Experienced sailors know that if they turn the wheel too hard, they will soon need to compensate by turning it in the other direction, or worse, they will capsize the boat.
The same holds true for startup entrepreneurs and venture capitalists attempting to manage through lean times.
Unfortunately, many startups and their boards mismanage periods of low capital availability — as the current downturn is projected by many to be — by overreacting or underreacting.
In this context, overreacting is when you slash expenses too aggressively, compromising your ability to take advantage of new business opportunities and crippling prospects for future growth. In sailing terms, this is like lowering your sails until the boat is unable to move in the water.
Overreacting may help you survive, but it comes at the cost of diminishing any capacity to get to where you really want to go. Venture capitalist Frank Foster calls this approach the “small furry mammal mode” — designed to survive an ice age.
Arbitrary cuts to your revenue plan may be easier to model, but it’s a lazy substitute for navigating the route your startup will likely face.
Underreacting, on the other hand, means waiting too long before making the necessary adjustments. This is akin to cruising along at full speed but recognizing too late that your boat is about to drop over the edge of a waterfall.
In my experience serving on startup boards, each of these mistakes is a function of acting — or failing to act — based on gut feeling instead of data.
Reacting appropriately is a matter of deliberate, measured cash and resource management. The startup needs to survive and also be put in a position to thrive. If you do not have multiple years of runway, you have to treat your cash like it is oxygen in outer space. But you also need to use some of that oxygen to breathe. Knowing how much cash to use requires a plan.
Scenario analysis can help you develop that plan and make informed decisions in real time as circumstances change. This approach requires generating a handful of realistic scenarios your company might face in the near term.
This article was originally published on TechCrunch.com. Read More on their website.