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

Over the past few months, investors from Sequoia to YC have called on their companies to prepare for winter. It doesn't matter if we agree or not, because the market behavior has become self-fulfilling.

We have been working with our portfolio companies to come up with winterization plans. We have seen some patterns that may be helpful to other people as they create their own plans after going through this exercise.

Scenario planning is important at this stage. We have communicated this point to our companies many times. A 36-month decision tree is a good place to place scenarios for winterization plans.

The feedback usually lasts 18 to 24 months. This downturn has the potential to be a longer lasting and more volatile slump.

You have to set drop-dead dates to make decisions in order to have enough money to pivot. The structure that the company is forced to think in is much more actionable than a single scenario.

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

The information below will help you make your own decision tree. In periods of volatility, psychology has an outsized impact on outcome, and the sooner you embark on the exercise, the more your psychology can move from fear to possibility.

Preparation

You should make sure you have the following materials ready.

Burn model

For your current plan, have a monthly burn model. The categories that should be included are revenue, COGS, salaries, and so on. If you can, try to separate essential from non- essential costs.

There are two important 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

Do you have a current hiring plan? Is it different in the last 10 weeks. Do you have a good idea of who your lower decile performers are at the company?