Just a few weeks after the beginning of the Coronavirus outbreak, the first SaaS businesses are reporting cancellations. The bootstrapped SaaS world may not be affected by the pandemic as much as other industries, but we are already seeing second-order effects appearing.
For example, you may not be affected by the temporary closure of bars and restaurants directly. Still, if you’re running a business that sells to these establishments or those they rely on, you’ll see some changes in the future. For SaaS businesses like OpenTable, this future has already started, as they see bookings going down 50% and more. This development has a trickle-down effect into many adjacent industries, in the same sector and beyond.
Online Sports Betting Platforms, a kind of business that did well in prior recessions, find themselves in a tight spot at the beginning of this pandemic. With most sports leagues suspended or canceled, their revenue streams that usually picked up when the economy tanked are starting to dwindle. No recession is the same, and what worked before doesn’t mean it will work reliably this time.
With a recession looming over the economy, it’s a good time to look into what you can do in your business to get through tough times. Just like building a sellable business results in an easy-to-run company, no matter if you intend to sell it or not, making your business recession-proof will have benefits outside of tough times as well.
In reflecting on my own experiences of working in SaaS businesses back in 2008 and the years after, I’ll make a case for how bootstrappers can approach setting up their businesses to withstand the up and downs of increasingly interconnected global economies. I’ve compiled this into the AAAH!-Framework, short for Awareness, Anticipation, Adaption, Hopeful Optimism, and Action!: actionable steps to make sure you meet the challenges of a recession.
Awareness — Accepting That Change Is Happening
It all starts with not looking the other way. Things are changing during an economic downturn. The graveyards of the economy are riddled with remnants of businesses that stared change in the face and decided to continue business as usual. Don’t have a Kodak moment and try selling the things you already sell for the price they always sold for and wonder why sales go down in a world where people buy less often and want different things.
You don’t have to understand or directly experience the reason for a recession for it to affect you. Social upheavals happen to large groups of people, and you’ll be in it whether you want to or not. Accept that change is happening.
This is surprisingly hard for entrepreneurs, who are usually quick to embrace change. It’s the entrepreneurial curse: our boundless optimism when it comes to the economy. If you think that things will work out eventually, a few years of things not working so well are hard to imagine.
Economic downturns are scary. But just like a booming economy, they are only times of change. You would react to more and more customers knocking on your door when things are looking better and better. So why not respond just as much when things are starting to look worse. Reframe the chilling word “recession” as “things that impact your business that you need to react to like anything else”, and you know what to do.
Awareness of change starts with you, the founder. If you have employees, you will need to make sure they also operate from that perspective. It won’t do your business any good if you’re working on making the business recession-proof when your customer service agents dismiss your customers’ worries and questions. Team alignment will be more important than ever, and it starts with operating in the same economic reality.
It is in that reality that your business needs to survive. By accepting that long-term change is ahead of you, you’ll be able to address what needs to be done without panicking.
Anticipation — Thinking About the Implications
With long-term change on the horizon, let’s look at how that will manifest.
First and foremost, the money dries up in a recession. Budgets shrink, and expenses are cut. Businesses will shrink themselves healthy, and if you’re not essential to their operations, you will lose them as a customer. This doesn’t mean you won’t find different customers who need your product. It just means that you might expect a shift in the composition of your customer portfolio.
Second, people are insecure and frightened of things getting worse. That will translate into their willingness to make long-term commitments, both as customers and as partners. Your customers will be more stressed than usual, less forgiving when it comes to issues, which will impact your customer service load and the intensity of the work involved. Sales and marketing will become less effective, first because the context in which they happen changed, and later due to increased risk perception in your prospective customers.
Operational capabilities will change all over the place. In your business, you might experience this in the shape of the team being less effective. Employees might look for safer jobs, and contractors might stop freelancing altogether. Services you depend on might make radical changes. Some might go out of business. Your customers might experience a shift in their needs and requirements that you will have to anticipate.
Here are a few things you might want to pay attention to and the questions you will need to find answers to:
- Legislative Changes: How are governments reacting to the cause and the consequences of the recession? How does this affect the regulatory landscape?
- Changes in Technology: Are people using technology differently during or as a result of the cause of the recession? Which outdated preferences might you rely on? Do you need to realign your messaging to reach people using these new technologies?
