The Virus Survival Strategy For Your Startup

“Winter is coming.”

This is the one blog post that I hope I’m completely wrong about.

With the Covid-19 virus a worldwide pandemic, if you’re leading any startup or small business, you have to be asking yourself, “What’s Plan B? And what’s in my lifeboat?”

Here are a few thoughts about operating in uncertainty in a pandemic.

Social isolation and a declared national emergency have had an immediate impact on industries that cluster people; conferences, trade shows, airlines/cruise ships and all types of travel, the hospitability industry, sporting events, theater and movies, restaurants and schools. Large companies are sending employees to work at home. Large retail chains are shutting down their stores. While the impact on small businesses and workers in the “gig-economy” hasn’t made the news, it will be worse for them. They have fewer cash reserves and less margin of error for managing sudden downturns. The ripple and feedback effect of all of these closures will have a major impact on our economy, as each industry that gets impacted puts people out of work, and those laid off workers don’t buy products and services.

It’s no longer business as usual for the rest of the economy. In fact, shutting down the economy for a pandemic has never happened. Millions of jobs may be lost in the next few months, as entire industries get devastated, something not seen since the Great Depression of 1929-39. I hope that I’m very wrong, but the impact of this virus social and economic effects are likely to be profound, and will change how we shop, travel and work for years.

If you’re running a startup or small business, your first priority (after your family) is keeping your employees and customers safe. But next the question is, ‘What happens to my business?”

The questions every startup or small business CEO needs to ask now are:

  • What’s my Burn Rate and Runway?
  • What does your new business model look like?
  • Is this a three-month, one-year or a three-year problem?
  • What will my investors do?

Burn Rate and Runway
To answer the first question, take stock of your current gross burn rate i.e. how much cash are you spending each month. How much are fixed expenses (those you can’t change, i.e. rent?) And how much are variable expenses (salaries, consultants, commission, travel, AWS/Azure charges, supplies, etc.?)

Next, take a look at your actual revenue each month – not forecast, but real revenue coming in each month. If you’re an early stage company, that number may be zero.

Subtract your monthly gross burn rate from your monthly revenue to get your net burn rate. If you’re making more money than you’re spending, you have positive cash flow. If you’re a startup and have less revenue than your expenses, that number is negative and represents the amount of money your company loses (“burns”) each month. Now take a look at your bank account. See how many months your company can survive burning that amount of cash each month. This is your runway –  the amount of time your company has before it runs out of money. This math works in a normal market…

The World Turned Upside Down
Unfortunately, it’s no longer a normal market.

  • All your assumptions about customers, sales cycle and most importantly, revenue, burn rate and runway are no longer true.
  • If you’re a startup, you’ve likely calculated your runway to last until you raise your next round of funding. Assuming there was going to be a next round. That may be no longer true.

What does my business model look like now?
Since the world today is no longer the same as it was a month ago, and likely will be worse a month from now, if your business model today looks the same as it did at the beginning of the month, you’re in denial – and possibly out of business.

It’s the nature of startup CEOs to be optimistic, however you need to quickly test your assumptions about customers and revenue. If you are selling to businesses (a B-to-B market) have your customers’ sales dropped? Are your customers closing for the next few weeks? Laying off people? If so, whatever revenue forecast and sales cycle estimates you had are no longer valid. If you’re selling directly to consumers (a B-to-C market,) were you in a multi-sided market (consumers use the product, but others pay you for their eyeballs/data?) Are those assumptions about payers still correct? How do you know?

What are the new financial metrics? Receivables – get on top of them. Days of cash left?

You need to figure out your actual burn rate and runway in this new environment now.

Is this a three-month, one-year, or a three-year problem?
Next, you need to take a deep breath and ask, Is this a three-month problem, a one-year problem or a three-year problem? Are the shutdowns of businesses going to be a temporary blip in the economy or will they drive the U.S. and Europe into a long recession?

If it’s just three-months, (looking more unlikely by the day) then an immediate freeze on variable spending (hires, marketing, travel, etc.) is in order. But if the effects are going to reverberate in the economy longer, you need to start reconfiguring your business. You need a lifeboat strategy. That’s a fancy phrase for figuring out what are minimal things you need to keep your company alive and what to leave behind.

A one-year problem means taking a knife to your burn rate (layoffs and elimination of perks and programs to reduce your variable expenses,) renegotiating what previously seemed liked fixed expenses (rent, equipment lease payments, etc.) and putting only the essential elements for survival in the lifeboat.

[Update: Read the detailed financial advice to CFO’s here.]

If you were selling online versus in-person, you may have an advantage (assuming your customers are still there.) Or you change sales strategy.

Whatever your product/market fit was last month it’s no longer true and needs to change to meet the new normal. Does this open new value propositions or kill others? Alter the product?

And if it’s a three-year problem? Then not only do you need to jettison everything that isn’t essential for survival, it probably requires a new business model. In the short term, explore if some part of your business model can be oriented around the new rules of social isolation. Can your product be sold, delivered or produced online? Does it have some benefits if delivered that way? (See the advice from Sequoia Capital here.) If not, can your product/service be positioned as a lifeboat for others to ride out the downturn?

