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>> Welcome to the Daily Debrief, I'm CNET's Kara Tsuboi here with editor of Webware.com Rafe Needleman and we are talking about this major financial crisis and what it really means to the start-ups. Of course we saw some start-ups in bad, bad positions just seven years ago in 2001.
>> And we're facing -- would you say a similar problem this time around as far as funding goes and the viability of a lot of these companies.
>> In some ways, yeah, it's worse because of the credit crunch. The start-ups can't get credit...
>> ...the way they could before, but in some ways it's a lot better because most companies -- most Web 2.0 start-ups right now have much lower cost structures.
>> So, in some ways, it's better, in some ways it's worse. The one thing that is always the case when credit gets tight, when financial markets pull back, is that the sources of funding begin to dry up.
>> Makes sense.
>> Yeah, the venture capitalists who are trying to get money from their partners to fund the companies, the partners might see their assets reduced and they're going to be a little more hesitant to respond to the capital calls, so it is a tougher time for start-ups.
>> So I mean, they obviously, just won't all be shutting their doors. Are there any tips that you can provide for trying to stay afloat in this economy right now?
>> Well, one of the things that does happen when consumer spending retrenches is we've seen this before and this is I guess a tip is that the start-ups can rotate into business to business products instead of focusing on consumers. There's a lot of consumer products that are free and then you try to get them to pay-up later, the premium model.
>> Selling to businesses while more difficult is a strategy that gives you higher margins in less term. It also requires that you invest in a more qualified sales team.
>> Because business products don't sell themselves.
>> Very few do that way.
>> But it's still providing a service that someone needs.
>> Which is why we'll stay afloat?
>> I mean if you have a company that's just based on a service that nobody needs then it shouldn't be around anyway, but there are those...
>> There are those and they pop-up in any frothy economy like we've been having and a retrenchment like this will weed them out, so a lot of companies that are people products I just call them the resumes they'll get whacked and that's the nature of booms and busts in technology. It happens all the time.
>> What's gonna happen with advertising dollars for a lot of these start-up companies.
>> I mean, that money probably is not gonna be there either.
>> Well, I've seen a lot of start-ups that are -- they come in to me and they say, Google is my business model. And what that means is that they're using AdWords to kind of prove their concept and make a few bucks to keep the lights on until they you know, get a real business model. But advertising is always a trailing indicator. There are advertising contracts that take a while to unwind and advertising in a declining consumer economy -- advertising consumer, advertising will also decline. And if your model is based either for revenues or just for proof of concept on advertising then it's really time to reexamine that and find a revenue model that's real than whilst people paying for the product as opposed to the derivative product of advertising based on traffic.
>> Now a lot of analysts are saying that we've really just entered into this really dark period of what could be a long stretch of bad economy, bad financial numbers, can a company just sort of keep the fingers crossed and hope to write it out or is there stuff that they can actually be doing right now to move their company forward.
>> Well, I mean, obviously if you're going through a bad economy, the question is how long can you survive. What do you do in that winter?
>> Now some companies were very smart. I mean [inaudible] raised a huge round of funding for the coming nuclear winter. That advise is a little too late to take. There is no credit today and it's probably more difficult to raise funding than it has been.
>> But it's always the case that people have pains in their lives and in their businesses and products that address those pains will be valued. The question is how do you build a product that can't easily be built by somebody else. So there's always room for innovation. There is always an overhang of capital out there. It's just the question of providing a service that is obviously unique that is hard to build, so that nobody else can -- that people just can't waltz into that market with you.
>> Right. And maybe to find that capital you need to look outside of the border of the United States.
>> Well, that's the other thing. A friends of mine says, hey look, I go where the cranes are, you know, you look at Dubai, look over constructions cranes there. There are markets that are outside of the US where there is growth. This is not the only economy.
>> There are others and there are needs elsewhere in the world than here. There are global products and there are region-specific products and maybe a US-specific product is not the right thing to build today.
>> Right. So if anything else this financial crisis will really weed out the bad from the good and the strong will survive.
>> I hope so, and they might spread out a little bit around the globe.
>> Bu there's always room for innovation. It will be harder for the next couple of years.
>> But hopefully, we'll see better start-ups because of it.
>> Absolutely. It's a very optimistic position to take.
>> It had to be.
>> But we have to be. And so, thank you. Editor of Webware.com Rafe Needleman, I'm Kara Tsuboi, and we'll see you on the next Daily Debrief.
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