Note: This article uses the term “recession” to mean any significant economic downturn. The severity of this current period remains to be seen, but your preparation and action plan will likely be the same.
6 keys for recession readiness from top tech CFOs
The tech industry worldwide has seen a major boom in recent years. While industries like tourism and entertainment struggled severely through lockdowns and social distancing, many tech companies grew faster than ever. Zoom is perhaps the most obvious example.
It was also a wild time for fundraising. In 2021 alone, global venture investment reached US$643 billion, up 92% from 2020 and ten times the amount from the previous decade.
519 new unicorns emerged in 2021 alone, and there were over 1,000 unicorns worldwide by Q1 2022.
But then the money dried up.
Investors pulled back, and many funds have chosen to put smaller amounts into seed and Series A funding in place of the large scaleup stakes we saw in 2021.
Of course, this isn’t just a tech scaleup phenomenon. Global inflation has seen interest rates rise, which means less cheap cash and therefore less investment across the board. Major markets have stalled, always-reliable index funds have dived, and investor confidence is low across the board.
Which has founders, finance experts, and world leaders bracing for a difficult few years. So how should you respond?
During the CFO Connect Summit 2022, three leading tech CFOs shared their approach to a sagging economy, and how they’re future-proofing their businesses.
Watch the conversation in full here. We’ve also distilled the six key takeaways below.
About the experts
Julien Lafouge joined Spendesk as CFO in June 2022, and was previously Group CFO at both EMPG and BlaBlaCar.
Dan Zhang is SVP of Finance at ClickUp, and held the same role at People.ai.
Sergei Galperin is CFO at Alan. Before this, he spent 15 years at J.P. Morgan as both Vice President of Financial Institutions Group and Executive Director of European Fintech.
Amy O'Brien is a reporter Sifted, and has reported previously for the Financial Times, City AM, and AFP. Amy moderated this conversation.
What does it mean to be "recession ready"?
Nobody knows exactly what the economic future holds. We seem destined for “tough times” in the coming months and years, followed by some sort of bounce back. It’s unclear when the rally will come, or how deep a hole the markets will reach before then.
So for company leaders - CFOs in particular - the challenge is to prepare for whatever may come. Startups and tech companies need to be ready for an extended period of slower growth, lower levels of investment, and new priorities in general.
As Dan Zhang of ClickUp explains, “the message from our investors was very clear: extend your runway and push towards efficiency. 2021 was all about growth, growth, growth. The most important things this year are growth, gross margin, and your burn multiple. Whoever moves fastest and shifts towards this mindset will have the highest chance of survival.”
This article highlights how to find this mindset, particularly for CFOs, founders, and finance teams.
Are we headed for a recession?
By some measurements, the US market already reached recession in Summer 2022. Other countries are headed that way, if not there already.
But the technical definition shouldn’t actually matter much for business financial planning. What matters is your ability to either borrow or raise funds, which is almost certainly reduced in the current period. And given this, your primary goals will be to see out the storm and emerge ready to rebound on the other side.
Which is exactly what we’ll explore in this article. Let’s begin.
6 steps for recession readiness
Your primary goal during an economic downturn is to become as cost efficient as possible. For some companies, this lets you extend the cash runway (the amount of time before you run out of money) - hopefully long enough to reach another hot fundraising summer.
For others, efficiency actually means profitability. Instead of putting growth first, you now want to become a sustainable, profitable business. Perhaps even start thinking about an eventual IPO, rather than another big investment round.
Both outcomes require a similar plan. And both go hand-in-hand: a close-to-profitable business is more attractive to VCs, too.
So with efficiency in mind, here’s how to approach the current difficult economic period.
1. Take stock of your company's current cash situation
For startups and scaleups, the first analysis is straightforward: how long can you last with no new funds? What is your current cash burn rate, and what are your biggest liabilities?
We’ll look at scenario building and cost cutting next, but the first step is simply to analyze your situation today if nothing else changes. Where does the bulk of your cash flow come from, and where does it go?
“If you understand the business very well,” says Dan Zhang of ClickUp, “you’ll also understand how to influence decisions to optimize the value of the business. To me, that’s the biggest value of the CFO during a bear market and as a wartime CFO.”
Let’s look at the key considerations for cash in and cash out.
Incoming cash flow
What funding do you have in the bank, and how long will this last at your current burn rate?
How difficult will it be to raise or borrow new funds if necessary?
How is your business impacted by raising inflation or higher interest rates?
What kinds of customers and industries do you serve, and will they be heavily impacted by a crisis?
This fourth question is hugely significant. If you rely on customer payments and those payments stop, your business is likely in trouble.
