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the economy

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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Martin Varsavsky: "time of scared bankers"

Martin Varsavsky is a famous serial entrepreneur who's founded 7 companies and is currently founder/CEO of FON the largest wifi network in the world. (Google + Skype are behind FON as its investors, btw).

Martin is also an investor in Dopplr where I have had the privilege to work with him a bit. He is known from his contrarian opinions and quick wits. For example in a recent article to the Huffington Post Martin is writing that "I believe that over the next 20 years, many of these "worthless" mortgages will turn out to be very valuable and partly or fully repaid.", which goes pretty much against what everybody else thinks on the issue.

He just sent an very interesting video to Seesmic 45 minutes ago:

Lunch with BankersBankers are so scared. I have never seen anything like this. Of course everyone else is scared as well. In this video I talk about my last meetings with different bankers.

Martin is telling us that bankers have never been this scared, and is throwing the big scary word "depression" around a few times, quoting that for example Nokia's stock is down for almost 70% already.

Interesting times indeed, and its great to hear the latest directly from Martin here.

Curiously enough Seesmic is one of the web 2.0 startups who is hitting the brakes full time with fresh layoffs. Do you think that this severe "doom and gloom" will hit Finland, or can we somehow weather the storm and just see it pass by?

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