- Market Movements: Are purchasing patterns going to change significantly? Will important players in the market thrive or suffer? Is your niche still going to exist a year from now, or is it transforming? Will the market be saturated, or will it expand?
- Labor: How will unemployment impact the availability of talent for your business? How quickly will unemployment rise? Are your employees feeling safe with you? Will they look at other jobs?
- Competition: Will there be more or less competition in your industry? Are competitors failing? Why? Are there new competitors springing up? What motivates them? Will funding sources in your market dry up, or will investors spend more? What kind of businesses will they fund? Will businesses that were not generating revenue because they had a lot of funding suddenly have to make a profit in a way that impacts your market? Which default-alive businesses are turning into default-dead?
Let’s take a look at the COVID-19 pandemic as an example of how to anticipate these changes. Governments responded to the pandemic with social isolation policies, massively disrupting existing consumption patterns. As a consequence of quarantine efforts, work-from-home became a necessity for many, resulting in an explosive increase in the need for enabling technologies like videoconferencing and collaboration tools. With school-age children being forced to stay home as well, EdTech tools and homeschool-related fields became much more interesting all of a sudden. With people working from home and having their children around, a lack of social connectivity tools designed for this purpose became clear. Companies who had until recently only marginally served these fields started intensifying their efforts to move into that market, increasing competition among the available solutions. Other markets started drying up temporarily, mostly in industries related to tourism and non-virtual entertainment. Virtual entertainment businesses began to see sharp uptakes in usage, and delivery businesses were overrun with orders.
All of this happened with the first few weeks of the COVID-19 pandemic. The long-term repercussions of this event are unclear at this point, but the forces set in motion will result in lasting changes to industries, professions, and personal lives.
Adaptation — Implementing a Response
You’ll need to be on your toes to be able to react to changes quickly and reliably during a recession. You can prepare for this by segmenting the actions you’ll need to take into two main categories: short-term activities you can take right when a recession hits and long-term activities that you can expect to take during the downturn.
The best antidote against money drying up is having it before it stops moving. Your immediate goal when entering a recession should be to have or at least quickly build a war chest. Collect revenue as much as you can, as soon as you can. Even if you need to discount them heavily, offer and advertise yearly subscription plans. Give your customers a pay-ahead-of-time offer that they can’t refuse. You need more runway than usual over the next months.
Try having at least three months of cash as if you had no revenue on hand. That should be the minimum to aim for to give you enough time to buy yourself time for impactful changes. If you’re not yet profitable, double this to six months of cash. In this case, turn on your revenue engine as soon as you can. Even if it’s terrible at the start, it’s better than nothing. If you can get your revenue working while people are spending less and less, it’s a testament to your entrepreneurial skill, and it can only improve from there. Get it started as soon as humanly possible.
Focus on sales now, right this moment. You will need to land your customers before they stop spending their money due to budget cuts. Somewhere in the financial and controlling departments, people are dusting off the old emergency budget cut plans. Get in there before the door closes.
Finally, a thing you can do right when you get into a recession is to cut your own expenses. Cut all non-essential subscriptions. Even if it’s a bit more extra work, the costs for those services might mean the difference between staying afloat for one more month or having to declare bankruptcy.
This is an excellent opportunity for some reflection: who could be doing to your service what you are doing to all these non-essentials now? For whom are you the non-essential thing that is ready to be cut at a moment’s notice when things look bleak? Think about why that is, and how you can become the service that your customers decide to keep in moments like this.
Having a war chest, focusing on sales early, and cutting expenses are god practices in any kind of economic climate. When you’re entering a recession, they become necessities.
Another thing that is more important than ever at this point is to focus on crystal-clear communication.
Be clear to your customers that you intend to stick around. Be explicit about the measures you’re taking to deal with the uncertainties of the immediate future. Some customers may complain about your communication because every service they use has something to say at that point. I believe that as a customer myself, I’d rather ignore one more email than having to wonder if the businesses I depend on are aware of what is going on.
The reason you need to be extra clear is two-fold. Initially, you need to soften the blow for people who are starting to realize that their mental model of the world differs from reality. If you position yourself as someone who began diligently preparing before they even considered the economic change a problem, you will be regarded as a shining beacon of perceptiveness and preparation. Later on, clear communication will be an important indicator of you staying the course: if you’re consistent and understandable in your words and actions, you will build relationships of trust with your team and customers. This kind of confidence can make the difference in retaining a customer and having them cancel their subscription. Being straightforward with your team can mean that they don’t start looking for other job openings elsewhere.
