"It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change." — Charles Darwin

In Spring of 2022, as the economy and markets were beginning to deteriorate dramatically, a number of venture firms came out to advise their companies on what was changing and what they should all do to prepare their businesses for the tougher times to come.

Sequoia advised their founders that this was a Crucible Moment in which every company would be tested — but where the very best could also come out stronger. YC advised their companies to "plan for the worst."

While the context here was timely and unique, the advice was timeless. It acts as a guide for what founders and companies should do when economic conditions and market realities deteriorate quickly. When a tectonic shift happens in markets that change everything — seemingly all at once.

As you'll learn, the key to is to not fool yourself and recognize the new reality and adapt to it aggressively so you can move from defense to offense as quickly as possible. Difficult markets enable the best companies to go on offense and come out stronger.

Here's timeless advice for founders and companies navigating a quickly deteriorating market and challenging macroeconomic conditions:

• Recognize the new reality and adapt to it quickly.
• Quickly cut and consolidate to a position of maximum strength.
• When times get grim you’ve got to become the Grim Reaper.
• Expect to face headwinds and challenges from all directions.‍
• Understand that the cost of capital has gone way up.
• Manage your resources wisely to ensure your survival.

Recognize the new reality and adapt to it quickly.‍

The speed at which you can recognize the new reality, reassess your approach, and make the necessary moves the better. Ultimately, your goal is move from being forced to play defense to being able to play offense again as quickly as possible.

• Don't panic. Intentionally pause and reassess.
• The first step is always the hardest. Every crash starts with founders not confronting reality.
• Rapidly changing markets require that you adapt your strategy and approach quickly. Those who adapt the fastest are the best positioned to succeed. While those who adapt the slowest, tend to simply compound the pain they'll face when they eventually are forced to adapt.
• Adapting to a new reality is always hardest for those who excelled the most in the previous reality. They've been rewarded for a certain way of operating that's unlikely to work to the same degree — or any degree — in the new reality.
• Respond with intention now, rather than regret later.
• Understand that uncertainty will be ever present. Backward-looking fundamentals can't clarify what's to come. Focus on the most likely path of travel and build in a margin of safety into everything that you do.
• Once you confront reality, you have to prevent yourself from spinning into a negative cycle. Remember that courage is a choice — so choose courage and vow to prevail. Confront your fears and then consciously choose courage over fear at every step.
• How are you going to ensure you see reality, face it head on, and adapt quickly?

Quickly cut and consolidate to a position of maximum strength.

When faced with new risks and uncertainties, your first priority should be cutting everything non-essential and consolidating to a position of maximal strength. Doing this quickly will give you the best chance of competing and winning in an adverse market.

• Trade short-term pain for long-term gain.
• Cut non-strategic costs to the bone. That’s everything that does not move the needle on your most important metrics and priorities — which should all reinforce the durability and profitability of your business.
• Cut more than you think you need to upfront or face a cascading series of cuts that erodes morale.
• Get rigorous around strategic costs: things that contribute to retaining customers and growing profitably. But remember to continue investing where returns are the highest. Competitive forces are weakest in adverse markets, which makes winning easier for the strongest players.
• Remember that the pain of discipline is always less than the pain of regret. Make the tough decisions upfront, be aggressive, secure your firm's survival. Cutting the right way will make your business stronger and more durable — not weaker.

When times get grim you’ve got to become the Grim Reaper.

Treat adversity as your call to greatness. When times get tough, those that can raise the level of their gameplay amidst all of the challenges will come out stronger. Commit to do just that from day one.

• Re-strengthen your focus. Make sure every hour and dollar is being invested behind your most important priorities.
• Put more wood behind fewer arrows.
• Top grade everything. As you’re cutting and pairing down, improve end quality and output across every dimension. Give your best people more authority, poach the best talent on the market, raise your standards for everything.
• Transform from the Navy into the Navy SEALs. Start by reminding yourself of the why, reaffirm your mission and values, and ask for team's commitment to the highest standards.
• Think of everything that’s come before as your offseason. Now it’s game-time. Everyone must operate at a faster tempo, to higher standards, with more rigor. No exceptions.
• Remember that the one who wins is the one best prepared for the fight. First prepare your own mind, then your team, and then your company to win in this new market.

Expect to face headwinds and challenges from all directions.‍

In adverse markets, expect to face pressure and novel challenges from all sides — employees, customers, and suppliers. Challenge markets eventually effect every layer, although typically somewhat differently, that compounded can feel like a giant superset of challenges.

• Against softening macroeconomic conditions, every stakeholder begins to vie for what's best for them and the broad order is often reset.
• As employees face rising costs, often from inflation, they'll demand higher pay.
• As suppliers face declining revenue and rising costs, they'll ask for higher prices.
• Lenders may begin to enforce covenants, restrict lending, or ask to renegotiate loans altogether as they go into risk-aversion mode.
• Interest rates may rise, even dramatically, making credit more expensive.
• All against a backdrop of declining revenue, slowing sales and growth, and a focus on cutting costs — creating an enormous challenging set of conditions.

Understand that the cost of capital has gone way up.

One of the the most prevalent knock-on effects is that the flow of capital slows while the cost of capital risks simultaneously. As capital becomes harder to raise overnight, the value of every dollar goes way up — which is why cutting expenses and doing more with less is non-negotiable.

• In difficult markets, fear plays a larger role and shapes how people perceive both opportunity and risk. Which is why the cost of capital rises dramatically.
• As people search for sure bets and avoid unsure ones, valuation multiples come down to historical norms (typically 3-5x), capital becomes harder to raise and costs more (e.g. higher dilution and less friendly terms), and liquidity dries up slowing the supply of money.
• Inevitably that means every company has to fight harder for every dollar of revenue and investable capital.
• Every dollar in costs cut by one company is a lost dollar in revenue for another company — which creates a vicious negative flywheel of revenue loss and cost cutting. Often this plays out in waves, as company cut headcount and costs in a race to stay as competitive as possible.
• Given every dollar is more precious than it was, how are you going to change your priorities?

Manage your resources wisely to ensure your survival.

Part of recognizing that every dollar has become much more valuable is ensuring that you're managing every aspect of your finances as rigorously as possible. That starts with paying incredibly close attention to your cash flow, margins, operating expenses, burn rate, net cash position, and especially your runway.

• Start with your cash. Ensure you know your cash position, cash flow, and cash runway — ideally daily, at the very least weekly. Without this understanding you have to recognize that you're flying blind.
• Control your expenses. While profitability is always an output, recognize that you control the key inputs by setting prices and controlling operating expenses. Don't be afraid to force your entire company to work within much tighter constraints. Ask your team to respond creatively.
• Solve problems with muscle not cash. In lean times, you're forced to solve problems with creativity and hard work. You can no longer simply spend away your problems. Treat this as an opportunity to get leaner and stronger — like any workout, expect this to require hard work and ask your team to step up to the challenge.
• Manage your runway. First compute your runway by computing your net cash position (cash - any drawn venture debt) and dividing that by your monthly burn (total reduction to your net cash position). Ultimately, decide on a monthly burn rate and focus on keeping that constant so you can manage your runway in real-time.