The Covid pandemic was a good example of this. Travel and hospitality ground to a halt, which was bad for airlines, hotels, and many other industries. But it was also tough for the software and systems powering those industries - even if the companies themselves could work remotely just fine.
As Mews CFO Pavla Munzarova explains, “hotel occupancies almost went down to zero. Which meant our merchant streams also went down to zero. It meant that we just had to re-plan everything.”
But for some businesses, a downturn doesn’t have to hurt. Netguru CFO Gosia Madalińska-Piętka says that service businesses can actually benefit from their clients’ hiring freezes. These companies still need help, and now they need to look for it externally.
Outgoing cash flow
Divide costs into internal (payroll) and external (almost everything else).
For payroll, see what’s committed and what’s planned. Consider whether now is the time to grow, to pause, or to downsize. Just beware that downsizing will almost certainly make your recovery harder.
Identify the real difference makers in the external category. If you have thousands of line items, maybe 50-100 will actually move the needle if you cut or adjust them.
We’ll get to cost cutting in a moment. As Dan says, “you need a financial model that highlights the diminishing return on investments. [At ClickUp] we carved out total sales and marketing spend into tranches and ranked them by ROI.”
And pay attention to your ability to influence these costs. For some things, it’s easy - if Facebook ads show low ROI you can simply stop them immediately. Other costs are less adjustable, such as rent, service contracts, and payroll.
But as Spendesk CFO Julien Lafouge explains, “everything is negotiable. Even office rent, for example. You must go back through these things.”
We’ll look at how to strategically cut costs shortly. But first, you need to understand what you’re potentially up against.
Takeaway: Create a comprehensive overview of your financial situation: how you make and spend money, and highlight the most important drivers on your ledger.
2. Build scenarios for a range of possible outcomes
Scenario planning and forecasting takes on a whole new level of significance in tough economic times. Because we don’t yet know whether this is a slight bear market or a full blown recession, you need to create a range of scenarios to stress test the company against.
How will you fare if revenue drops by 30%? What if you can’t find a good injection of funds for 24 months? And what if a key client industry is hit hardest, and you lose a whole class of customers?
Your scenarios must of course be realistic. But according to Julien, you also need to think in severe terms. “The Covid crisis showed all of us that, as good as we thought we might be, we never build the perfect scenarios. You might think you’re stress testing by adding or subtracting 20%, but you’re not. Make your scenarios much wider in terms of duration, impact, and amplitude.”
In his case at BlaBlaCar, the Covid crisis was even harsher than they initially thought. “Covid hit and we simply couldn’t operate. It was forbidden by the Government. So we quickly had to know how long we could sustain zero revenue.”
Scenarios help put you on the same page with the board and CEO. Your plan may be to grow 20% year over year, but economic conditions can change everything. So you need to set realistic expectations and get a clear understanding of what happens under each possible scenario.
As Dan says, “we can then be direct with the board: do you want to grow 120% and burn all the money in two years, or grow 80% and get to cash-flow positive?”
Ultimately, scenarios will illustrate your biggest risks and opportunities during a potential recession. In most cases, this will lead to some form of cost cutting - or at least a slower rate of investment in certain projects.
3. Cut costs strategically
A coming recession forces most companies to tighten their belts. Even those in a strong cash position still need to protect that cash, in case the next round of funding takes longer than they’d like.
So assuming you need to cut something from your current business plan, where do you start?
According to Julien, the single biggest mistake is to try to make broad cuts across your top line. Even if you know you need to reduce costs by 10% from 2021, “you don’t just cut 10% of costs across the board - you cut 100% of the things that don’t work.”
And focus on impact. The 80/20 principle applies again here, although perhaps even more starkly. A relatively small number of costs will have an outsized effect on your total spend. So while smaller “luxuries” may be easier to cut operationally, they won’t really move the needle.
“The classic example of a cost you don’t want to cut is good quality coffee for the team,” says Julien. “It has no impact financially, but a terrible impact on morale.” That probably depends on the size of the company, but when you’re nickel and diming minor office expenses, you’re getting desperate.
As Julien said above, everything is negotiable. Even your fixed costs like rent, which can seem impossible to alter, may be up for discussion. A key part of the CFO’s role is to keep open communication with core suppliers, and renegotiate contracts where possible and necessary.
Of course, everything depends on your business, your runway, and countless other considerations. But in general, your decisions may look something like this:
What to cut in a recession
- New experiments, side projects, and "moonshots"
- Inefficient marketing campaigns and strategies
- Big investments without a clear ROI
- Extra software and services subscriptions which bring no value
What not to cut
- Efficient marketing and sales tactics. If anything, invest more
- Small perks that bring joy (and help retain talent)
- Travel and entertainment expenses (especially where you can claim tax relief)
Resist as long as possible cuts which inhibit growth and can’t easily be undone. Go too far, and you’ll be totally unready when the crisis is over.
