Many entrepreneurs and startups are now mumbling about the prospect of a double dip recession. Ii is not clear if we are receding back to the late 08 and early 09 economy or experiencing the “new normal economic reality”. Certainly, the stock market got way ahead of itself in terms of valuation, the European debt crisis made us aware that Europe was worse off than the US and has curbed our enthusiasm for risk and investment, jobs are not being created at a rate that equals the new people coming into the job market and “under employment” is now a way of life with people taking jobs below their skill level and their pre-recession salaries, companies are maintaining profitability at the expense of hiring and real customer growth and of course and the gulf oil spill is bringing us all down psychologically.
What we may be experiencing is a new normal economic reality where growth, salaries, jobs, opportunity and available investment capital will be in short supply. So how does an entrepreneur succeed in an environment like this? Is there a way to take advantage and to thrive in this new economic reality?
In late 08 I wrote a blog entitled “Managing Startups In A Recession ”( http://bit.ly/ddrecession). Recently, I went back and re-read this blog to see if I had any new insights into managing a startup in a tough economic environment. Has anything changed since the start of the recession? Certainly the points I addressed are still valid and I suggest you take a look at this blog as a refresher and a reference point. Moving forward, the last year and a half have given us some new hard evidence on how to survive and flourish in this brave new economic world. Entrepreneurs have settled into and adapted to the new world realizing that the environment is not likely to change very much any time soon.
Entrepreneurs-By-Necessity – This is a new phrase being coined in the San Francisco Bay area acknowledging the fact that there is little job growth and the actual amount of money being paid to employees(especially if you consider the hours salaried employees are putting in)is significantly less then what was being paid prior to the recession. This means that an individual’s only choice may be to start their own business if they want to actually make money and have an opportunity to achieve personnel wealth and some degree of self respect. This means we are actually seeing more entrepreneurial activity and not less compared to the prior era. Ironically, this trend will create its own opportunities for entrepreneurs. For example, there are special startup/investor office sharing facilities popping-up all over San Francisco catering to these entrepreneurs.
The Absence Of Institutional Capital For Early Stage Companies – Working capital provided by institutions or angel investors has increased somewhat since the start of the recession. However, it is still anemic relative to pre-recession levels. Essentially, there is not going to be much capital available for early stage startups requiring startups to self fund their companies. This has a number of repercussions that we will discuss later in the blog. The basic take away from this is; do not expect an institutional investor to come along on a white horse with working capital. If they do it will most likely come at a time when you actually do not need the cash. Also, watch out for the percentage equity that they want to take and the time expectation for cash-out. For a number of reasons a quick turn over is going to be the goal.
If I Do Not Have Money To Fund My Company What Do I Do? – I have stated this before in previous blogs and I will state it again. Look for investment from another business that can take advantage of what you are doing or making. I funded my first startup like this. In fact, I received three tranches of funding from 3 separate companies and finally sold my company to one of them. Before going to angels and institutional investors start searching for companies that can take advantage of what you have and contact their business development team.
A Long Runway – It is going to take you a lot longer than you would like before your company gets going and eventually becomes self sustaining. Little working capital translates into little resource to build and market you product and service. Be prepared for a very long road from a business and personal perspective.
Economic Pain Points Are Opportunities – This new economy is going to be painful for individuals and companies. Forcing them to look at many ways to save on expenses, hire people temporarily, forcing people to constantly be on the look out for jobs and opportunities and companies will be laying off and firing people at will. Believe it or not this situation creates opportunity. These are great areas for entrepreneurs to focus on and create businesses around these pain points. For instance, the current job board systems fall short providing individual job seekers with little feedback on how many people looked at their resumes, what kind of companies and people looked at it and what they did or did not like about it. There is no scoring system based on skills and backgrounds and what scoring combinations are having the most success. This is just one simple example of an opportunity. There are many more areas where entrepreneurs can make a real difference including feeding the startup machine with talent, advice and possibly micro-loans as opposed to venture capital.
Too Many Ideas Not Enough Execution – Entrepreneurs are very creative. However, sometime they put too much emphasis on ideas and not enough on what it takes to execute on these ideas. Building a business around an idea is difficult. Pick you battles and focus on easy problems to solve. This will get you to market faster and keep the expenses down.
Keep It Really Simple – New businesses these days have to be really simple and not capital or time traps that require an abundance of full time resources to launch and retain. Your first launch should be an extremely simple business model, easy to understand and low cost to maintain and grow.This will also increase the likelihood that someone, company or institution will invest in your business.
Conclusion – The recession economy is here to stay and is now the new economic reality. Embrace it and take advantage of the new opportunities that it creates. Forget about institutional investing for now . You are going to have to go it alone or hook it up with another company that sees "value" in what you are doing. When you are off and running start exploring the institutional money route. However, be aware of the valuation you will give up in a buyers market.