Bear Market Strategies: How Top CFOs Plan for Recession
We’re in the midst of a market downturn. Economies that were flush with cash (and spending it) mere months ago are now hunkering down and pinching every penny. It’s a difficult period, but also a time where smart planning and strong CFO leadership pay off.
In a recent CFO Connect Summit session, we asked three CFOs how they prepare for slower growth and tighter cash controls. What do they forecast, what changes have they already made, and what is their game plan as a “wartime CFO”?
Watch the conversation in full, or read the key takeaways below.
About the experts
Julien Lafouge: CFO, Spendesk
Dan Zhang: SVP of Finance, ClickUp
Sergei Galperin: CFO, Alan
Amy O'brien (moderator): Reporter, Sifted
Why prepare for a recession?
Call it what you want - a bear market, an economic downturn, a recession, or “tough times” - the economy is in a pessimistic place. Compare this with early days of the Covid-19 pandemic, where certain industries struggled but markets still boomed, the situation from mid-2022 onwards is far different.
And for a lucky group - namely tech startups and scaleups - 2021 was actually a growth period. Cash was relatively cheap, and new unicorns were being minted seemingly every day.
But all good things come to an end. “One of our investors boasted that they have predicted seven of the last two recessions,” says Sergei. “They’ve seen this all before, and they knew the crash was coming.”
“The message from our investors was very clear,” adds Dan, “extend your runway and push towards efficiency.”
With less money in the public markets, investor confidence is down. And the same is true in venture capital. “Companies got into this cadence of raising funds every year,” says Sergei. “Times were good, so we could raise a little bit and grow a little easily.”
But that assumption doesn’t work anymore. As we learned in another Summit session, VCs are still investing. But at a far slower pace, and with a much closer eye on the financials of each company.
Businesses can’t rely on an endless supply of venture capital. It’s time to put effiency first, extend the runway, and perhaps even aim for profitability. “It’s kind of like driving down the highway without an airbag,” says Sergei. “If you slam on the brakes you can get hurt.”
How smart CFOs prepare for economic downturn
Whether requested by the board, other executive leaders, or you’re simply taking initiative, preparing your business for a bear market is smart in the current climate. Here’s how our experts have done this for their companies.
1. Understand your current position
“If you understand the business very well, you’ll also understand how to influence decisions to optimize the value of the business,” says Dan. No matter your predictions about the state of the market, they’re worth very little if you don’t know your current cash position, and financial strengths or weaknesses.
This is true in part because not every recession or downturn affects everyone equally. “Some companies will suffer more than others,” says Julien. “In my previous role at BlaBlaCar, Covid hit and we simply couldn’t operate. It was forbidden by the Government. But Spendesk is relatively Covid-proof - we’re a digital tool that helps companies manage their cash and spend.”
And cash is where most CFOs should start. According to Julien, “being well capitalized is fundamental. In France, 62% of startups only have a one-year runway. And when a crisis hits, that’s nothing.”
Both ClickUp and Alan raised funds in anticipation of a downturn. “We raised our Series D in April 2021 to give us runway for 18 months,” says Sergei. “And then at the end of 2021, one of our investors told us not to wait another six months (which was our plan). Go now! And we could raise from a position of strength - for three years of runway.”
With cash in the bank, all three companies can weather a financial downturn with relative confidence. Rather than a question of survival, the coming period is an opportunity to improve the overall unit economics of the business and focus on efficiency.
2. Build forecasts based on tough but realistic scenarios
We don’t yet know whether this is a bear market, an economic downturn, or a full blown recession. And the impact of each of these possibilities will differ based on your industry, business model, and cash situation.
You need to create forecasts with a whole range of scenarios, including the worst case.
“The Covid crisis showed all of us that, as good as we thought we might be, we never built the perfect scenarios,” says Julien. “At BlaBlaCar, turnover went to zero overnight. We didn’t plan for that.”
“You might think you’re stress testing by adding or subtracting 20%, but you’re not. Make your scenarios much wider in terms of duration, impact, and amplitude. At BlaBlaCar, we had to know how long we could sustain zero revenue. There’s a lot of uncertainty, and nobody’s right or wrong.”
These scenarios help in two ways. First, you can get everyone on the same page, including the board. You need executive leadership to understand the possible financial outcomes, and to agree on the path forward. (This includes reallocating resources, which we’ll get to next.)
And second, extreme scenarios let you plan for the worst. Despite a great capital position, Dan explains, “we also took a large loan - venture debt. Our financial plan is to be cash-flow positive, but that venture debt is there as an insurance plan. That’s for the doomsday scenario.”
