Experienced sailors know If they turn the wheel too hard, they will soon find themselves needing to compensate, or worse, capsize the boat.
The same goes for startup entrepreneurs and venture capitalists trying to navigate lean times.
Unfortunately, many startups and their boards mishandle periods of low capital availability—as the current downturn is predicted by many—by overreacting or overreacting.
In this context, overreacting when you cut costs too aggressively, hurts your ability to take advantage of new business opportunities and undermines future growth opportunities. In sailing, this means lowering your sails until the boat can no longer move through the water.
Being overly frustrated may help you survive, but it also diminishes any potential to get you where you want to be. Venture capitalist Frank Foster calls this approach “small furry mammal mode” designed to survive the Ice Age.
Arbitrary cuts to your revenue plan may be easy to model, but they’re a lazy substitute for guiding the path your startup might face.
On the other hand, low responsiveness means waiting a long time before making the necessary adjustments. This is similar to cruising along at full speed but realizing too late that your boat is about to tip over the edge of a waterfall.
In my experience serving on startup boards, each of these mistakes is a function of action — or inaction — based on gut feeling instead of data.
Appropriate response is deliberate, cash and resource management. The startup must survive and also be positioned to grow. If you don’t have a multi-year runway, you should treat your money like it’s oxygen in space. But you need to use some oxygen to breathe. Knowing how much cash to use requires planning.
Situational analysis can help you develop that plan and make informed decisions in real time as conditions change. This approach requires creating a few realistic scenarios that your company may face in the near future.