This article was first published in Sifted
Ahead of every round of financing, my cofounder Saasha and I allocate some time to crafting our “cockroach plan”. This is the plan for how we’ll survive the worst-case scenario: failing to raise.
We call it a cockroach plan because of the cockroach’s legendary ability to survive against all the odds. And it isn’t a plan B, or even a plan C — it’s a plan F; it really truly is the last resort.
Startups facing tough times — like the pandemic — have gone into cockroach mode before, preserving resources and minimising costs until they can blossom again. And with inflation and interest rates increasing, and venture funding down, it might again be a time for more founders to consider having their own cockroach plan figured out.
The benefits of having a cockroach plan
In our experience there are three main benefits to having a cockroach plan. The first is the “fluffiest” but arguably most powerful: that’s the confidence it gives you going into your raise. If you know you have a plan for the absolute worst-case scenario which enables the survival of the company, you can go into fundraising from a position of strength and without that whiff of desperation that investors can smell a million miles off.
Second, creating a cockroach plan gives you optionality, which is simply invaluable in times of uncertainty.
Third, creating a cockroach plan really focuses the mind on what costs and activities in the business are truly essential for survival — and which are nice-to-have for sunnier times. This brutal life-and-death prioritisation process provides an invaluable perspective for business as usual, even if the worst-case scenario never comes to fruition (which for us it hasn’t yet, thankfully). It also serves as a powerful forcing function to check the senior leadership team are truly aligned on what generates immediate value, and what does not.
Given the current macroeconomic climate, founders are likely to avoid far greater pain further down the line by making a plan now. After all, it’s much harder to let people go than it is to not hire them in the first place or to reduce marketing spend now. Plus, you can always ramp up again later if the worst doesn’t actually come to pass.
How to think about your cockroach plan
The first cockroach plan Saasha and I wrote back in 2015 was very extreme, but very simple: I would go out and get a job and generate a salary to cover both our families’ living costs (we’d long ago slashed all discretionary expenditures in our family budgets) and Saasha would continue to work on the business full time. Subsequent versions of the cockroach plan have been more complex, but no less extreme.
For startups figuring out what to optimise for in the current climate, having spoken to lots of investors and absorbed as much information from the market as I can, the message I’m hearing loud and clear is that if you can’t get to profitability (which is clearly the ideal scenario), you need to extend runway to a minimum of 24 months, and you should assume that fundraising will take longer than usual: nine or more months as opposed to six.
An important part of creating the cockroach plan is also understanding what level of commitment you have from your current investors. As we speak, investors are figuring out how much of their funds they’re going to allocate to existing portfolio companies; and of those, which ones they’re prepared to protect to survive, and which ones they’re not. As uncomfortable as it may be, these difficult conversations need to be had pre-emptively rather than further down the road when you’re all out of options.
A new world
Although no-one knows where the markets and economy are headed right now, the prevailing sentiment seems to be that what’s unfolding marks the end of a 13 year bull-run, and the start of a paradigm shift. As Johannes Lenhard, a Cambridge academic who researches the VC market said: “The VC model of blitzscaling unicorns between 2010 and 2020 is over.”
This means your cockroach plan needs to be all about efficiency-fuelled growth, rather than capital-fuelled growth. And if you can survive this nuclear winter, your business will without doubt emerge stronger. As Charles Darwin so aptly said: “It’s not the strongest, nor the most intelligent that survive; it’s those that are quickest to adapt.”