Once you have taken these initial actions, you can start looking at what can be done over the next few months to make sure you stay in good shape and react to the changes that will undoubtedly begin to appear.
When I talk about changes here, I mean two things: problems and opportunities. Problems are the things we’re most concerned with when a recession hits. But opportunities will appear as well, and they will be the antidote to your problems most of the time.
There will still be customers out there looking for solutions to their problems, even when budgets are smaller, and people are cautious about buying. That’s why refining your position is vital during this time. Pay close attention to what changes in the day-to-day lives and workflows of your prospective customers. Learn from them about their fears and worries. If those change, you will have to adjust your messaging to include them in the catalog of problems you solve. If your product needs to be adjusted for this, prioritizing that will enable you to help with newly found critical problems.
Some customers will quit, and some prospects just won’t buy even if you reacted to their changing needs. Michele Hansen talks about this on her blog: in a recession, customers prefer to buy cheap. She recommends doing Customer Portfolio Analysis. You look into your customer base to find which industries and customer cohorts generate the most revenue for your business. Then, you trace their funding source and assess the risk of that drying up. After that, you reach out to customers who are in the groups that are most likely to continue to support your business. In those calls, you find out how you can serve them even better, and then double down on the learnings from those conversations.
During a recession, you want your product to be as simple and focused as possible. Any perfection of cruft or untrimmed fat can be detrimental to your prospect’s willingness to buy. On the flip side of this, any support and help they can get from you without needing to pay will create trust and goodwill. Often, that translates into referrals and word-of-mouth marketing that circumvents people’s purchase risk calculations. If you have already helped a prospect with a valuable piece of content or a free tool, they will be much more likely to do business with you.
There are a few questions that you should reflect when you’re navigating your business through a recession. Many of those questions don’t appear as often when things go well, so it might take some research to get to a meaningful answer.
- What are your strengths? Do you have any unfair advantages you could capitalize on? How can you protect your upside?
- What are your weaknesses? Where could competitors sweep in and grab vital market share? How can you protect your downside?
- What category are you in? Which category should you be in? Has there been a category shift? Will there be? Is your market still in the Goldilocks zone: small enough to escape the competition, big enough to support your business?
- Is your positioning accurately reflecting the value of my service? Could it be misunderstood due to changing circumstances?
- How can your offer be more compelling? Is lowering prices an option? What can you do beyond that to make purchasers feel safe in choosing to buy your product? How can you get existing customers to commit more to your business? What experiments can you do to find these opportunities? Who can you have a conversation with to find new avenues of talking to your customers?
For the COVID-19 pandemic, in particular, ask yourself how the existing and potential implications might impact your business:
- Are you serving profoundly negatively affected industries like Travel, Tourism, or In-Person Entertainment? What can you do to help these businesses cope with the changes that already happened? How can you help them prepare for regulation changes and shifts in consumer behavior?
- Are you serving industries that benefit massively in these times, like EdTech, Remote Work Tech, and Home Fitness? How can you help them shoulder the increased demand? Are there opportunities to help stragglers in those industries to catch up with the new reality?
- Is your service ready for work-from-home usage? Do security requirements change when it’s not used from inside a company VPN? How can you provide that? If you already do, how can you position yourself favorably?
- How will prolonged social isolation affect your customers? With conferences, meetups, and workshops being canceled, how can you help your customers communicate with each other? Can you enable your existing network of customers to form a tribe?
- Does the inability to meet face-to-face impact the sales potential of your customers? Can you help them with that?
- Which of your marketing efforts can be viewed as profiteering off a catastrophe? Can you control the messaging around it?
As a safety precaution, start looking into adjacent markets that you have some overlap with. If your business is threatened, you can move sideways and take your customers with you. In other cases, you might find excellent opportunities to partner up and mutually promote each others’ projects. In times of need, band together. This is just as true for families as it is for service providers in many industries.
