By Yusuf Ozdalga on Tuesday 10 May 2022
A negative macroeconomic environment is surely not pleasant, but with the right actions and the right business model, there should be no need for panic, writes QED Investors'
New data released recently said that the US economy contracted in the first quarter of 2022. An official recession is only triggered after two consecutive quarters of decline, so we are not yet in official recession territory.
However, the stock market, especially for growth stocks, had one of their worst months since 2008 in April of this year, so there is definitely room for concern.
The economic elevator very much seems to be going down.
So what are the implications of this for fintechs? How should an entrepreneur attract capital and new investors in an adverse macroeconomic environment?
How should one change their elevator pitch if the economic elevator is going down?
While there is no “one size fits all” answer to this question, there are certainly some guidelines that should help any founder.
First and foremost, this is the time to focus on unit economics if there ever was one. As we have said before, the best immunity against market volatility is the vaccine of solid unit economics and the booster of a strong culture. In other words, focus on your numbers as well as your people.
Let’s take each one of these in turn.
Unit economics gets talked about a lot, but many organizations do not truly internalize what it means to focus on them. What it means in practice is that you measure and record the value of each customer.
Many companies only look at vertical economics (i.e. how much money did I make or lose this month) whereas the right focus is to also look at horizontal economics (i.e. how much is this particular customer or segment worth during their expected lifetime). This requires a good data driven culture and lots of work around measurement and segmentation.
Back in the early days of Capital One, we religiously measured these economics with our Net Present Value (“NPV”) models. We also sliced and diced our customer data in every way possible. We knew that the number the NPV model spit out was very likely wrong in an absolute sense, but we also knew that the model helped us make the right investments as we could rank order and assess decisions very accurately in a relative sense.
Similarly, culture gets talked about a lot as well, but many organizations do not fully internalize how important culture can be. Especially for a fast growing organisation, it is very important to keep a keen eye on how the culture is evolving.
As a leader, you need to constantly reward the right behaviours publicly while reprimanding or punishing the wrong behaviours.
This becomes even more important as your company expands into new geographic areas. A best practice in these cases is to have some of your best people to go to these places to “seed” the new culture. Otherwise, you will run the risk of having strongly opposing cultures in different offices, which can spell disaster for the smooth functioning of your company.
Secondly, in addition to focusing on the fundamentals of economics and culture, when the economic elevator is going down you should also look at your runway through a different lens. Do you have at least eighteen months of runway? If not, assume you may have to do a fundraise in a very difficult time and act accordingly.
Perhaps there are things you can do to extend your runway, or there are longer term investments that are best postponed when the funding environment recovers.
Also keep in mind, whatever the action you are going to take, it is better to take it sooner rather than later. And going back to culture, it is imperative that any changes you enact are done in a clear and transparent manner. If people don’t know what exactly is going on, they will almost always assume the worst.
Finally, if you are pitching your business to an investor when the elevator is going down, keep in mind that a flat round may be the new up round. In other words, keep your valuation expectations realistic. This will be crucial as the investors you are talking to will likely be nervous themselves, and maybe getting pressure from their investment committees or their LPs.
A negative macroeconomic environment is surely not pleasant, but with the right actions and the right business model, there should be no need for panic.
Focus on your unit economics and your culture, take those decisions to extend your runway as quickly as you can, and re-anchor your expectations when you talk to investors. And most importantly, keep in mind that after every downturn comes a new upturn. The darkest nights make for the brightest stars!
The views and opinions expressed are not necessarily those of AltFi.