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Economic downturn for startups: survival or opportunity hunt?

Lately there has been plenty of discussions and advice on what startups should do now that the economy is probably going to play in the minor key for some time to come. Sequoia Capital handed out their powerpoint of doom, as reported by TechCrunch and ArticStartup among others.


CC Attribution: Today is a good day@Flickr

The advice comes out with such a weighted tone that it almost seems like they are saying that you have to save money no matter what - including at the cost of the opportunity. And this is precisely where it gets funny. Naturally saving money and being cost effective is something you should always do, no matter the economic climate.

Startups are about opportunities and going after them in a well-mounted systematic effort and energy. Everybody knows and excepts that sooner or later the economic curve takes a turn upwards and there will be better times yet. Startups should play their game in such a way that once this happens they will be among the first to capitalize on their opportunities in a big way, and do what startups are made for: grow rapidly.

It should not be a decision between continuing as a "growth company" and going after your opportunity - or - almost shutting down and only worrying about getting cash (from anywhere) and just staying alive. If a startup goes into a total conservation and minimal survival mode it is about 100% certain that the opportunity will be partially lost to competition who is capable of grasping more of it better and quicker. And loosing opportunities to the competition is the same as directly loosing money.

Startups don't necessarily need to "out save" their competition in costs, they need to outsmart them in cost efficiency and be able to grab more of the opportunity for themselves. I claim that it all depends on the phase your startup is in:

1) You have no product, no revenue = This is the phase where you are not really out there grabbing opportunities yet. So don't worry too much, get there later. Conserve as much as you can and build your product slowly and steadily. Get work from people with equity etc. Establish a revenue model and understand where you can get the cash the fastest. Be ready to speed up once things look better and you are ready. Save plenty of time for thinking, following the latest info on your market etc. Making excellent decisions demands that you have the capacity to think and consider them, so you can't be busy 24/7.

2) You have a product, some costs, but no revenue yet = In this phase getting revenue ASAP is your primary goal. Save what you can on your operations, including trying to really heavily prioritize your next product updates and versions. Focus on sales and either free or really cost effective marketing (like getting PR articles, Viral, and such). Follow what your competitors are doing and do not in case copy their strategy one-to-one. In this phase strategic convergence with your competitors is totally the kiss of death.


CC Atrribution: Sarcasmette@Flickr

3) Product and revenue, but not profitable yet = this is a happier place to be in for a startup. And this is where it becomes a repeat of point 2 above with the emphasis of really focusing on your current customers; keeping them, selling more to them etc in addition to focusing on increasing sales. Dave Chase wrote a nice article for iMedia Connection about brands and advertising spending during the Great Depression. In short: there were many companies who did the opposite of their competition; they spent more on marketing, managed to grow a lot, and come out of the recession as the winners with plenty of new loyal customers. For many startups this economic downturn may be a similar situation: when you competitors are less visible because they save so much on visibility - this is absolutely the time for you to be visible in a cost effective manner and get as much attention as possible. Great opportunity.

4) Product, revenue, profitable = this is the best place to be in right now. See where you can cut costs but most of all be more cost effective. Don't be happy with low returns on marketing, low productivity with R&D etc. You need to get more for your Icelandic Crowns than before. However while doing that play heavily on the opportunity side; be more visible than your competition, take better care of your customers, re-prioritize your product development: try to create more meaningful value in this economic climate, focus on sales with great success stories on how your customers endure through tough times with you etc. This is no time for you to go to a totally minimal survival mode - but rather a time to make smart choices and kick your competitions of ass. Follow your competition closely, the more they seem to cut back on the opportunity hunt and visibility the better for you. People look for better deals in a recession, re-evaluate your strategy and see where are the best areas for your to provide those deals.

I though that the doom and gloom of startup advice was so monotonic and one-eyed in just screaming "save save save!".. so I had to write this and speak my mind. The bottom line being; this is one of the best times your startup will probably ever encounter to do bold moves like: a) hire your competitor's sales team, b) come up with a new offering that will grab you market share and a totally new segment of customers, c) create some serious customer loyalty towards you, d) figure out some very clever and cost effective marketing strategies and methods.. etc you get the idea.

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Comments

Paul Graham

Readers may want to read what Paul Graham has to say on the subject:

http://paulgraham.com/badeconomy.html

All in all I agree with the sentiments. If you have an idea that you believe in and have the willpower to go for it, then you should do it now. I do not at all subscribe to the notion that, hey you can set up your startup later. The world will have changed, the markets, ideas, everything. From my own experience, if you don't do it, you'll regret it. Ideas do not form in isolation, but they are a refection of the world around you. That is why they are always anachronistic and cannot be postponed. Chances are someone will do it if you don't.

There is nothing wrong with setting a startup now. People have not fundamentally changed. If you are solving a need, people will want to use it. Not that it won't be harder, it will, but it also means less "Me too" competition and companies. The startups this downturn will affect most are the ones who want to put up "Social Network X" and plan to monetise by ads. I think that's going to be a much harder sell than before, and rightfully so. I'm actually glad people are now asking serious questions about the money and revenue model.

As it stands, this situation is I believe an opportunity for Scred. The financial market is in turmoil and people will be more concerned about their money. There is a real chance to aggressively push new ways of thinking about money, which suits us just fine.

Of course many businesses

Of course many businesses thrive in a recession. I suppose huuto.net/ebay will do well, Lidl will do well, Prozac too (?!) and so on. So your response to the economic conditions should be based on the nature of your business.

I wonder how the public funding agencies will respond to all this though. Will it be much harder to get funding or not.

Scred it!

I subscribe to what Taneli, Paul, and others are saying as we have reiterated at ArcticStartup -if you have a startup this is your chance to dig your heels into the market and even grow your business when the established players need to wrestle with their over blown cost bases that have build up over the good times.

Chaos is startups' best friend -you can move fast, be agile and change course when the bigger ships are just trying to figure out what happened.

Funny that Kristoffer is the one who had commented this very post. I believe that Scred is better equipped than many to benefit from the lack of liquidity in the markets as well as in the wallets. Re-evaluate your product offering and ask people if that's exactly what they need. Then test and iterate. I know that you guys have all the tools to make it big home and away. Use them!

Just today, when I had lunch in Frederigsberg in Copenhagen one person in our table ended up paying the bill and when others offered to pay back she said that 'well, we normally split the bill here in Denmark, but since it's so inconvenient now let's just leave it'. Naturally this was not the ideal solution to anyone in the party. Start kicking some ass guys! Scred it!

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