Everything that can reduce the risk for your customers will help. It means making your product more stable, offer more and better guarantees, find alternative suppliers in case your supply chain is impacted. If you see something happening within your niche, move along with it. Don’t resist where things are going. Align your business with the trajectory of your customer’s needs and requirements. Reduce ambiguity where you can: be the scalpel, not the Swiss Army Knife. Do one thing really well, and have a clear value proposition that can help your customers solve their critical problems.
Revisit your strategies and tactics regularly. Things change quickly, particularly during the initial phases of a recession. There are weeks when decades happen. What was the right choice last month might become damaging to your business by next week. Keep your messaging under close observation. The sensibilities of people shift precariously, and your marketing slogans from last week might be tone-deaf today.
Healthy Optimism — Trust in Progress and the Good in Others
“This, too, shall pass.” The one good thing about recessions is that they end. They end because things turn around eventually. That doesn’t happen by chance. It happens because entrepreneurs believe that it can be done, and then they just do it.
This trust needs to come from within you, the founder. You need to have an inner compass that guides you through these times. Believing that your business is doomed won’t help you make the right choices to keep it afloat until things are better. I’ve always been a very optimistic person myself, and I think it’s important to see the good in other people even when times are tough, and they are acting from a place of fear and uncertainty.
Show empathy for other people’s plight, guide them to make good long-term choices, and supply the tools to do that. Remind them to focus their energy on the things that provide value to others. Stay away from the negativity, and don’t join the chorus of the alarmists. Be a voice of reason and productivity that people can follow.
Stay confident in your ability to adapt to changing circumstances. Create processes in anticipation of major shifts: how will you handle increasing customer service workload when new regulations change people’s workflows overnight? What happens when your crucial employee gets sick and has to stay home for weeks? Prepare for contingencies like that, and they won’t be more than small bumps on the road for your business.
Be generous, don’t fire your employees if you can avoid it. Ask for people to take a pay cut, which is often called the “Recession Discount,” and pay it back when things are better. Show your workers that you’re in this for the long run. They will stick with you if they see a future in your company. With a healthy dose of optimism that resonates throughout your actions, you will create the required alignment to get through the recession together. Tough times will eventually be over, but tough people remain. Band together even closer with your team and your customers, and you’ll be able to weather the storm.
! — Act Deliberately, but Act
One of the most important things to do when you’re entering a recession is to overcome analysis paralysis. Technical founders are particularly prone to decisional perfectionism, and that can ruin your business more than ever when you’re facing a recession.
Don’t act rashly, but act. Take a day for reflection. Work on your awareness and acceptance of the changes to come. Make sure you have answers to all the questions regarding the future of your niche, your customers, your business, and your own personal life.
Reflect on these things thoroughly, but try to keep yourself from going down rabbit holes. Nobody knows what the future will hold, we’re all giving our best guesses. If you approach your business systematically, you will increase the chance to emerge from this recession successfully.
Make notes on how you came to your conclusions. What might seem perfectly reasonable today might never again be in the future. If possible, make a recording of your train of thought in audio or video form. You might need to revisit a lot of your assumptions later, and it helps to jog your memory at that future point in time.
Let your reflections stay with you for a day or two. Recessions usually last for months and years; there is no harm in giving your brain a day to process your thoughts.
After that, get right to work. There will be a lot to do.
You can find this segment as an article on The Bootstrapped Founder blog.
Links I Found Interesting
Morningbrew took to the task of providing us with a Guide to Living your Best Quarantined Life. Stay productive, have a round of Quarantine Bingo, find workouts that you can do from home. It’s all there.
John Cutler talks about The Know-It-All CEO in his The Beautiful Mess newsletter. He talks about how mistaking how decisions are made for the methods of organizations to reflect on decision quality can lead to CEO’s losing their magic touch. It’s a brief but powerful piece on how you can optimize the way you place bets in your business.
Andrew Chen wrote about why adding one more feature to your product won’t matter as much as you think in a piece called The Next Feature Fallacy — a problem I have had myself more than once in the past. If you want to start acting and stop procrastinating, read this.
Bootstrapping Success Stories I Noticed
Sarah Hum from Canny wrote about their experience of year three of running their bootstrapped business, which includes reaching an ARR of $750k, growing the team to seven people, and settling down in Toronto after years of being nomads. I’ve always enjoyed the writing that came from the Canny team, as it’s always both insightful and relatable. If you want to see founders talking to their customers the right way, look at Canny.
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Warm Regards from Berlin,