Today much is said about the startup crisis in Latin America. The hyperinflation in the world that emerged after the pandemic and the rise in interest rates to control it discouraged funds from investing in technology companies. This situation has meant that globally many startups have to lay off talent to increase their runway due to the scarcity of financing resources.
As a consequence we have had to see more than 20 thousand layoffs in Latin America. Was that the correct strategy? We are facing the typical “playbook” of cutting personnel and marketing areas, closing the operation that is not working, among others. In my opinion, this is not the right strategy.
Crises are handled before they happen
Entrepreneurs by definition are dreamers, we want to grow at full speed, expand to many markets, obtain a good volume of users and customers and develop great products. For this you need to hire talent. People are what allow us to develop technology, sell, operate, manage and lead the business so that it works. This is an adequate approximation, but what is rarely seen is how the startup is prepared and projects a negative market situation such as an economic crisis, a pandemic, etc. in its numbers.
We had our worst crisis in 2020 during the pandemic, as we faced three months without new sales and, in addition, the loss of 50% of our clients; nothing could be worse. The result was a year of 3x growth, consolidation in Mexico and a case study of Harvard Business Review about how we manage the pandemic. In our case we were able to get out of this crisis successfully because we were prepared to do so. Now what should be a good playbook to help us anticipate these situations?
Startups are businesses
A startup does not stop being a business and a business has the objective of generating money. When this north is lost, growth is prioritized, which in many cases leads to a strategy based on creating high volumes of transactions, encouraged by cashbacks or very low or even zero margins.
For this, it is key to have very clear acquisition efficiency metrics, business margins and continuously optimize them. Many startups don’t look at their profit and loss (P&L), nor their unit economics. Those documents should be the roadmap for making decisions.
Startups must seek to be profitable
It is key to always have a path to profitability. There is nothing that generates greater peace of mind for an investor than knowing that you have a positive cash flow or that you can become profitable in a certain number of months and that this depends 100% on you.
Do more with less
It is necessary to be frugal, continually reflect on how to do more with less, not only when you have little left run way, but in each of the decisions that are made. It should be part of the company culture. Just because the company has good cash flow doesn’t mean it should be wasted.
Prioritize people
Talent is key for a company. In fact, the last thing a company should cut back on is talent. How can we avoid it? Carrying out a responsible hiring process, achieving a balance between the needs of each position with the objective of hiring the best talent for the role. In the end, the company should not have more people than it needs to have.
Make smart investments
You don’t have to open markets just to open them or to show that the company is consolidating. Is it worth entering that market? Will it generate a good return for the company in the immediate future? It is key to understand the challenges of each market when entering it. Otherwise, when there is a crisis, it will probably be necessary to close operations in countries due to lack of strategy.
In short: crises are managed before they happen because you never know when they are going to arrive. Hiring responsibly and prioritizing talent should be rule #1. Having a good box does not mean that it should be wasted. Sometimes problems are easier to solve by thinking than throwing money to solve them. Finally, a startup does not stop being a business, which is why you should think about generating sales from day 1 and always having good margins.