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Summary:

Anticipating that a financial crisis like the one we’re currently experiencing wasn’t far away, I’ve run my company, richrelevance, on a zero-fat budget, raising small rounds of capital to ensure our team built the discipline to operate with small budgets. Yet, anticipation of the downturn does […]

d_selinger

David Selinger

Anticipating that a financial crisis like the one we’re currently experiencing wasn’t far away, I’ve run my company, richrelevance, on a zero-fat budget, raising small rounds of capital to ensure our team built the discipline to operate with small budgets. Yet, anticipation of the downturn does not make me immune to the shift. External risks in every business have changed. None of us will go through the next 18 months without significant impact.

But many entrepreneurs who saw the now-famous “Sequoia deck” unfortunately took its conclusions to be a tenet of truth and acted on it — perhaps too hastily. The folks at Sequoia are smart, but they aren’t necessarily smarter than you or me at running our businesses. This is the crux of the issue: While this market shift is, in fact, a 5- or 6-sigma event, what we do with that information is still within our domain.

Reacting blindly to a situation is wrong — being reactive is bad for your business. There’s a process to responding to urgent situations, much like triage in a hospital, and by understanding, analyzing, acting and repeating we can surmount these challenges. Now is a unique time when you can deepen customer relationships by advising them, seeking input, sharing ideas, etc. Below are four steps to responding the current economic situation without being reactive.

1. Identify and Understand
Acting on bad information is worse than not acting at all. My gut reaction to this shift was, “I’m sure glad we build enterprise software and that I’m not a social network,” but this thought is wrong and fraught with (incorrect) assumptions. While not all social networks will survive, their inherent value has not disappeared. And, while the innate value of the applications we’re building has not deteriorated, the amount (and way) we are paid for these services may change.

To protect our businesses, we need to keep a close eye on market dynamics. Talk to customers, partners, and vendors. Find out what they’re thinking and seek their input — this is a unique time to establish new dialogues and chart the course for deeper, more beneficial relationships.

Read. Gather data. Then, go sleep on it.

2. Analyze Risks
The biggest assumption from the Sequoia presentation is that the downturn is so large that it will affect us all equally and uniformly. This is patently false. As entrepreneurs, we believe the opportunity in our market is so great that it outweighs the risk. Sit at a whiteboard with your management team and consider the new risks in the equation. Break these down into two groups: risks I can control (internal) and risks I can’t control (externalities). Much like a triage leader, identify the severity and urgency of each risk in how it affects the bottom line, how much capital you have on hand and how much you can absorb long term. The key is to be honest with yourself.

3. Act
First, stop any bleeding. If your burn rate outpaces revenue, cut — dramatically. If you have contracts that put you underwater, address those. Next, address internal risks. For example, if you finish X product line you may increase revenue with existing customers. Yet if X product requires long-term R&D and there’s not enough cash to get you there, put the project on the chopping block. Finally, proactively shore your business up against externalities — i.e., “What happens if my customers don’t pay on time?” Keep in mind: The stakes are higher than ever. Use your advantage as a startup to do more things better and faster than the competition.

4. Close The Loop
You’re not done. Iterate. Constantly communicate with your team about how you’re executing against goals. Stay engaged with customers. Re-engage the whiteboard regularly.

None of these principles are new. This is how we should be running business regardless of the economy. The climate may have changed, but the rules of good business are still the same. Failure is still not an option. Freaking out is not either.

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  1. 4 Steps to Making Strategic Decisions in Today’s Market – Gigaom.com | Business Online Information Sunday, November 16, 2008

    [...] Read More … ) Related Tags: strategic decisions, 4 steps, s market, financial crisis, [...]

  2. 5) Write generic blog posts full of buzzwords and completely devoid of substance.

    “Analyze risks”? Really? As opposed to playing pin-the-tail-on-the-donkey or what?

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  6. I think the point here isn’t the header “Analyze Risks,” but the substance below the header which says “The biggest assumption from the Sequoia presentation is that the downturn is so large that it will affect us all equally and uniformly. This is patently false.”

    I think this is right on and reflects a real problem I’ve seen with startup CEOs reflexively reacting to how the downturn will affect the economy generally rather than to how it will affect their company specifically.

    Sometimes the best advice is a sober, concise recount of something people have heard before but they tend to forget in times of perceived crisis. For example, the suggestion to “Break these down into two groups: risks I can control (internal) and risks I can’t control (externalities)” isn’t anything new, but it is sound advice that, if taken by more CEOs who right now are running blindly in fear, would do them a lot of good.

    In short, this is something I’ll be sending to a few friends with a not-so-subtle hint to take the advice, even if they’ve heard some of it before.

  7. The triage part of this article was a good reminder. I was re-calling something that Steve Pavlina wrote a while back on triage. Basically it was something to the effect on divide your tasks into three buckets. The tasks that if you get them right won’t matter, the tasks that if you get them wrong matter and the tasks that if you get them right *will* matter. This is similar to medics performing triage during a war where victims that will live anyway don’t need attention and victims that will die anyway don’t need attention. It’s only the victims who will live with attention and die without that you should be focusing on.

    Same is true in these times. Give attention to the elements of your business that do matter and will allow you to be successful. Take attention off of stuff you can’t control (e.g., day-to-day market conditions) as well as stuff that’s not meaningful (i.e., that doesn’t add value).

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