How budgeting can help startups survive the economic downturn

Insights, News

25th May 2022

With the global economy heading for a downturn and public tech companies under valuation pressure, the knock-on effects for venture capital firms are rippling through the ecosystem.

That means VC funds are slowing down their deployment of capital, financing rounds are occurring less frequently, and valuations are falling with a worsening economic outlook.

Fund investors are expecting more discipline from VCs, and VCs are allocating more capital for their best-performing companies, leading to less fundraising opportunities for new entrants. 

While it is important as a founder to maintain optimism and determination in tough times, it is also wise to prepare for a market environment that will be vastly different going forward than it has been for the last several years.

In essence – plan for survival, even if you are able to fundraise over the coming 24 months. 

Plan, plan, and plan again 

One important tool to ensure your company survives is a well-planned budget.

Your typical early-stage startup budget has more often been used as part of the investor sales pitch rather than a useful tool to mitigate risk and optimize opportunity. 

But done right, a budget can have important strategic value, supporting you in evaluating new opportunities, hires, pivots, and other scenarios while ensuring financial discipline as well. 

A well thought out budget has a multitude of benefits: first and foremost, it can serve as your company’s commercial roadmap. It is also one of the most crucial and simplest instruments of strategic alignment for all decision-makers and stakeholders of your company and can help crystallize your business goals and make them more transparent and clear to everyone.

Perhaps most importantly, it will ensure that you’ll have sufficient liquidity to fund your current and future plans, help identify and understand what’s working, as well as locate unnecessary cost drivers.

A good budget will help you to answer the following questions:

  • What do you want to achieve (top-line goals, margins, profit, etc.)?
  • When do you want to achieve it (monthly / quarterly / yearly development, seasonality, etc.)?
  • How will you achieve your goals (e.g. product releases, pricing decisions, hiring key personnel, increasing marketing spend, etc.)?
  • How will you finance it?

Game out multiple scenarios

In times of growing uncertainty, it’s a good idea to prepare multiple scenarios in your budgeting process. Make sure you can rapidly adapt your plans to changing market conditions and understand the mechanics in-depth. Apart from the baseline budget (i.e. what you think will happen), an upside and a downside scenario can help you understand the impact of sudden changes in your business and help you prepare and plan for the right kind of reaction.  

Further readings

Our portfolio company Layer has several great resources. Not only do they offer some great tools for budgeting across teams and platforms (such as in Excel and Google-Sheets) but have also created a lot of content around the topic. 

  • A good starting point is the following 7-step list for the creation of a startup budget.

Templates

We also selected a few budgeting templates that we consider very helpful:

  • Layer’s Business Case Template, which will help you present your business plan to stakeholders and investors with the help of a detailed yet simple document that showcases your plan, how it will benefit the company, and whether it’s possible or not.
  • SaaS Plan Simple, is a simple template by Point Nine’s Christoph Janz designed for SaaS businesses that has all of the basics. Christoph has an updated version and some notes on it here.

Stay Focused

A challenging economic environment is as much an opportunity as it is a threat. Some of the most successful companies in the world started during recessions, and many other top performers were forged in the adversity of a downturn. Right now, it’s more important than ever to have a firm understanding of the mechanics of your business and to develop a robust framework to help you deal with more risk than many are used to. A prepared mind is essential for weathering a storm, and your budget is the financial expression of preparation. 

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You can find guidance such as this, as well as many other similar documents about startup topics on our newly launched website btov Startup Resources.

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