By Ryan Silva, Assurance Partner
After years of high growth and favorable market conditions, tech industry growth and financing appear to be slowing down. High inflation and rising interest rates have lowered valuations, funding opportunities are drying up as investors eye opportunities with more scrutiny, and layoffs continue to impact all companies, regardless of size or ownership.
Fortunately, this environment presents opportunities as well as challenges. By understanding their position in the resilience framework, tech companies — whether VC-backed, PE-backed, or public — can make the right moves to set themselves up for long-term success and stability.
Persevere
Stabilize the Business
SCENARIOS IN PERSEVERE: Immediate action is needed to stabilize the business. VC-backed companies are looking at low valuations while PE-backed companies are seeing high interest rates that cause cash burn. Public companies are dealing with high infrastructure costs as growth slows.
Key Actions
Ø Strategy & Business Model
· Stabilize labor expenses and optimize staffing
· Consider discontinuing unprofitable or underperforming product lines and prioritizing innovation portfolio
· Revisit pricing model to provide more flexible options for cash-strained customers
· Consider moving to a subscription-based model rather than an on-premises model
· Identify what’s core to your business so you can avoid cutting costs in high-risk areas
Ø Operations
· Proactively address supply chain disruption
· Reassess major planned operational changes
· Revisit analytics to ensure key business continuity metrics are tracked
· Consider variabilizing your expense base by outsourcing non-core functions and evaluating current staffing and capacity to align with demand
Ø Liquidity & Cash Flow
· Reevaluate debt covenants and ratings
· Revisit valuation plans on both buy & sell side
· Reevaluate major capital investments for timing and priority
· Identify different or creative financing structures to better support your business
· Divert cash from superfluous perks to support core business functions and salaries
Ø Risk Management
· Assess internal controls and do penetration testing
· Revisit risk management/crisis response plans
· Educate employees on cybersecurity protections and ensure vigilance during times of vulnerability
· Continue to invest in security and network reliability
Ø Regulation, Legislation & Compliance
· Look for state, local, and federal incentives
· Appoint someone to monitor pending and proposed regulation & legislation
· Assess your compliance with ESG requirements
· Ensure cost cuts do not impact compliance activities
· Analyze data capture and use to ensure all behavior is ethical and protects customer information
Resilience in action
Ø A recession restricts funding opportunities for a small PE-backed SaaS company. In response, the company reaches out to their lenders to renegotiate bond and loan covenant terms and presents stakeholders with a plan to slow cash burn.
Maintain
Balance Risk and Innovation
SCENARIOS IN MAINTAIN: The business is stable but growth has plateaued. Public companies are trying to balance meeting analyst expectations and growth expectations. VC-backed companies are looking to moderate their cash burn while PE-backed companies are trying to capitalize on their acquisitions.
Key Actions
Ø Strategy & Business Model
· Assess cash reserves and draw up plans for innovation investments
· Revisit business strategy and assess appropriateness of goals and KPIs
· Place early bets on possible avenues of significant innovation
· Seek partnership opportunities in order to share risk
· Communicate the vision for the future of the company with investors
Ø Operations
· Reallocate staff
· Assess staffing gaps and create a plan to fill them
· Look for efficiencies in back-office operations
· Make sure all low-value costs are eliminated
· Double down on what’s next by putting as much cash as possible toward new product development and supporting core business functions
Ø Liquidity & Cash Flow
· Diversify revenue streams
· Assess timing for a funding round or sale
· Proactively reduce costs in anticipation of dry funding cycles
· Continue to look for additional funding sources
· Consider spinning off non-core assets
Ø Risk Management
· Upgrade cybersecurity solutions
· Conduct an internal risk management assessment
· Upgrade security measures, policies, and procedures
· Create a business continuity plan
Ø Regulation, Legislation & Compliance
· Identify and track legislative and regulatory trends
· Explore other ESG standards
· Assess the possibility of making commitments beyond current regulation
· Look for tax credits, such as R&D credits, to secure additional cash
Resilience in action
Ø A public company’s growth has plateaued after several high-growth years. Leadership evaluates opportunities to diversify their revenue and invest in a few priority innovation projects to set the foundation to build on their growth potential.
Recover
Pivot to Growth and Seize Opportunity
SCENARIOS IN RECOVER: Companies are in growth mode and have a clear picture of their top opportunities. PE-backed companies are looking to improve internal controls and processes so they can scale successfully while PE firms will be reviewing the list of strategic add-ons and determining if the enterprise value of these companies have dropped enough to take action on a select few. VC-backed companies are testing new products and services while public companies are focusing on putting the right staff in place to support their growth.
Key Actions
Ø Strategy & Business Model
· Execute on planned product and service upgrades
· Consider options for geographic expansion and explore site selection
· Consider entering a partnership or joint venture
Ø Operations
· Implement upskilling programs for employees
· Implement back-office operational efficiencies
· Consider infrastructure updates
Ø Liquidity & Cash Flow
· Invest more money in areas that are generating high ROI
· Identify and assess longer-term investment opportunities
· Prioritize innovation projects for investment allocation
Ø Risk Management
· Invest in automating manual compliance processes to free up resources
· Have a risk management assessment conducted by an external third party
· Communicate risk management findings to board members
Ø Regulation, Legislation & Compliance
· Proactively manage government relationships
· Project the future of ESG regulation and create a plan to adopt new standards ahead of the curve
· Implement a regular assessment of your compliance function to ensure it remains strong
Resilience in action
Ø Executives at a VC-backed hardware company are aware that ESG regulations are likely coming down the pipe in the next 2-5 years. In preparation, they research the strictest current ESG reporting standards and implement a plan to adopt them in the next 12 months, far ahead of their peers.
Thrive
Business Fundamentals and Growth are Strong
SCENARIOS IN THRIVE: Companies are seeing high growth and are outperforming their competitors. Public companies are exploring product expansion and acquisition targets, while VC-backed companies are developing and deploying new products and services as they get ready for a liquidity event. PE-backed companies are actively pursuing new acquisitions and continuing to build out their platform looking for the right time for their liquidity event.
Key Actions
Ø Strategy & Business Model
· Expand products and services
· Build new facilities in high-growth regions
· Execute on partnerships and joint ventures
· Actively pursue acquisition targets
Ø Operations
· Create a more robust talent pipeline by investing in education and community programs
· Recruit industry-leading talent
· Implement infrastructure updates
· Regularly revisit your L&D programs to ensure your employees are being offered the right learning opportunities at the right times
Ø Liquidity & Cash Flow
· Execute on bigger, longer-term investment opportunities
· Deploy capital to support priority innovation projects
· Build up cash reserves
Ø Risk Management
· Develop a comprehensive risk management framework to identify, assess, and prioritize risks across the company
· Position the ESG team and business continuity team to work closely to update risk assessments to account for ESG risk
Ø Regulation, Legislation & Compliance
· Begin adhering to new global standards ahead of legislation
· Adopt extremely progressive ESG commitments to set future industry standards
Resilience in actionØ After a period of accelerated growth, a public software company opens a new facility in a fast-growing emerging market. They beat their competitors to the space, allowing them to capture the majority of the market share as it continues to grow.