Clad Your Plan in Iron

For startups in 2023, surviving is thriving. Over the last decade, venture-backed companies – as long as they were growing rapidly – didn’t have to worry seriously about survival. Capital was abundant, checks were large, valuations were high and rounds were fiercely competitive. But times have changed. VCs are deploying more cautiously and doing real due diligence again. The bar for a new round of funding is higher. Growth still matters, but now more than ever, so do unit economics, capital efficiency, and a clear path to profitability. Companies that can’t meet these elevated criteria simply won’t raise. If they don’t have a clear path to breakeven, their survival will be threatened.

Survival can’t be guaranteed for any startup, of course, but there are a lot of ways startups court failure. One obvious way is to not have a plan – "Failing to plan is planning to fail” goes the adage. In our experience, most startups have something they call a plan. But often, these plans are expressions of hopes rather than thoughtful considerations of how reality might play out. They give little thought to vulnerabilities and what can go wrong. They have no protection from the arrows that an unpredictable economy will fire at them.

Just like no armor is impenetrable, no plan is perfect. But in our experience, there are eight ways startups can clad their plans in iron and drastically increase their chances of survival.

1. Build a financial model that reflects the key drivers of your business. If you’re assuming growth will increase 20% MoM without identifying exactly how and what resources will be required, you’re setting yourself up for significant disappointment. Great financial models don’t just answer questions about outputs (“What’s our revenue in 2025?”). They also answer questions about inputs (“How many salespeople do we need to achieve $10m in ARR by year end?”, “What do those salespeople cost?”, “How long will it take for them to ramp?”, “How often will a new hire not work out?”). They’re built from the bottom up, not from the top down.

2. Stand up a proper monthly FP&A process. All models are wrong, we know that. But some models are much better than others when it comes to reflecting how your business works and accurately predicting key variables. The first build of a model might have slick mechanics but it will also likely have bad assumptions and even a few critical errors. Predictive and explanatory power takes time to build. The way to build it is to run a careful monthly financial planning and analysis (FP&A) process, checking all of the key assumptions against actuals. Attention in the FP&A process should be given not just to model outputs but also the underlying assumptions that generate those outputs. Every new month of data is a test of your hypotheses about how the business builds and scales.

3. Adopt a (genuinely) conservative mindset. When we were still investing, nearly every startup founder we met with declared that their financial plan was “conservative.” Yet very few companies ever met their plans. We often want to channel our inner Inigo Montoya and say to founders, “You keep using that word. I do not think it means what you think it means.” In conservative plans, sales cycles don’t all of a sudden halve. Reps don’t double their productivity. CAC doesn’t drop precipitously as the business scales. Every hire doesn’t work out. And new ones don’t immediately ramp. Conservative plans use historical data where they can and all assumptions are set to defensible levels. But there’s more: Conservative plans build in what Seth Klarman, the famous value investor, called a “margin of safety.” For Klarman, the margin of safety was the difference between the intrinsic value of a company and its market price. An investor who purchased a stock at its intrinsic value had very little protection from the vicissitudes of the macroeconomy and financial markets. But an investor who buys a stock with an intrinsic value well above the current market price has built in protection from the market’s inevitable ebbs. Analogously, if companies set all of their assumptions at realistic levels and then build in a margin of safety by haircutting their assumptions further, they’ll be protected in part from unforeseen disruptions and downturns.

4. Haircut the inputs, not the outputs. This is critically important. Your downside plan shouldn’t be a simple “80% of topline” plan. Think carefully about what would happen in a down market. What are all of the driving variables that are likely to change? What would you alter in the face of those changes? How quickly could you act? People are often surprised by how quickly cash disappears when the key dials are turned down in a financial model. Circumstances can turn from rosy to bleak virtually overnight.

5. Don’t forget about the balance sheet. Nearly all of the downside cases we’ve seen from startups contemplate things like slower revenue growth, difficulty hiring in key positions, and smaller gains from scale. Vanishingly few consider what would happen when key variables on the balance sheet change as well. For example: What happens when customers stop paying on time or in some cases stop paying at all? What if vendors start demanding upfront or early payment to keep prices from increasing? What if inventory is harder to turn? There might be no faster way to be surprised about your cash balance than neglecting the balance sheet.

6. Identify your essential team. In early stage companies, personnel is almost always the single biggest cost. Hence getting costs down quickly and significantly means contemplating headcount reductions. Too often, founders operate with the assumption - despite evidence to the contrary - that they will never need to make workforce reductions. They concoct narratives about how cutting heads would be giving up, a bad signal to the market, or make growth impossible. Certainly, there are circumstances in which these stories are true in part, but they rarely are in full. They often delay the inevitable. Yet when you need to get costs out of a business to survive, delay is your worst enemy. Because salaries are paid out over time, a small early layoff can have the same effect as a much larger one later. Founders should thus know exactly which employees are keeping the lights on and which employees are bets on the future.

7. Clearly define your bets. If you’re a venture-backed startup, you’re undoubtedly spending considerable resources on growth and/or driving operational efficiency. You’re making plenty of bets on the future. That’s okay and all to be expected. What’s not okay is not knowing exactly which bets you’re making – and how, when, and why they’re likely to pay off. Too many times, we’ve seen founders spend big on product, sales, or marketing initiatives with no clear definition of what success or failure looks like and how they’re going to measure it. Every resource in the company that is not keeping the lights on should be thought of as a bet and for each bet you should be prepared to answer: What bet are we making? What evidence are we gathering to know if the bet pays off? How will we double down if the bet is a success? And how will we reallocate resources if it fails to pay off? If you can’t answer these questions you’ll almost inevitably end up allocating scarce resources to failing initiatives long after it is obvious they are failing. You’ll also miss critical opportunities to double down on what’s working.

8. Narrow your focus. We’ve sat on over a dozen startup boards and worked with many more startups as clients. In all of those experiences, we can’t remember a single time thinking “This company isn’t doing enough!” Startups almost never make that mistake. The mistake they make is trying to do too much. They dilute their most important initiatives with less important ones. Instead of completing critical items fast, they push forward many seemingly important items at a snail’s pace. Nowhere can this tendency to do too much be better combatted than in the planning process. Every company with an ironclad plan has done something akin to Warren Buffett’s 5/25 prioritization. They’ve written down their 25 most important goals and circled the top five. Rather than thinking about the bottom 20 goals as “still important” and to be worked on when time permits, they avoid those goals at all costs, focusing on the company’s most important goals.