Downturn Success Stories: Part 1

“Every decade or so, dark clouds will fill the economic skies, and they will briefly rain gold”

–      Warren Buffett, 2016

The COVID-19 epidemic has had a sudden and dramatic impact on financial markets. In the span of a few weeks, US indices plunged into a bear market – erasing more than 3 years of gains and $11.5T of market cap. While equity markets have partially recovered (for now), the world’s future remains uncertain as we tally the pandemic’s impacts.

Startups are adjusting to a new reality as many VCs pause new investments to focus on their portfolios, and many in the tech community wonder whether the economic – and lifestyle – shock from COVID will set off a longer-lasting downturn within the ecosystem.

Whatever the macro conditions may be, there are always opportunities to create value in the early stage landscape.

The B2B software space in particular has seen inspiring success stories from past downturns that remind us of what’s possible this time around – below are some of my favorites.

Atlassian weathered not one, but two financial crises on its way to becoming a $36B+ juggernaut. Started in Australia during the 2001 dotcom crash, the founders bootstrapped their company off $10,000 in credit card debt, and the team lived (and worked) together in The Tenderloin when they opened their San Francisco office. They finally decided to raise venture funding in the wake of a second financial crisis, but pulled through with $60M from Accel in 2009. Atlassian reached IPO off only $210M in private funding, driven to success by a values set honed by the lean times they weathered:

• Open company, no bullshit.
• Build everything with heart.
• Don’t f*** the customer.
• Play as a team.
• Be the change you seek.

Twilio was started amidst high times and soaring markets when Jeff Lawson, Evan Cooke, and Josh Wolthuis quit their jobs and started building in early 2008. Following 20 grueling investor pitches and rejections, the founders gave their final pitch to a prominent Silicon Valley seed fund … the day Lehman Brothers collapsed. The investment fell through, but the team kept building, with no salaries or company bank account, until revenue started to flow. Twilio closed thousands of customers within several weeks of launch, and eventually IPO’d off of $241M in venture funding. The company crossed the $1B/yr revenue mark in 2019, and currently trades at a $14.6B market cap.

Hubspot grew accustomed to good times in the 2 years following its 2006 founding, growing from 100 to 700 customers in 2007. The crash hit just as the company began to scale its sales team, but CRO Mark Roberge found surprising advantages amidst the chaos. Hubspot was able to access previously unavailable (and unusually hungry) talent, and the tough times forced the team to be laser-focused on delivering a must-have product with amazing unit economics. Better yet: the capital crunch forced many of Hubspot’s competitors into bankruptcy, providing a tremendous white space opportunity. The company IPO’d after only $121M in venture funding, and is now worth $6.7B.

A few key takeaways from these stories and my own observations:

–      Teams accustomed to “operating lean” fare best in times of crisis, while companies with a high-burn philosophy may face painful adjustments in order to reach the default operating efficiency of leaner competitors.  There’s a difference between “lean” and “precarious”; always be sure to keep 9+ months of runway.

–      A strong mission, values system, and camaraderie can save a company – and might be the only thing holding your team together when lavish perks and high salaries aren’t an option. When customers start making cuts, a rock-solid relationship forged by your company’s culture can help you stay onboard.

–      Amazingly talented people were laid off during the last crisis, and early data suggest a similar situation this time around.  While many companies are reducing headcount by 20-30%, keep your ear to the ground and save some budget room to pick up the star employee(s) that competitors might lose. You’ll be grateful to have them, and most will remain grateful to have you – even after the crisis passes. Remember to choose wisely, lest you pick up someone else’s non-contributor.

–      While it’s tempting to hyper-focus on operational matters, it’s equally important to look externally. Crises can remove noise from the market and sharpen customers’ pain points. Pay attention to market dynamics and look for opportunities that your competitors are leaving unguarded. Follow Bill Gurley and Chetan Puttagunta’s advice – use your customers’ payment flexibility requests to build a deeper understanding of what they actually need, and what you’re doing to help them. During a crisis, the best-performing products have a direct and substantial impact on cost savings or revenue growth.

In my next post, I’ll continue the story around investing in downturns with some experiences from Wildcat partners who led rounds into startups during the past financial crisis. Several overcame their hurdles and emerged from the crisis as stronger, better companies that exited for $B+ valuations.

I’ll explore how our partners found and worked with those companies, and what we might be looking for this time around.