The Financial Crisis: A Survival Guide for Startups

27 Comments

Entrepreneurs often focus so much on running their companies that they don’t have time to worry about events in the outside world. Normally, this is how it should be, but the credit crisis slamming Wall Street right now is an exception, and it has deep implications for any startup.

The current mayhem actually began back in 2001. In an attempt to mitigate the economic impact of the dotcom collapse and the Sept. 11 terrorist attacks, the Federal Reserve began a series of interest-rate cuts, slashing the cost to borrow money to 1.75 percent from 6.5 percent. This was great at first: Entrepreneurs could borrow cheaply to build new businesses; consumers could borrow cheaply to spend money on our products.

There was an unexpected result, too. People began using the cheap rates to buy houses. Lots of houses. Investment banks then repackaged the new mortgage debt into all kinds of new securities that supposedly separated risky loans from safe loans. The result was cataclysmic: As housing prices plummeted, suddenly financial institutions had trillions of dollars of asset-backed securities that couldn’t be valued at all. Unable to borrow money, some of these banks are now failing, making credit hard to come by for everyone, including entrepreneurs.

If you are lucky enough to have customers, your customers are going to be less inclined to spend now. If, like most startups, you have no customers, you’re in worse shape: The angels and VCs competing to give you money last year will be far less willing to invest now.

So, what’s a founder to do?
3 Steps to Surviving the Credit Crunch

1. Communicate with your team and your investors.
Explain to your staff that you’re now in bunker mode: no new hires, no bonuses, no raises. It also means no new servers or software upgrades. Renegotiate your existing vendor relationships now, don’t wait. Prepare your investors to expect slower growth. Speak their language: offer specific examples of customers who won’t be buying as much, or as quickly, but who you won’t lose. Show your investors that you know how you intend to reduce your burn rate. At Angelsoft, we’ve reduced our burn rate by 30 percent since June. On Monday, with the stock market in chaos, our investors wrote us another check –- OK, it’s a loan, but it’s money we need now, and a sign of confidence in us.

2. Focus on finding revenues.
Many startups focus on acquiring as many new users as possible, only figuring out later how to convert those users into revenue. There is no time for such a strategy in this market. You will run out of money before you get there. Refocus your product, marketing and sales away from customer growth and towards incremental revenue generation. You won’t grow as quickly, but cash in hand is imperative now.

Angelsoft has always been a free service for entrepreneurs, but three months ago, we decided to create a premium product that lets entrepreneurs post their business plans to our investor community for $250. From a long-term perspective, this may curb growth of our users, but by generating some revenue now we will survive longer on our current capital.

3. Do Less.
This may sound obvious, but it really is a huge mental shift for most entrepreneurs. You were hired to get your business huge or move on to the next new thing. When times are good this makes sense. But right now even great businesses will have a hard time growing. If you continue with growth as your sole objective, you will spend yourself out of existence and won’t have the chance to prove yourself when the economy returns.

Ryan Janssen is COO of Angelsoft.net, a web platform that connects investors and entrepreneurs.

27 Comments

Greg

The first thing you need to do is to accept the passing of Wall Street as we once knew it…here’s how…

http://www.wallstreetcoffin.com

Help put these once titans of capitalism to rest as we generate some money for a couple of worthy charities.

Marc Dangeard

This crisis actually has some really good impact: less easy money will force people to think more about generating revenue.
The advice is very good, but I would say that you should not need a financial crisis to think that way.
Generating revenue makes sense when you are a business, and trying to charge people is a good way to test the market.
I would argue that Angelsoft should not have waited to try to find revenue streams. And maybe there is more that could be done in this area. For example Vator.tv creates competitions, maybe this is also something that can be done with the assets on Angelsoft.net.
While charging may mean less people signing up (depending on what you charge for), it also means that whoever signs up really cares about what they are getting, which is very valuable for a business because your paying customers are your best advocates: they have to justify why they decided to get the service and pay for it, and the reasons they will find are selling arguments for others. Very different from free accounts that anybody can open with no strings attached: they were just trying the thing, they do not need to justify their behavior beyond curiosity, no advocacy there.
Maybe this is the reason why the best businesses are the ones that are created during times of crisis: founders had to think harder about getting revenue and it makes the business better/stronger…

Scott

Ryan – Thanks for the post. While I agree that the picture has changed dramatically when looking through the macro-economic lens, I’m not as convinced of the startup CEO’s need to make sweeping changes as a result (eg. operating in “bunker mode”). Certainly, it just got a lot harder to raise some kinds of money, and that should be taken into account, but on the whole – I think companies with great products and teams will have an easier time because there will be less competition. And not just direct product competition, but competition for HR, funding, press, consumers etc etc. And gee – if the Wall St. MBA’s actually have to go out and get their hands dirty, so much the better! Hands-up for Josh Kopelman’s efforts in that respect: http://www.leavewallstreetjoinastartup.com/. All in all – I’d say I’m cautiously optimistic about this new M.O. for early stage companies – especially those in the tech sector.

Mark MacLeod

Very timely article. Just posted on this topic myself this morning (http://startupcfo.ca/2008/09/lehman-brothers-and-your-startup.html)

It’s all about extending the runway of the business until such time as things calm down.

Jeff Bussgang from Flybridge (a VC in my last company) also posted on this. Bottom line: He’s short term bearish and long term bullish.

http://bostonvcblog.typepad.com/vc/2008/09/vc-take-on-market-crash-short-term-bear-long-term-bull.html

Mark

Simon

Daniel; sadly, that’s not true. If you double your response times, you’ll still need the same technical support resource, as you’ll still get the same level of requirement. All it enables you to do is give your technical support team an hour off, once – but the same resource will need to be applied, if an hour later. If you halve the resource, then two hours in you’ll need to stretch the response time to four hours.

Paul Gibson

I totally agree with you. Recently one of my friends joined a startup called Cruxle (www.cruxle.com) that operates in a very frugal way, adjusting to the economic crisis! I believe that’s the right way to run a startup company like that. They are building a great product and in a great way! Go Cruxle. Check it out folks, you can discover your favorite TV Shows, Movies, Music, books and Videos and I love their recommendations.

Daniel

In order to decrease your expenses, you could do less like the article says. Like for instance if you run a web hosting company, instead of trying to reply to everything in under an hour, stretch it out to two hours. This should reduce the amount of technical support you need by half.

Also, companies offering free service are definitely going to a lot better during tougher times like this

Comments are closed.