Fewer, Bigger, Bolder: From Mindless Expansion to Focused Growth by Sanjay Khosla and Mohanbir Sawhney
April 6, 2014
The Lotus in the Swamp: Entrepreneurship in Difficult Economic Times
March 17, 2009
These are tough times for entrepreneurs. We are going through one of the worst financial markets crises in history. The meltdown in financial markets has plunged economies around the world into a recession. Entrepreneurs are finding that investors have all but disappeared and revenues are declining as customers cut back spending. Given these woes in the capital markets and the economy, it seems that this is a very bad time to be starting a new company or to grow a startup business.
Yet, history suggests that difficult economic conditions may actually be the best of times for entrepreneurship. Like a lotus that thrives in a dirty swamp, some of the most innovative companies have emerged during deep recessions. And just as the lotus relies on the swamp for its nutrition, startup companies can actually benefit from difficult economic conditions. The Great Depression of 1929 was the most severe and prolonged economic crisis the world has ever seen. And yet, it was during these times that great companies like Motorola and Texas Instruments were founded. Ironically, it was during the Depression that Fortune magazine was launched, when there wasn’t much business to talk about! The next biggest recession the United States experienced was in 1982, as the economy shrank by 2.2% and unemployment spiked at 10.8%. However, it was during this time that we saw the birth of the IBM PC, the founding of Sun Microsystems, and the creation of Cisco Systems. These events gave birth to the PC industry, the computer workstation industry and the networking industry. Twenty years later, as the U.S. was again mired in recession in 2001, Apple launched its first retail store and introduced its revolutionary iPod digital music player. As Steve Jobs noted, Apple does not pay attention to the state of the economy. Instead, it believes that as long as it keeps putting great products in front of customers, they will continue to open their wallets.
Why are difficult economic times a good time for startups and innovation? There are several reasons. First of all, when funding is easy to come by, as it was during the dot com boom, there is a lot of noise and confusion in the marketplace. Many dubious business concepts get funded, and it is difficult to separate the wheat from the chaff.Startups are locked into a mad race to “get big fast”, even though they cannot absorb the pace of growth that is demanded by impatient investors. In my experience, far more startup companies die of indigestion than of starvation! When you get too much money too fast, you end up spending it in foolish ways. And you don’t have as much pressure to make the business profitable, because you can always raise more money. Just as homeowners in the United States got into trouble when banks lent them more money than they should have and on more lenient terms than they should have, venture investors tend to pressure startup companies to accept more capital than they need, which can end up getting them into trouble in the long run.
Another reason that recessions are good for startups is that customers become more demanding about value for money. So startup companies are forced to ask themselves hard questions about what value they offer to their customers and why customers should do business with them. When a market is growing rapidly, it doesn’t take much to sell your products and services. After all, a rising tide lifts all fortunes. But, as the legendary investor Warren Buffet observed, it is when the tide goes out that you find out who has been swimming naked! This customer-enforced discipline is good for startup companies, because it makes them focus more sharply on creating relevant offerings and compelling value propositions.
Finally, a recession in an industry often signals that the current technologies and current business models are running out of steam, and that it is time for disruptive new technologies and innovative business models to take hold. For instance, the Desktop Computing paradigm grew out of the declining fortunes of the Mainframe computing paradigm. Similarly, we are witnessing a slowdown in the Enterprise Software market, but at the same time, we are witnessing the emergence of Software as a Service (SaaS) paradigm and the Open Source Software paradigm, which have the potential to usher in a new era of software, applications and devices. Take the mobile device industry, for example. While the fortunes of conventional mobile handset manufacturers like Motorola and Sony Ericsson are declining, we are seeing the creation of open-source mobile devices based on Google’s operating system, Location-based services on mobile devices, mobile gaming, mobile advertising and mobile commerce. Customer needs do not disappear in a recession. There is always room to innovate, and there is more room to innovate when the existing paradigm is looking tired.