Leadership – Plan, Communicate and Act with Compassion
Revise your sales revenue goals, product timelines and create a new business model and operating plan – and communicate them clearly to your investors and then to your employees. Keep people focused on an achievable plan that they clearly understand. From the perspective of having lived through the last three crashes, I’ve observed the biggest mistake CEO’s made was not making draconian cuts to expenses quickly enough. They dripped out layoffs and cuts holding on to favored projects with magical thinking that somehow this was just something that would pass.  You need to act now.

If you’re in a large company considering layoffs, the first option should be to cut the salaries of the higher paid exec/employees to try to keep the people who can least afford it, employed. (Good things will come to CEOs who first try to save everyone on the ship before they jump in the lifeboat.) If/when people need to be laid off, do it with compassion. Offer extra compensation. If in the worst case you see you’re running out of cash, under no circumstances run it down to zero. Do the right thing and have enough cash on hand to offer everyone at least two weeks or more of pay.

Your Investors
One of the key elements of survival is access to capital. As a startup or small business you should realize your investors are also asking themselves how this pandemic will affect their business model. The cold hard truth is that in a crash VC’s are running their own “What do I save in the lifeboat?” exercise. They triage their deals –  first worrying about liquidity of their late stage deals which have the highest valuations. These startups typically have very high burn rates and funding for those could fall off a cliff. You and the survival of your startup may no longer be their priority and your interests are no longer aligned. (VC’s who tell you otherwise are either naïve, lying through their teeth, or not serving the interests of their investors.) In every major downturn inflated valuations disappear and the few VC’s still writing new checks find it’s a buyer’s market. (Hence the term “Vulture Capitalists.”)

Some investors have only lived in a booming market when valuations only went up and investment capital was plentiful. But investors with grey hair can remember the nuclear winter after the past recessions of 2000 and 2008 and can offer some historical patterns of crashes and recovery to CEOs running early stage startups – some who weren’t born when the crash of 1987 hit, were 10 years old in the crash of 2000 and 18 in the last crash of 2008. Keep in mind, that today’s circumstances are different. This isn’t a bear stock market. This is a conscious shutdown of most of our economy, trading jobs for saving hundreds of thousands of lives, that’s causing a bear market and a likely recession.

Data from the last large crash in 2008 had seed rounds recovering early, but later stage funding cratered and took years to recover. (see the figure below showing quarterly VC investments before and after this crash – part of this post from Tomasz Tunguz.)

This time around, the health of the venture business may depend on what hedge funds, investment banks, private equity firms, sovereign wealth funds, and large secondary market groups do. If they pull back, there will be a liquidity crunch for later stage startups (Series B, C…). For all startups in the short term, the deal terms and valuations will get worse, and there will be fewer investors looking at your deal.

As a startup CEO you need to know if your board is going to be screaming at you for not radically cutting burn rate and coming up with a new business model or, will they be yelling at you to stop being distracted and stay the course?

And if the latter, I’d want to know what skin in the game they have, if they’re wrong. It’s pretty easy for VC’s to tell you that they’ll be right behind you when you’ll need a next round, until they’re not. Unless your investors are matching their orders for “full speed ahead” with a deposit into your bank, now is not the time to be railroaded into a burn rate that is unrecoverable.

Prepare for a long cold winter.

But remember no winter lasts forever and in it smart founders and VCs will be planting the seeds for the next generation of startups.

Lessons Learned

  • This is a conscious shutdown of our economy, trading jobs for saving hundreds of thousands of lives
  • It’s likely going to cause a recession
  • The Covid-19 virus will change how we shop, travel and work for at least a year and likely three
  • It’s inconceivable that you can have the same business model today as you did 30-days ago
  • Put in place lifeboat plans for three-month, one- year and three year downturns
  • Recognize that your investors will act in their interests, which may no longer be yours
  • Take action now
  • But act with compassion

20 Responses

  1. Steve, very well said.

    I sent this message to the CFOs of my companies:

    Action This Day

    Our first priority is the health and safety of our families, employees, customers and communities.

    As CFOs, our next key priority is preserving cash.

    For immediate action:
    1. Evaluate your liquidity and likely cash out date under your worst-case scenario.
    2. Objective: minimum of 18 months of cash. 24 months is better.

    If you have more than 24 months, congratulations.

    If not, take action now.

    1. Draw down all debt commitments. It’s like buying insurance. There’s a cost, but it’s worth it if things get worse. Ask existing and new lenders for additional funding.

    2. Make a list of all vendors, by $ spend amount. Call all large vendors and ask for lower prices. If appropriate, offer to sign a longer agreement in exchange for lower cash payments in 2020 and 2021.

    3. Review all marketing programs. Cut marketing by x%.

    4. Payroll costs are probably your largest cost item. If necessary, you may need to take action. Choices include:
    a. Hiring freeze.
    b. Layoffs.
    c. Cut all salaries by 20%. Cut CXO salaries by 30%. Award equity to employees equal to the value of their reduced salaries.