It’s not the CFO’s sole responsibility to build the action plan - this depends on executive leadership and the board. But CFOs can give everyone the full picture, so that the action plan is as robust as possible.
3. Cut costs strategically
Most companies need to prioritize efficiency and profitability. Even those with plenty of cash to work with still have an eye on the unit economics.
“2021 was all about growth, growth, growth,” says Dan. “The most important things this year are growth, gross margin, and your burn multiple. Whoever moves fastest and shifts towards this mindset will have the highest chance of survival.”
Which almost always leads to cost cutting. “We urgently revised our plan, maybe 10 times,” continues Dan. “We slashed non-revenue-generating and non-essential spend aggressively, to get to a cash-flow positive scenario.”
What to cut
The number one mistake for most companies is cutting costs broadly, rather than strategically. As Julien explains, “Be clear about what works and what doesn’t. You don’t just cut 10% of costs across the board - you cut 100% of the things that don’t work.”
“We can divide costs into two key categories: internal (payroll) and external. You’ll have thousands of lines of spend in that external category, most of which won’t be important. There will be 50-100 that really represent the bulk of costs. You must go back through these. And even if you think these things are fixed - office rent, for example - everything is negotiable.”
For Dan, it depends on your scenarios. “Identify the key spend levers that get you to cash-flow positive in a bear, base, or bull market. Then make cuts on the big items, but don’t worry about the small things.”
Another difficult equation is payroll - some companies have famously gone through cutbacks or payroll freezes. If you’re not at the point yet, but worried about fixed internal costs, Julien says that this is the right time to work with more agencies and non-permanent employees if possible. “If everything is fixed, you have less flexibility. Agencies and outsourcing can introduce more flexibility.”
What not to cut
Another temptation is to cut the fringe benefits and “nice to haves” that many companies have added in recent years. But this is a mistake.
“The classic example of a cost you don’t want to cut is good quality coffee for the team,” says Julien. “It has no impact financially, but a terrible impact on morale. If you’re at this stage, you should have already done all the big adjustments and now you’re really desperate.”
Anticipate the bounceback
Finally, Julien advises CFOs to keep the rebound in sight: “Rebounds are often short and fast, and if you’ve cut too much you may not benefit from this bounce back. Cut the fat; don’t cut the muscle.”
An economic downturn is often the right time to cut tests and special projects, and focus on your core value proposition. But if at all possible, avoid cutting what’s working. It likely pays for itself anyway, and losing it will only harm growth in the long run.
4. Enhance collaboration
Finance teams are often portrayed as the ‘bad cops.’ And the more cost-cutting you have to do, the higher the chances of this. But this climate is also a chance to get closer to other teams and teach people how to think fiscally.
Particularly for tech companies coming out of a major boom, many employees will never have been through this. Even senior leaders may never have known anything other than hypergrowth and fast spending.
“Cuts and spending freezes can cause frustrations,” says Dan, “even among the other leaders. So this is a great time to involve them in the budgeting process.
“Sales leaders have quotas to hit - same for marketing and engineering. So at ClickUp we introduced milestones for hiring. Yes, we’re still hiring, but only as long as we hit certain milestones.
“For example, marketing has a 12-month CAC payback period. If you can keep hitting that payback period, you can keep investing. Because you’re net positive. Meanwhile, sales can only add more headcount when their existing salesforce is achieving over 90%.
“This makes the CFO an enabler, rather than an inspector. Finance isn’t constantly hammering them down - it’s up to them to show ROI and access more resources.”
5. Embrace this leadership opportunity
Economic challenges are often the CFO’s time to shine. It’s a chance to sharpen the business and become more analytical in decision making.
These are skills that come naturally to finance teams, but not necessarily to other employees. So the CFO needs to step up and lead, which offers plenty of positive opportunities.
“I spend a lot of time on financial education,” says Sergei. “‘This is why we’re raising prices by X%: it will raise our net profit by Y%. Therefore we can afford to hire 10-15 more people, who will build feature Z, and that is our path to profitability.’
“I accompany our monthly financial report with a Loom video to walk the team through our performance, and point out where it puts us on our path. That gives everyone a sense of ownership, which in turn keeps us all together.”
Cost cutting and budget tightening obviously suits certain personalities more than others. The ‘Wartime CFO’ is often used to represent a ruthless, take-no-prisoners form of leadership.
But you don’t need to represent every other team’s worst nightmare: a prison warden shutting down every project and idea in sight. Instead, this is your chance to build a culture of preparation and analysis that values what’s worthwhile.
As Dan explains, “the previous generation of great companies were really built in the last financial crisis. And finance teams particularly took the chance to steer businesses during these complex times. They inspire teams to tune out the noise in the market and just execute the business plan.”