As Julien says, “rebounds are often short and fast, and if you’ve cut too much you may not be able to benefit from this bounce back. Cut the fat; don’t cut the muscle.”
4. Double down on what works
The flipside of this cost-cutting analysis is you find the good investments that may help you keep growing. You certainly don’t want to cut anything that’s a net benefit to the company’s survival.
For example, most scaleups invest heavily in social media advertising. This may be the first place to make cuts, but never across the board. Instead, stop the campaigns and platforms that aren’t working. Even if they’re worthwhile experiments, now’s not the time.
But any cost-effective campaign that brings in new business should probably continue. You want to grow sustainably, but you do still need to grow.
In real terms, you might see that LinkedIn advertising is costly but converts, while Facebook is cheaper but brings in few customers. Provided the LinkedIn campaigns pay off in the not-too-long run, you’re likely better off keeping them. And then you can work with the marketing team to bring their cost down.
Another obvious decision many companies make is to raise prices. But again, the goal here shouldn’t simply be to offset inflation or temporary costs. Rather, use this chance to find more profitable pricing for the long term.
What are your most value-adding products or features, and does your current pricing reflect these?
And related to this, Dan says you should identify your “high calorie” customer segments - the ones that bring you the most value in the long term. Direct your marketing and sales efforts to finding more customers like these, and hold off on those segments that bring you lower ROI.
5. Bring other teams to the table
Your recession action plan only works with strong collaboration and communication between teams - especially leadership. While the CFO and finance team are often in charge of analysis and make recommendations, other departments will actually need to execute.
And this is a stressful time, particularly for those teams whose budgets are squeezed. They still need to hit targets, and they can feel like the CFO is taking away a large chunk of their resources just because.
“Cuts and spend freezes can cause frustrations,” says Dan, “even among the other leaders. So this is a great time to involve other leaders in the budgeting process.”
At ClickUp, Dan builds clear incentives - or “milestones” - into the company’s budgets. If a team remains efficient and overall cost-effective, they continue to receive resources. For the marketing team, that means a 12-month CAC (customer acquisition cost) payback period. If the department stays within that milestone, it can keep investing.
For sales, the goal is to have 90% of the team meeting quota. If they can’t reach that figure, it doesn’t make sense to add more people to the team.
This way, the finance team is ultimately responsible for budgets but teams can control their own destiny. “This makes the CFO an enabler, rather than an inspector. Finance isn’t constantly hammering them down - it’s up to them to show ROI and access more resources.”
6. Embrace this opportunity to lead
A strong startup CFO contributes greatly to company growth and success. Other executive leaders and the board relish the chance to bring a CFO into the team.
But this decision really pays off during an economic downturn. A CFO’s experience and leadership really gets the chance to shine when money is tight and efficiency is critical.
Dan says that “the previous generation of great companies were really built in the last financial crisis. And finance teams particularly took the chance to steer businesses during these complex times.”
Alan CFO Sergei Galperin spends “a lot of time on financial education. ‘This is why we’re raising prices by X%: it will raise our net profit by Y%. Therefore we can afford to hire 10-15 more people, who will build feature Z, and that is our path to profitability.’
“I accompany our monthly financial report with a Loom video to walk the team through our performance, and point out where it puts us on our path. That gives everyone a sense of ownership, which in turn keeps us all together.”
Instead of being the bad cop in all interactions, this climate is a chance to get closer to other teams and teach people how to think fiscally.
Our three experts also agree that talent retention is particularly important. This recession comes on the back of the Great Resignation, which has shown how challenging it can be to keep top talent.
Investing in your teams and helping them grow puts you in a great position to bounce back when the market turns.
Get recession ready today
Whether you’re optimistic for the near future or preparing for the absolute worst, smart CFOs can’t afford to wait. Now’s the time to shape your business into a lean, mean, profitable machine.
As we’ve seen, the steps to do this are straightforward:
Take stock of your cash position
Map out the best, worst, and baseline scenarios
Make informed, strategic expenditure cuts
Reinforce your company’s strengths
Collaborate closely with other teams and leadership
Take your place as the company’s financial brain
Straightforward doesn’t mean easy. And there will be difficult decisions to make after many hours of analysis. Keep a united front with the company’s top brass, and don’t try to go through this process alone.
Finally, if you want help with spend analysis and cash management, you know who to call.