How start-ups can survive

Here we go again: Another boom, another bust. But we've learned something from the last time, haven't we?

In 2001, the first dot-com economy collapsed. New companies couldn't raise funds to continue operating. Existing companies couldn't go public or get bought. My employer (Red Herring) folded, as did hundreds of other businesses. Almost all companies with speculative growth-based (as opposed to revenue-based) business models died off. And Aeron chairs flooded the market.

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We're heading into another start-up downturn right now. Erick Schonfeld on TechCrunch points out how the credit crunch will lead to a venture crunch, and Jason Calacanis' latest e-mail newsletter predicts that "50-80 percent of the venture-backed start-ups currently operating will shut down or go on life-support" within the next 18 months (italics mine). Is it time to panic?

I don't believe so, although to operate as if the world isn't changing for young technology companies is equally irresponsible. There are similarities between the current economic picture and the last bubble, but there are differences as well, and they are important for start-ups. Here are a few things new company CEOs might want to consider as they formulate a strategy for surviving the next 18 or so months of what is likely to be a weak economy.

Advertising is a trailing indicator. If your business is based on advertising revenues of any kind--from big sponsor contracts to Google ad words--count on it diminishing drastically in coming months. Reduced consumer spending means less advertising (I don't care what Digg says ), and it sometimes takes a quarter or so for contracts and plans to unwind. What appears to be stable advertising income cannot be counted on.

Rotation into business. As the consumer economy slows, most companies will search for additional revenue strategies, which will likely include selling to business if the companies are currently consumer-focused. Get ahead of that curve. It's more difficult to sell a contract to a medium or large business than it is to push goods and services on individual consumers, but business products generally support more predictible margins and slower churn. However, to sell to business you need products that are more robust than single-feature Web sites, and you need a top-flight sales team. B2B products don't sell themselves.

Nobody trusts start-ups. Regarding the above tip...You may think you have a product or service that plays in business, but you're going to have a hard time selling it. Big business won't trust a start-up. And why should they? Underfunded, undisciplined opportunists don't often have stable, secure, or scalable services that real business needs to operate. Your best bet is to partner with a company that is already selling to business. Don't try to go direct. Yes, you'll lose a lot of your margin. Them's the breaks.

Forget the VCs, head to the angels. Although venture capitalists may be affected by the credit crunch, since they rely on their partners' funds that could be harder to scare up, this should not affect as much the availability of capital from the angel investors, generally early-stage investors who put their own money into companies. The challenge is that while angel funding is often enough to get a company launched, you won't find the multimillion-dollar funding rounds in that ecosystem that you might need to develop the big product that big companies will buy. But for early-stage development, now's as good a time as any. It costs a lot less to get a product off the ground now than it did seven years ago. It's the scaling and selling that's the challenge.

No credit. One of the biggest and most ominous differences between the 2001 pop and the current crunch is that companies will have an even harder time securing credit today than they did then. A few companies, like Ning, managed to load up on cash for the "nuclear winter," but for other firms it's too late. So it goes without saying that companies should do everything they can to conserve resources. That doesn't mean folding up shop. It does mean to lay off the fancy parties and expensive conference travel.

Spend into the recession, or move. If you have a runway of funding to last out a bleak year, don't panic. But most of all, don't stand still. Go under the radar and build your product. Talk to your potential customers. The clouds will lift eventually--and if not in this economy, then perhaps in another, like China or Dubai. As a friend of mine said: "I go where the construction cranes are."

Related: Why the credit crunch is about more than Wall Street .

 

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