Plan for Bad Times, Budget in Good Times

When times are good at our startups, we think it will never change; when times are bad, we think it will never change.

Yet the only constant with startups is change.

The challenge for many Founders is that this is likely the first time we've had good or bad times, so we have yet to see a full cycle. That makes it difficult to know whether this is a short-term blip or a long-term trend. As such, we tend to grossly overcompensate by spending too much in good times and running for the hills in bad times.

How Startups Actually Grow

We all have this fantasy that our startups constantly grow "up and to the right!" on our beautiful charts. The reality is way different. The best way to think about our startup journey is a constant cycle of "feast or famine."

Our feast periods are typically tied to funding rounds or early customer revenue. At that moment, we're feeling fat and happy, and we think in terms of abundance. We make key hires, spend aggressively on customer acquisition, and think more about growth than safety.

But invariably, the money runs out, we panic, and we start cutting every possible cost with the assumption that "This is the end!" In many cases, we're able to find a way out of the calamity with yet another funding round or some new revenue, and then the cycle repeats itself again... and again... and again.

Good Times = Stop Spending!

So how do we deal with this crazy cycle? We need to learn how to act in good and bad times so that we can level out our reactions to both. Let's start with the "good times" because, frankly, those are way easier to get right.

In good times we're going to be highly encouraged to focus on growth, which is generally a good thing. But we need to realize that every commitment we make is actually a liability that we have to sustain long-term. Instead of spending all the money like it's never going to go away, we should consider setting a certain amount aside for rainy days.

A good rule of thumb would be to set aside 1/3 of what we have for a "rainy day fund," even though, by definition, the skies look very clear right now. The old adage "It's better to have capital and not need it than to need capital and not have it" absolutely applies here. Limiting our spending in good times is hard, but this is exactly the point.

Bad Times = Stayin' Alive!

It's never a question of "if" the bad times will be an issue; it's a matter of "when." Whether it's macroeconomic forces that slow things down, a major competitor entering the fray, or just a capital raise that takes forever to close, there's always a drought looming.

Our tendency in bad times is to freak out and assume we're done for. But experienced Founders will tell you that this is a natural cycle of contraction that every startup goes through, many times. We have to pay back staff, marketing expenditures, and anything else that we can to give us more runway for the time being. It's painful, but it's real.

Now, if we were more prepared in the good times, we may have stowed away a bit more cash to help us through, but that doesn't change the fact that we still have to go on a bit of a diet to survive. And that's what this is all about — survival. We need to be around long enough for the next uptick — that's the only objective.

In Case You Missed It

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