Use chronological scenario planning to help your startup get through a potential recession – ProWellTech

A guide for creating a decision tree

Use chronological scenario planning to help your startup get through a potential recession – ProWellTech 1

Over the past few months, investors from Sequoia to YC have sounded the clarion call to get their portfolio companies preparing for winter. At this stage, it does not matter if we agree or not: Enough momentum in the market has shifted that market behavior has become a self-fulfilling reality.

Over the past 60 days, we have been working closely with our portfolio companies to help devise “winterization plans.” We have gone through this exercise enough that we have seen some patterns that might be helpful to others as they create their own plans.

We agree with many of our peers that scenario planning is vital at this stage. This is a point that we have communicated repeatedly to our own companies. We have found that placing scenarios within a 36-month decision tree is particularly useful for preparing winterization plans.

Why 36 months when the usual feedback is 18 to 24 months of runway? We also believe that this downturn has the makings of a longer lasting and more volatile slump. A 36-month perspective is a more appropriate time horizon for collecting more information so you can decelerate even further (with cash to pivot) if things are worse in 12 months or accelerate if things are better in 18 months.

Chronological scenario planning forces you to set drop-dead dates to make decisions, all in the context of having enough cash on hand to gracefully pivot. It forces the company to think in an “if, then” structure that is much more actionable than siloed scenarios.

Cutting all costs to survive without the ability to make progress is not really surviving.

We hope the information below helps you create your own decision tree for winter. The sooner you embark on the exercise, the more your psychology can move from “fearful unknown” to “curious possibility”  —  and in these periods of volatility, psychology has an outsized impact on outcome.

Preparation

Before you can start creating your decision tree, you should ensure you have the following materials prepared.

Burn model

Have a detailed monthly burn model until “cash-out” for your current plan. This should include the usual categories like revenue, COGS, salaries, etc. Ensure you break out recurring internal expenses (office space, software subscriptions, etc.) from consultant fees, lawyer fees, from capital expenditures. Try to start separating essential from non-essential costs.

Two key points:

  • Be honest with yourself on how well you actualize forecasts .  Are you always spending more and making less than you project? That is a recipe for disaster when you are planning against burn. This is not a fundraising model;  this is the time to be conservative with your numbers so you have a realistic picture of your expenses. If you don’t actualize your forecasts, start putting that discipline into the organization immediately. Once you close a month, look back at your forecast and see how you did. Getting good at forecasting and budgeting is a necessary skill in a tighter capital market. Get that skill now.
  • Everyone regrets not making cuts sooner  —  often more than months too late. What you think is essential is likely not essential. I have unfortunately had to go through several scale-backs in my career, and I was always shocked at how much fat I considered to be muscle.

Updated organization plan

What is your current hiring plan? Has it changed in the past 10 weeks? Have you conducted performance reviews recently, and do you have an understanding of who your lower decile performers are at the company?

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