request - about my experiences in 2001 and my advice on how to manage cash through a downturn in your market.

Here are the ten ideas I shared - leaving out the colorful story around them:

1. Build a detailed model of cash flow so you can test every decision against it and manage the business for cash conservation.

2. Push out accounts payable as long as you can. This takes a tough CFO or controller.

3. Structure deals to be paid up front. Resist payment terms as much as you can and negotiate discounts to get paid up front if you have to (we were very successful with this strategy with all but our largest customer).

4. Don’t destroy your market but do some aggressive deals if you need to in order to keep the top line and your market share growing. If you slow down it’s a self fulfilling prophesy and you’ll run out of money – which leads to loss of control of your destiny.

5. Spend in sales to keep growth up. Sales and R&D are the critical value creation points of a software business, focus on them and tighten your belt everywhere else

6. Manage performance aggressively. If someone isn’t performing let them go quickly and only replace them if you absolutely have to (see prior point).

7. Squeeze into your space. Put off taking on new rent obligations as long as you possibly can.

8. Get a line of credit and draw it down before you need it. By the time you need it you won’t be able to get it, so get it while you can.

9. Likewise if you need to raise venture capital do it well before you need it , and don’t get greedy on valuation. A successful company makes everyone money, don’t risk long term success for valuation or your percentage.

10. If you have to, take the company through a pay cut. As CEO cut your pay first, cut all bonuses and consultants, cut executive pay and when you have no choice cut everyone’s pay to make it through. Believers will stick with you, and they are the ones you want.


lipper said...

really enjoyed the post Penny. some very sensible advice but i think all of your points would be just as relevant to a startup in a bullish market wouldnt they?

Penny Herscher said...

Yes, many of these points play in good and bad markets, but some are higher risk in a bullish market - for example cutting pay or cutting very aggressive deals. It can be helpful in the short term, but damage the company in the long run so much of the judgement comes in the balance between strategic and tactical decisions.

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