Many entrepreneurs and companies are now mumbling about the prospect of a double-dip recession. I am not absolutely sure we are receding back to the late ‘08 and ‘09 economy or if we are 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 U.S. 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, the gulf oil spill is bringing us all down.
What we appear to 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?
I wrote a blog entitled, “Managing Startups in a Recession” (http://big.ly/ddrecession) in late ‘08. I went back and read and re-read this blog to see if I had any new insights and if things had changed. Certainly the points I addressed are still valid, and I suggest you take a look at this blog. However, the last year and a half have given us some new hard evidence on how to survive and flourish in this brave new world.
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 than what was being paid prior to the recession. This means that an individual’s only choice may be to start his or her own business if he or she wants to actually make money and have an opportunity to achieve personal wealth. So expect to see more entrepreneurship and not less over the coming years. Ironically, this trend will create its own opportunities for entrepreneurs. For example, there are special entrepreneur office sharing facilities popping up all over San Francisco catering to these entrepreneurs.
The Absence Of Institutional Capital - The absence of working capital provided by institutions or even Angel Investors is going to continue. 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 an investor does, it will most likely come at a time when you actually do not need the cash. Also, watch out for the percentage equity that investors want to take and the time expectation for cash-out. They will have a short time horizon for making money.
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 investments 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 three separate companies and finally sold my company to one of them. Forget about Angel and institutional investors. Find a company(s) that can take advantage of what you’re doing and see if they will invest.
A Long Runway - It is going to take you a lot longer than you would like before your company gets going and eventually becomes profitable. Little working capital translates into little resource to build and market your 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 and hire people temporarily. People are constantly going to be looking 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. For instance, the current job board systems fall short in providing individual jobseekers 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.
Too Many Ideas Not Enough Execution – Entrepreneurs are very creative. However, sometimes 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 your battles and focus on easy problems to solve. This will get you to market faster and keep the expenses down.
Don’t Hesitate Too Long To Change The Approach – If it is not working, fix it or move on. Do not spend too much time with a broken business model, service or product. I have seen many entrepreneurs stuck in this no-man’s land. There is no time and money for this anymore; move on.
Keep It Really Simple – New businesses these days have to be really simple without 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.
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. This is actually a good thing because you will be lean and mean, and partnered with a company that understands you, your product and your market.
About the Author
Kevin Flood is an entrepreneur who has started a number of companies resulting in the IPO and sale of many of these companies. He has built and worked with companies on several continents and in several different industries. Kevin frequently blogs about startups on his blog – kevinflood.blogspot.com.
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