📈 5 Point Startup Turnaround Plan
How to take control of your destiny 🔮
‘Ah, Mr. Macdonald - so you’re the one who is going to prison?’
Before I was a startup founder, I was a turnaround CEO, working with an American investor to buy distressed manufacturing companies.
In 2012 we purchased an automotive supplier in France. One of the factories had recently burned down. I was the sole director at the time and the président directeur général. We had to conduct a workforce restructuring. I turned up to the first meeting with the unions and, to my surprise, a minister from the French government was in the room. His first remark to me was a threat that I would be sent to prison. Not an uncommon tactic in the theatrical world of french labour union negotiations.
I responded in kind:
‘You’re on private property and have no right to be in this meeting. Get the **** out of our factory.’
He left, and the union were under no-illusion that I could be intimated... Or so I thought. At various points of the restructuring they tried to hold me hostage and burnt an effigy of me outside the factory. We completed a tough but fair workforce restructuring and took the company from ~€40m in turnover with a €4m loss with 3 sites in France through to a profitable position with sites in France, North America and Eastern Europe. I took part in many similar turnarounds, most successful, taking companies that we bought for a dollar and in some cases turning them into businesses which were sold or valued at $100m+ (makes top decile VC returns look weak!).
It struck me that a turnaround playbook would be a useful tool for many startups right now - so I’m sharing an abbreviated version.
Who is this for?
As Insightfull highlighted with carta data - startup shutdowns have accelerated significantly in 2023.
This turnaround plan is for startup founders who need to rapidly cut cash burn in order to survive.
I have spoken to many founders recently who face the prospect of unacceptable terms for equity or debt funding. They have two options:
Shut down their company
Make the company generate positive cash-flow
I know founders considering option 1. Some think that as soon as there’s no billion dollar outcome on the cards - they should shut-down and start working on a new idea and raise again. I think this attitude is heretical to the traditional idea of entrepreneurship. It’s been born out of years of gluttonous funding practices and excessive valuations.
For those who have been worshipping at the altar of growth for the last decade - a return to discipline and profitability can seem an unattractive path. Particularly when the tactics and strategy required to achieve profitability are painful medicines to swallow.
But let me tell you from experience - there is nothing more satisfying as an entrepreneur than taking your company to a position where it is generating cash. The sacrifices that are needed to get there are entirely worthwhile. You will be able to sleep better at night, knowing you hold your destiny in your own hands.
To illustrate how a company can go from being worth nothing to being very valuable despite significantly shrinking, here are the real financial results of a turnaround conducted by my team in my turnaround days. Growth is not the only way to create a valuable company.
Infinite runway is our goal here.
Guiding Principle
Revenue is vanity. Profit is sanity. Cash-flow is reality.
This is your guiding principle. Cash must be prioritised. In some cases you will sacrifice revenue for cash flow. In other cases you will even sacrifice profitability for cash flow.
This may sound strange to some of you - ‘what do you mean? profits are cashflow surely?’
Profits are not necessarily cash - and you will sacrifice profits if it creates more headroom, extends runway and increases likelihood of survival.
Turnaround Plan
Communicate
You are now a War Time CEO. This means centralising decision making and reducing freedom for your team. They will not like this initially.
Communicate to your leadership team and board that times are changing and capital markets require a different approach if you are to survive.
Let your team know that there will be a significant mindset-shift from all of them in order for them to adapt to the new company priorities.
Be up front with them about centralising decisions - and let them know that this temporary pain will be worthwhile when they come out the other side with a profitable company - where freedom and decentralised decision making can be restored.
Manage shareholder expectations - explaining the shift in priorities from growth to cash generation and the impact this will have on forecasts.
Ask your top shareholders for additional capital contingent on you hitting certain goals on your path to cash flow profitability.
Change the metrics by which you measure and reward the team and share at all-hands meetings during the week. Cash metrics should be prioritised - eg customer payback time, runway in months, working capital metrics and revenue realised in terms of in your bank account.
Get Control of the Cash
Ensure you and your Co-Founder are the only signatories on all the bank accounts - you can extend this to a finance person as well if necessary.
Setup a daily cash report - showing all cash across all accounts including balances on corporate credit cards and details of all payments for the previous day. This report is your new bible.
