The Opportunity of Economic Uncertainty: “Can you say Tariffs?”
For early-stage tech companies backed by venture capital or private equity, rapidly changing factors like trade issues, unpredictable market conditions, fluctuating investor sentiment, and the shifting customer demands can pose significant challenges to say the least.
But these challenges actually represent an opportunity to build the long-term resilience that would help your organization weather both current and future storms. Here are five key strategies to employ in uncertain times like these.
ONE - Get Flexible
When political or economic changes are likely to bend you into a pretzel shape, best to be really flexible. That means configuring a leaner, more flexible and agile operation. Leanness lets you bend more easily because you’ve eliminated the rigid structures that support only one way forward by impeding your ability to flex. Your organization needs an agile structure to let it quickly adjust or pivot in response to new market conditions, technological advancements, customer preferences, or God forbid, tariffs.
Steps for achieving a lean and agile organization:
Streamline Operations: Identify and eliminate inefficiencies in your operations. Take a hard look at processes, technology, and workforce allocation. Use lean principles like continuous improvement (Kaizen) and reduce non-essential activities that consume resources without adding significant value.
Technology Optimization: Leverage technology to automate mundane tasks and streamline business operations. Cloud-based tools, artificial intelligence (AI), and data analytics can reduce overhead and improve the speed of decision-making, all of which are vital during uncertain times.
Flexible Workforce: Consider adopting a more flexible workforce strategy, such as hiring contractors or utilizing remote workers. This allows you to scale your team quickly in response to demand fluctuations, without committing to long-term payroll expenses.
TWO - Focus on the Cost Side
Turn your fiscal focus from the revenue side to the cost side. Tech companies, particularly early-stage ones, often operate on tight budgets and high burn rates. Preserving capital and ensuring that every dollar spent is well-invested is key to being able to adapt to external change.
Strategies for cost management:
Reduce Non-Essential Expenses: Start by reviewing all expenditures and identifying areas where you can reduce costs without harming the core business operations. Cutting discretionary spending, deferring non-critical capital investments, and reassessing supplier contracts can lead to significant savings.
Focus on Cash Flow: During times of uncertainty, cash flow management becomes even more critical. Forecasting cash needs, managing receivables more effectively, and delaying non-urgent investments can help you maintain a cushion in challenging times.
Negotiate with Suppliers and Vendors: Leverage your relationships with suppliers to negotiate better payment terms or lower costs. Many vendors are willing to work with companies that are transparent about their financial situation. Discounts, deferred payments, or renegotiated contracts can help improve cash flow.
Scenario Planning: Regularly conduct scenario planning exercises that model both the best and worst-case financial situations. This allows your leadership team to identify potential stress points and prepare solutions ahead of time.
THREE - Diversify your Revenue Streams
Seemingly this strategy conflicts with a strategy of tight cost management. But in fact, cost management efforts give you the headroom to diversify your sources of revenue by expanding beyond your core offerings. When the winds are shifting you don’t want to commit only to a path that might lead you upwind. So, if your company relies heavily on one product, customer segment, or geographical market, any disruption in that area can have a devastating impact on your revenue. Diversifying your revenue streams gives you room to tack.
Ways to diversify revenue:
New Markets and Customer Segments: Consider expanding into new geographic markets or targeting additional customer segments that may be less impacted by the current economic downturn. For example, if your product primarily serves small businesses, expanding to enterprise clients could help mitigate risk.
Expand Product and Service Offerings: Look for opportunities to diversify your product or service line. This could include introducing complementary products, offering bundled services, or creating a new pricing model (e.g., subscription-based models). Diversification helps spread risk and creates new growth avenues.
Recurring Revenue Models: Implementing a recurring revenue model can provide more predictable cash flow, which is valuable during times of volatility. If you don’t already have one, consider introducing subscription services, maintenance contracts, or other recurring revenue streams to build stability.
FOUR - Think Long Term
Just when you feel you’ve got to focus only on the near term, it’s time to give concerted effort to thinking long-term. A tactical response to a short-term inflection point (say, a coming tariff regimen) only gets you as far as the inflection point lasts. Then what? So, the real question is: How will you leverage your new Agility, Cost Discipline, and Diversified Revenue streams over the long term?
Key components of strategic planning:
Focus on Core Competencies: During times of uncertainty, it’s crucial to double down on your company’s core competencies—those unique capabilities that differentiate you from competitors and provide the most value to your customers. Focus your resources on enhancing and expanding these areas to maintain a strong competitive edge.
Align Your Strategy with Market Trends: Stay informed about broader economic and technological trends that may impact your industry. Understanding where the market is heading and aligning your product roadmap accordingly can help your company remain relevant and ahead of the competition.
Contingency Planning: Develop contingency plans that allow you to respond to unforeseen changes or disruptions. This could include diversifying your supply chain, ensuring business continuity with remote working capabilities, or having backup strategies in place in case of a downturn in customer demand.
Strong Leadership and Communication: A critical part of long-term strategic planning is maintaining strong leadership and open communication. Your team needs to trust your vision, even in times of uncertainty. Regularly communicate with your employees, investors, and customers to ensure alignment and confidence in the company’s direction.
FIVE - Keep Your Investors Close and in the Know
If you are nervous, consider what your investors are feeling. Now is the time to bolster relationships with your investors. Clear and transparent communication will help foster trust and collaboration, ensuring that your investors remain supportive and engaged as you work through difficult circumstances.
Investor communication strategies:
Regular Updates: Keep investors informed about the financial health of the company, key strategic decisions, and any changes in direction. Regularly scheduled updates—whether quarterly or monthly—demonstrate proactivity and build confidence.
Be Transparent: If your company faces challenges, be upfront with your investors. Acknowledge the difficulties and outline a clear plan for overcoming them. Investors prefer honesty and are often willing to provide additional support if they understand the situation and see your commitment to resolving it.
Seek Guidance and Support: Don’t hesitate to tap into the experience of your investors, particularly those with backgrounds in navigating uncertain environments. Their guidance could help you find innovative solutions and secure additional funding if necessary.
The Unwelcome Opportunity
The old saying is: “Never let a crisis go to waste.” By Building Flexibility, Focusing on Costs, Diversifying Revenue Streams, Thinking Long-Term, and Bolstering Investor Relationships, leaders of early-stage venture or PE-backed tech companies can build the resilience needed to thrive through the current storm and also emerge better equipped to weather the storms that are sure to come in the future.
By Ken Marshall, Managing Partner