Oct 9, 2008

The Financial Crisis: A Survival Guide for Israeli Startups

(the hebrew version was published in The Marker...click here).

Entrepreneurs often focus so much on running their companies that they don’t have time to worry about events in the outside world. Normally, this is how it should be, but the credit crisis slamming Wall Street right now is an exception, and it has deep implications for any startup.

A little history from me (sorry):

The current mayhem actually began back in 2001. In an attempt to mitigate the economic impact of the dotcom collapse and the Sept. 11 terrorist attacks, the Federal Reserve began a series of interest-rate cuts, slashing the cost to borrow money to 1.75 percent from 6.5 percent.
This was great at first:
1. Entrepreneurs could borrow cheaply to build new businesses; consumers could borrow cheaply to spend money on our products.
2.There was an unexpected result, too. People began using the cheap rates to buy houses. Lots of houses. Investment banks then repackaged the new mortgage debt into all kinds of new securities that supposedly separated risky loans from safe loans.

The result was cataclysmic: As housing prices plummeted, suddenly financial institutions had trillions of dollars of asset-backed securities that couldn’t be valued at all.
Unable to borrow money, some of these banks are now failing, making credit hard to come by for everyone, including entrepreneurs.

Now..... how does this affect you:

If you are lucky enough to have customers, your customers are going to be less inclined to spend now. If, like most startups, you have no customers, you’re in worse shape: The angels and VCs competing to give you money last year will be far less willing to invest now.

So, what’s a founder to do?

1. Focus on cutting expenses: Communicate with your team and your investors. Explain to your staff that you’re now in bunker mode: no new hires, no bonuses, no raises. It also means no new servers or software upgrades. Renegotiate your existing vendor relationships now, don’t wait.

2. Prepare your investors to expect slower growth. Speak their language: offer specific examples of customers who won’t be buying as much, or as quickly, but who you won’t lose. Show your investors that you know how you intend to reduce your burn rate.

3. Focus on finding revenues. Many startups focus on acquiring as many new users as possible, only figuring out later how to convert those users into revenue. There is no time for such a strategy in this market. You will run out of money before you get there. Refocus your product, marketing and sales away from customer growth and towards incremental revenue generation. You won’t grow as quickly, but cash in hand is imperative now.

4. Do Less. This may sound obvious, but it really is a huge mental shift for most entrepreneurs. You were hired to get your business huge or move on to the next new thing. When times are good this makes sense. But right now even great businesses will have a hard time growing. If you continue with growth as your sole objective, you will spend yourself out of existence and won’t have the chance to prove yourself when the economy returns.

This entry was based partially on a blog entry by Ryan Janssen COO of Angelsoft.net, a web platform that connects investors and entrepreneurs.

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