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Tech Founders Share Plans for Surviving the Bubble Burst

How screwed are you if the frothy tech market turns sour?

Flickr / nikkytok

Is this the end of the glorious tech market bull run?

There are as many answers as people to ask. But that’s the question on everyone’s mind since last week’s China-induced market meltdown that hammered tech stocks, which continued Monday morning. Companies ranging from Twitter to Alibaba dipped below their IPO prices. Investor Bill Gurley from the venture firm Benchmark tweeted a series of warnings to startup founders, telling them to prepare for leaner periods when profits (egads!) will once again matter more than growth.

Brad Feld, an investor at venture firm Foundry Group, agreed. “Knowing how you are going to operate your business successfully in a down cycle (or bear market), especially one that is prolonged, is important,” he told Re/code. “The advice [I give] varies based on the company and is very context specific, but the punch line is often ‘Make sure you know how to run your business so you don’t run out of cash.'”

Re/code reached out to founders of startups of varying sizes — from early stage to unicorns — to find out how they are preparing for the worst. A handful were happy to discuss plans, some spoke with us anonymously and others weren’t in a chatty mood at all.

Not surprisingly, most said they were not at risk of demise in a down market. One person claimed a bubble burst would actually help his business.

Overall, what we discovered was that, at least from our entirely unscientific survey of startups, most have avoided repeating the mistakes of their predecessors. These founders have assumed the next round of financing would not come easy, many have stockpiled for a rainy day and several are already focused on earning profits and have pushed hard on revenue growth while keeping expenses in control.

How any of them will survive a big crash is anyone’s best guess. But at least one thing is clear: Those who responded to us are not the Webvans, and TheGlobe.coms of today.

Here they are, in their own words. The responses have been shortened for clarity.

Danielle Morill, Mattermark data analytics on startups and the venture industry
Funding: $11.4 million

When Brad Feld invested in us, he actually asked me about exactly this. From my initial pitch email in October 2014 to now, our plan is pretty much the same if things get bad.

Report on every minute of it with data. Longer contracts. Avoid selling to startups or SMBs, or businesses whose customers are startups or SMBs. Cut expenses, hunker down and become profitable. I’d also add that we will avoid signing massive expensive long leases or any other kinds of fixed-cost contracts like that.

Jonathan Matus, Zendrive data analytics on drivers’ performance, collected through their smartphones
Funding: North of $1.5 million

We have an unfair advantage: An engineering office and co-founder in India. Our cost structure allows us to grow when others need to cut costs.

Stewart Butterfield, Slack chatting and communication service used internally by companies
Funding: $340 million

We don’t have a hunker-down plan. Though I wouldn’t wish a hard crash on anyone, we’d actually come out ahead even in a pretty severe correction.

We’re in the fortunate position where we have healthy unit economics, high growth, low burn (and revenues growing faster than expenses), a product that customers would be very reluctant to give up and a huge pile of cash (at our current burn rate, it would take a couple of decades to run out).

On the other hand, in a big correction nearly everything would get easier for us: Less competition on the hiring side, cheaper real estate, lower advertising rates, acquisitions would become affordable and so on. It’s possible our organic growth would slow, but the advantages would outweigh the drawbacks in any scenario short of breadlines in Manhattan.

Eileen Carey, Glassbreakers peer mentorship platform for women within companies
Funding: Over $1 million

To prepare ourselves for a “winter is coming” scenario, we chose to invest all our time in the enterprise product. We tested a premium version of our offering with some smaller and mid-sized customers, but realized should the market turn, it would be best to land larger annual contracts with big enterprise customers, as we had demand for both markets. We [built] added security and raised enough runway from angel investors to last us through the longer enterprise sales cycles so we’ll be able to operate on revenue throughout 2016.

Ted Livingston, Kik messaging platform
Funding: $120.5 million

One of Kik’s guiding philosophies is to consider all the options. That’s why we ask ourselves every day, “What if the market crashed tomorrow?” We’ve been doing that since day one. We’ve been deliberate about how we’ve scaled so that, if the market did crash, we wouldn’t have to conduct mass layoffs. Instead, we could just keep executing according to the plans we already had in place.

Jay Hallberg, Spiceworks social network for IT professionals
Funding: $111 million

As an almost 10-year-old company, we’ve experienced plenty of market ups and downs. Spiceworks was a two-year-old startup during the 2008 crisis. We were well capitalized and, more importantly, had been managing the business in a fiscally prudent way. During that crisis, we continued hiring, we didn’t have a layoff, we grew our user and customer bases, we increased revenues and we continued to invest in the product.

[W]e feel confident in whatever may come as we’re in a strong financial and market position, we can adapt as needed, and we’ll remain focused on building a company for the long term.

Funding: North of $100 million

If funding completely dries up, we have many years of runway, so we aren’t making any extensive plans for how to prepare for a market turn. We always operate under the assumption that the last round of funding was the last money we’ll ever raise, and we act accordingly. We are watching our spend and our burn closely and will spend lots of effort growing revenue in the coming year.

Aaron Skonnard, Pluralsight online courses in programming, IT, design and other areas
Funding: $162 million

Given that we’re profitable, we don’t tend to worry about this as much as the other fast-growing tech companies that are fueling their growth with huge burn rates. This is one of the major benefits of figuring out how to produce EBITDA early on — you become somewhat immune to those types of market fluctuations and external forces.

Funding: North of $15 million

We don’t really have an “emergency plan.” We’ve never thought that our next capital raise would come easy, and we’ve never run at a cliff. I would be skeptical of the longevity of any company that needs to make fundamental strategic changes because of a sobering fundraising environment, it isn’t indicative of a company that plans to be around for a long time.

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