So the spirit of entrepreneurship remains alive and well even when things look gloomy. And entrepreneurship in India is no exception. Despite all the bad news we read about in the newspapers and the breathtaking decline of the Indian stock market, the Indian entrepreneurship scene is more vibrant than ever before. A case in point – the Tata NEN Hottest Startups contest that is currently ongoing has received over 500 entries in the Tata NEN Hottest Startups competition. The range of industries and markets these startups represent is amazingly diverse, ranging from traditional domains like IT, Internet, Media, Outsourcing and Retail to newer domains like Health Care, clean tech, biotech and agribusiness. And the fundamentals of the Indian economy remain solid. The Indian Internet audience grew to 28 million users by April 2008, a 27% increase from the previous year. The mobile subscriber industry in India continues to be on a tear, reaching 315 million subscribers by September 2008, with 10 million new subscribers being added every month. And despite the economic slowdown, the organized retail market continues to hold immense opportunity as it still stands at only 4% of the total retail market. The silver lining to the devaluation of the Indian Rupee is that revenues for startup companies focused on the U.S. and Europe are almost 25% higher in rupee terms than they were 6 months ago. Clearly, there is no shortage of opportunities in the market. And there is no shortage of talented and passionate entrepreneurs who are pursuing these opportunities.
However, entrepreneurs do need to recalibrate their strategies for difficult economic times, as investment capital becomes scarce and the marketplace slows down. They need to think differently about their markets, their offerings, their approach to funding, and their operations. Here are some tips for surviving and thriving in difficult economic times:
Grow organically: Think about how you can grow your startup company with minimal or no external capital. This might sound difficult, but on deeper reflection, investment capital is usually required for two reasons – to fund product development and to get big fast in a competitive race. I advise entrepreneurs to begin with project-based services that can provide quick revenues and lessen the cash burn, and then gradually invest in product development as they generate resources organically. The mantra – “servicize to learn, and then productize to earn”. Further, in difficult economic times, getting big fast may not be essential, because the race will be won not by those who run the fastest, but by those who last the longest. So you can afford to slow down and pace yourself to run a marathon, instead of burning out quickly in a frantic sprint fueled by venture capital!
Sharpen your Value Proposition: As customers become more demanding, you cannot afford to be wishy-washy about why they should be buying your products or doing business with your company. You need to communicate your value proposition clearly, crisply and concisely. What benefits do you offer? When, where and who should be using your products – what situations or scenarios have you optimized your offerings for? How are your offerings better than competing alternatives, including the alternative of not buying anything at all? How can you make it easier for customers to do business with you? How can you reduce their perceived risk of using your products or doing business with a small company? These are questions you should pay close attention to.
Diversify your markets: For a startup company, it is a good idea not to have all your eggs in one basket. If you focus exclusively on the U.S. market or the Indian market, you are more vulnerable to sharp downturns in that market or in currency fluctuations. For instance, the U.S. market might have looked very lucrative a few years ago for Indian IT companies, but an over-dependence on the U.S. is now hurting the leading Indian IT firms. As an entrepreneur, think about how you can make your products and services relevant to the Indian market as well as to developed markets. While it may take some effort to tailor your offerings and your marketing to different markets, you will be better protected from the wild swings in currencies and economic trends.
Variablize your Assets: Fixed assets are the bane of startup companies. You need loads of capital to acquire fixed assets, and they greatly limit your flexibility once you have acquired them. So, whether it is real estate, computers, software, and office equipment or even staffing, think ten times before you put a single Rupee into the ground. Instead of buying servers and setting up data centers, use virtual “cloud computing” services like Amazon.com’s Elastic Compute Cloud offering. Rent your office space, your office furniture and your office staff. Use part-timers where you can to reduce your burn rate. I have seen startup companies even time-share their executive management – hiring a part-time CFO or CMO until they have the resources and the need for highly-paid executive talent. Variablizing your assets makes you leaner and more agile, putting you in a better position to ride out the storm.
In conclusion, the spirit of entrepreneurship lives on in times good and bad. In fact, entrepreneurship may actually thrive in difficult economic times, because entrepreneurs need to be more disciplined, more focused, and less distracted by competition. If entrepreneurs can adapt their strategies to position themselves for the downturn, the same economic headwinds that are slowing them down can become the wind at their back, propelling them to the Promised Land.