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Summary:

By now, most agree that this recession is likely be longer, deeper and fiercer than those in the past, rendering smaller, newer companies especially vulnerable. Such vulnerability is already playing out in the public markets: Over the past three months, the Russell 2000 has fallen much […]

By now, most agree that this recession is likely be longer, deeper and fiercer than those in the past, rendering smaller, newer companies especially vulnerable. Such vulnerability is already playing out in the public markets: Over the past three months, the Russell 2000 has fallen much further than the Dow.

There is, however, a way for startups to not only stand out in this recession, but thrive in it: By being as disruptive as possible.

The me-too business model that fared pretty well during good times will be toxic this year. Venture-backed IPOs grew scarce last year and there will likely be few in 2009; merger activity is also expected to remain sluggish. Startups with little or no revenues or a high burn rate may not make it through December.

In an economy where risk is shunned, boldness is a risk that still offers a shot at success. It’s much easier to say this than to make it happen. But there is reason to believe that 2009 will allow original ideas, and companies behind them to come forth.

Recessions dry up funding for innovation, but often innovation goes underground — or rather, back into the garage. For those that produce successful innovations, there may be fewer competitors around to copy their successes.

Some of the costs involved in starting up a business are falling. Office rents are declining. Used office furniture is available for cheap on eBay and Craigslist. Software programs that used to be costly are free, thanks to Google Apps and (with many restrictions) Microsoft’s BizSpark.

So technology, especially on the Internet, is likely to continue to evolve rapidly. Mobile devices and netbooks could invite people to spend more of their time online, expanding a captive audience for provocative new applications. The trick will be in monetizing their attention.

Recently Richard Moross, CEO of UK startup Moo.com, on the Guardian UK site outlined the kind of thinking startup founders may take in the downturn.

Be honest with yourself. Is this really a business? Is it really different? If the elevator pitch includes the words ‘Twitter’, ‘social network’ or ‘it’s web app X meets geek meme Y’ you probably need to rethink things – those days are gone. Today your idea needs to be super-relevant: do people actually need this, or are you just a solution looking for a problem?

Years of complacency have left many an apple cart ready to be tipped over. Startups that disrupt in a way that resonates with consumers and companies could emerge from this recession stronger than ever.

  1. 2009 will be great for disruptive startups. The key is to have a viable idea and (most importantly) great funding, to last the duration of the downturn.

    In December 08 we launched Unison (http://www.unison.com) as the world’s first free enterprise software — it replaces Microsoft Exchange/Outlook — and have 5500 companies testing it already. I think that Microsoft’s big-marketing, high-price software model has great potential for disruption in 2009, and we hope to be part of it…

    Rurik Bradbury
    Unison Technologies

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  2. [...] … of Pop 2008 (Viva La Pop) A Mashup of the Top 25 Hits of 2008, according to Billboard. 2009 May Smile on Disruptive Startups – gigaom.com 01/03/2009 By now, most agree that this recession is likely be longer, deeper and [...]

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  3. Capital efficiency is a necessary, but not sufficient requirement to build a meaningful business. When combined with innovative solutions that enable customers to do things faster, cheaper, better, it opens a wonderful opportunity to build great stakeholder value. Difficult economic time always initially trigger job reductions, then the harder work of wringing incremental value brings a receptivity for new vendors doing valuable things.

    Too bad, the innovative cycle takes so much time and pain to get through.

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  4. It’s always a good time for disruptive startups assuming they generate revenue. Frankly, if you can launch a ‘me-too’ business that makes a ton of money, that would work as well.

    Many vc’s are posting optimistic new year’s posts about why great companies can still thrive…I think that was never in question, and i wonder whether these posts are intended to teach readers something, or if they’re really about vc’s convincing themselves that things will be ok.

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  5. The rules of the game never change. If you don’t have a good product or if you don’t have a business model you won’t win this game. Whether you manage to raise money or not doesn’t change this fact. Money will help but won’t be the remedy to everything.

    On the other hand, if you get it right, this environment will just help you. Costs will definitely be lower and it’ll be easier to get talent & attention.

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  6. everyone thinks that their own startup is disruptive on some level. some gimmes:

    – if your startup is a new website that relies on ads, forget it

    – if your startup is a new website with recurring fees, probably forget it.

    – actually just forget websites entirely, the market is hypersaturated and needs
    a culling of 80% or more of market participants.

    – keep your powder dry. you may need your savings just to survive. the Fed is now
    seriously talking about employing excess stimulus to push the “effective” interest
    rate below 0. this is not just a cyclic recession.

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  7. Duisruption at this time may go unnoticed, esp without deep pockets to market.

    Jitu

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  8. To the contrary, we have found that early stage companies are a great place for investors to focus. Today the traditional capital markets available to the public are trading at risk profiles that are not far afield of venture markets. However, the opportunity for return as a ratio to risk is much higher in the venture funds than the public markets.

    Many high net worth investors have maintained a disciplined approach to investing 10% of their investment capital into VC funds. Today, many non-institutional investors are actually investing higher percentages as the public market is no longer a “safe” investment, and low interest rates deter fixed income investments. The corporate bond market is almost as risky as funding an early stage company today.

    By taking on 20% more risk by investing in a seed round of an emerging technology company, the investor is afforded stronger opportunities for 500% to 2000% returns. Your ability to pick the right start up is likely to be as good or better than your ability to pick a stock – and the public markets rarely deliver triple digit returns.

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  9. Kevin Kelleher Sunday, January 4, 2009

    @charlie. Thanks for pointing that out. It does take a while for these cycles to work themselves through.

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  10. Kevin Kelleher Sunday, January 4, 2009

    @Ari: I agree that the rules don’t change but that the circumstances now may make it easier for some to stand out.

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