Ensure that you (the founder) are approving every single out-going payment from the bank account. No exceptions. This is the quickest way to stem cash burn. Question any payment you don’t understand, and refuse to approve payments that are not operationally critical (at least for now until you can conduct a cost review).
Cancel all existing credit and debits cards the company has issued.
Review all direct debit agreements and standing orders.
Layoffs
Enact an immediate hiring freeze.
Prepare yourself mentally - remember if the company does not survive then everyone loses their jobs. This is a mantra to repeat to yourself and other stakeholders when justifying the difficult decision to layoff team members.
Cut once, cut deep and cut quickly. Do not wait to ‘see if things improve’. Having to do a second cut later destroys morale and when you model it out significantly increases the likelihood your turnaround will fail.
How much to cut? Typically the advice is to cut until you have 2 years runway. I would suggest cutting deeper and in combination with your other turnaround actions - generating infinite runway.
How to assess who to cut:
I prioritise keeping self-managing individual contributors. This means you can remove middle managers and team members who are not directly improving business (cash) metrics.
Any management who appear reluctant or cagey about the turnaround plan should also immediately go. You need everyone pulling in the same direction.
Recent performance reviews are often viewed as a good filter for making decisions, but I find they can be polluted by politics and ulterior motives. An alternative mechanism is Cyril Grislain ‘s Skill x Will matrix.
Convert full time to part time roles where feasible.
Offer to remaining team members a significant increase in equity (employee options) in exchange for a reduction in cash compensation. While this shouldn’t be mandatory, as everyone is in different circumstances, you may be surprised by the take-up.
Sales team compensation should be adjusted to balance more towards variable pay (eat what you kill).
Cost Reduction & Working Capital
You should already have good visibility of your costs from the daily cash report and the requirement for you to approve all payments.
Create a report outlining every cost in the business, how it is paid and on which terms they are paid, eg:
$275,000 - AWS - Card - Monthly - No Payment Terms
First step is to prune all unnecessary costs - cancelling the cards and you approving outgoing bank transfers should have you 90% of the way there already.
Secondly starting with the biggest cost buckets create a target for each supplier comprising of:
Cost reduction - a target % reduction in cost
Improvement in payment terms
Improving payment terms is often ignored by startups, but it can have a dramatic impact on creating cash headroom. For example taking a supplier who you are paying $100,000 monthly in advance to 90 days end-of-month payment terms is the equivalent of getting a revolving $400k bank loan.
Negotiate new pricing and payment terms with your top suppliers - the 80/20 rule likely applies here - you’ll be spending the majority of your money with a small number of suppliers and partners.
For smaller suppliers - ensure all payments are on credit cards rather than debit not only do you get good working capital improvement here (assuming you pay off credit on last day) you also get increased protection on purchases.
Cash is also king for any new supply agreements. Gone are the days you or your team accept a 20% discount for paying a year in advance.
If you are a company that makes or sells physical goods: optimising your inventory is also another overlooked area to significantly increase headroom. Reduce inventory = increase in cash headroom.
The final step in improving working capital is with your customers - but we cover that below.
Fire Your Customers
Pricing is a powerful lever in improving cashflow and profitability.
B2B startups: Conduct a gross & operational margin analysis customer by customer and product by product. Any customer with negative gross margin should immediately have a price increase or ‘be fired’.
Founders do not like enacting price increases. Frequently founders are the sales people who put in place the existing contracts. But remember you are War Time CEO now - it’s a different time and it requires a different mindset. Remind yourself - if you do not increase prices you will go out of business and your customers will be worse off without your product.
Startups should also leverage credit terms here to improve cash flow. In communications / negotiations over price increases you could also offer a smaller price increase if the customer pays in advance.
B2C startups: conduct a similar margin analysis product by product, geo by geo. Negative gross margin products or geos should have an immediate price increase.
More on consumer pricing / freemium model turnarounds here.
Your mindset throughout the turnaround will be critical to its success. You need to embody the War Time CEO - be courageous and communicate with conviction.
Here are some additional resources on turnaround that you may find useful:
Startup restructuring 101 by Cyril Grislain - this is excellent and more detailed than my 5 point plan.
p.s. I started writing this post last year but did not get around to finishing it until now. I think I have updated all the data, but please message / comment if you find anything unusual. I’m on X (twitter) and LinkedIn.
V good article 👏👏