    5. Some of your customers will delay paying you; some will default. Credit card customers will dispute charges leading to chargebacks to you. Monitor collections and chargebacks frequently. Develop a playbook for mitigation.

    6. If you own bonds or other investments, review them for risk. Some companies, and perhaps some governments, may default.

    7. Because events are changing so quickly, have your CEO consider sending a short weekly email to your Board with any updates.

    Call me if you’d like a sounding board to discuss the decisions you’re considering.

    Most of all, stay safe.


  2. This is a really bad plan. This is a recipe for failed businesses and a recession.

    The key thing to do is pivot: How can your work be relevant to this crisis? There are changing market conditions, which create all sorts of inefficiencies, new beachhead markets, and new opportunities.

    There is a huge population stuck at home. They need safe food. They need to connect with each other. They need to keep working and learning. The big players aren’t there yet. Your startup can be.

    • PM, I have to disagree. The writer is stating the obvious needs that have to be addressed as a first priority. The business has to first exist in some form. To your credit, you are being forward thinking. Once structural minimum operations are in place, then they can think about a pivot to satisfy unfilled needs or spot new opportunities.

  3. Really good Steve. Hope they are listening to you.

    Take care of yourself and family.


  4. Steve, all very good points, stressing the importance of getting clarity on the financial position, being agile and taking swift decisive action. I would also add that organisations (especially SMEs) can look at the situation as an opportunity. Businesses are going to be looking for ways to reduce their costs, increase efficiency, operate online, work with remote staff and to find new ways to carry out sales. All of these can create opportunities and urgency for people to look at new solutions. Take care and stay safe. Chandresh

  5. I took the liberty to translated your article into brazilian portuguese so people here can access such an important content:

  6. Sadly, I have to agree with Steve. I work with many startups that are still in the development stage. Most of them were planning to launch somewhere this year, or even in the next few months. Some of them were looking for investors. Many of them are in disarray. For pre-launch startups the situation is in some ways worse (the whole enterprise might collapse before it even starts) and in some cases not as bad as cost levels are still low. Any innovative suggestions on what pre-launch startups can do?

  7. Bravo Steve! This is the most somber, take-no-hostages summary that every CEO should read, digest, reflect upon, and… roll-up his/her sleeves! Reason being: this year’s imminent recession is not a question of “IF” anymore, but “WHEN”. And it may last beyond 2020, too.

    Financing velocity will slow-down to a crawl. Extreme investment caution, volatility in the stock market and declining multiples are here to stay. Recklessly “buying” growth by burning lots of cash may become the last nail to such a company’s coffin. And the ever-growing financing rounds without sustainable growth in revenues & profitability – seldom work. WeWork tried it…

    Remember, if Donald Trump calls himself a war-time President, you can start calling yourself a war-time CEO! And in war… all the assumptions drastically change. I know so, as I lived through one. So, what to do when revenue growth & cash flows crawl to a halt?

    Accept that in a CRISIS mode, companies need to look at CRISIS STRATEGIES! What are such unique strategies? My advice to CEOs: to begin with – don’t delay! Get help from experienced Operating Advisors/Mentors NOW – before it’s too late! Each company’s challenges are unique. There is no one-size-fits-all solution. So, companies must stop imitating their competitors. After all, imitation works well in karaoke bars – not in business…

    To survive & evolve, companies need help to “stretch” their dollars and accelerate the growth of revenues not only from customers but also from… NONCUSTOMERS. And they must tap into unique & yet unexploited capital pools!

    A crush-tested Operating Advisor can help companies to sharpen their Value Propositions and boost their ROIs in times of extreme calamity. This is precisely why I repeatedly advise the startups to start using Corporate Venture Capital (CVC) more… intelligently

    Interestingly enough, a few weeks ago, Steve wrote about a truly poor judgment of a certain CEO. The feeble chap refused to meet him to get advice. Apparently, he was too busy to do so… It puzzled me so much, that I commented on above using the metaphor of a high-school physics teacher being too busy to meet Albert Einstein for a chat…

    Well, I hope this buffoon is not too busy now – or maybe he is… running for cover. As the sky is falling and the apocalyptic predictions begin to rival the 10 plagues faithfully recited during each Passover Seder – take note: unless your name happens to be Moses and you can part water – listen to Steve’s advice!

  8. Completely agree Steve. The deadly reality

  9. I love the exchange of perspectives. My 2 cents – there are three prime directives for any business. To survive – fulfill your purpose. To succeed – fulfill your mission. To lead – fulfill your vision. These build on each other – if you are not fulfilling purpose, forget the rest. Having money is great, but if it cost you your employees and your customers – you failed the test. Remember – investors are glad to fund a business that has a products and customers.

  10. Sandra Denis,

    Here’s the article by Steve Blank …

  11. Love it Steve, and Jeff.

    Below is a post I wrote a few days ago that might also be useful to some people.

  12. A discussion of simple spreadsheet financial models can be found at: The approach is compatible with the cost and revenue blocks of the business model canvas.

  13. Nice! Thanks for sharing.

  14. Well said
    I wish people could read these words and take it into consideration

  15. Well done!

  16. can i post this article on my website

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