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Managing a Company in the Economic Downs

Andrew Warner interviewed Seth Godin about what it takes to start a company in a down economy (see video). I’ve enjoy reading Seth’s work and believe he is one of the foremost minds on marketing. There were some things discussed in the interview that are similar to what I mentioned in a recent blog entry about why it’s a good time to be an entrepreneur. I wanted to highlight those in order to emphasize their importance:

1. Less competition exists in a down economy. This translates into more opportunity. Find and attack your niche.

2. As a result, the cost of resources will decrease. More deals. Greater discounts.

3. We must focus on building value; focus on our core. Cut back on pork spending and spend time building value. This will forge a stronger position for success when the economy rebounds.

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It’s a Good Time to be an Entrepreneur

Doom and Gloom?

Let’s get the doom and gloom out of the way first. There are a million reasons to be concerned about starting a business given the state of the economy. Perhaps the biggest fear is driven by the fact that banks and VCs are cutting back on their investments. While this is true, low interest rates are compelling people to find alternative investment opportunities with decent returns. And there are still many angel investors looking for great opportunities.

Entrepreneurs need to remember that access to external sources of capital is not the only success driver of a new business. In fact, 99% of businesses are bootstrapped. Granted, not all start-ups are successful; but if you have a solid business plan then you have a better chance of success.

Less Competition

It’s a good time to be an entrepreneur because the economic crisis is killing off competition. Companies that were unprepared to go lean or that didn’t properly hedge their risk are dying off. Less competition means more opportunity. This is a great thing for entrepreneurs if they can find a niche or opportunity in industries that are struggling. The entrepreneurs that do launch in the face of such “adversity” will have an easier time finding customers.

Agility is the Best Defense

Being a small company can also be a good defense against the downturn. Many of the big firms that can’t survive the economy are unable to do so because they are too bureaucratic. It takes them too long to execute. But smaller, more agile start-ups are able to adapt to trends and defend against crises much faster than their corporate counterparts.

Cheaper Resources

At times like these, resources are less expensive. Entrepreneurs can find great deals on equipment during a financial famine. And there are a lot of people who have been laid off that might be willing to work for less. Companies that are starving for business, such as commercial real estate firms, are more inclined to negotiate a deal or a discount on property leases. This will contribute to lower start-up costs.

Focus on Your Core

If you can stave off the crisis your company will be positioned for stronger growth when the economy rebounds. One of the best ways to survive is to cut back on the frivolities, such as unnecessary operations, and focus on your core competency. If innovation is your bread and butter then invest in new product development. If legendary customer service is your founding principle, remind your customers using a revamped marketing campaign. Or if streamlined operations are what set you apart, cut out the marketing pork and invest resources in faster production. By focusing on your core your organization will be well-positioned to capture more of your market once the economy turns around.

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Less Venture Capital Available

There will be less VC funding available next year. I recently read about the trend in USA Today and wanted to share it.

“Venture capitalists predict that venture investing will fall 10% to $27 billion next year . . . 72% of venture capitalists don’t expect the market for initial public offerings to heat up again until 2010 or later. However, they believe that funding will grow or remain stable for start-ups in clean technology, life sciences and biotechnology” (USAToday.com). Apparently, this information is based on a survey that was sponsored by the National Venture Capital Association.

So how long will this trend last? I don’t know. But the takeaway is that VCs will be scrutinizing their investments even more heavily than before, which obliges entrepreneurs to really nail their business model before soliciting funds. And assuming entrepreneurial activity will not reciprocate this downward trend, angel investments will likely play a critical role in the fund raising process.

However, Richard Branson will be offering entrepreneurs and and their angels a silver lining. His new company, Virgin Money, will formalize lending relationships among friends and family effectively acting as a third party broker that will manage the payment plans to angels, such as friends and family. This could represent a new era in financing that makes sourcing angel capital a less complicated process. The CNN Money business blog explains how.

“Why do you need Virgin Money to borrow from your mom? These relationships can get emotionally complicated. Virgin Money mitigates any awkwardness by handling the payments; consequently default rates decrease to 5% from 14%” (CNN Money).

So maybe it’s time to mail that Christmas card to uncle Fred.

Proving Your Worth as a Manager

Of Storms and Alligators

storm1 I have a close friend who is the Executive Director of a small, service-based company that is taking a beating from the current economic downturn. Sales are down. Costs are up. And the well of funding has dried. Even though my friend is effectively knee-deep in alligators I have the utmost confidence in his ability to weather the storm. Unfortunately, my friend is not alone. In fact, even big businesses are struggling to survive. Look at the US auto industry. Granted, their lack of cash flow is due to more than just effects of the economy. But I think it’s safe to say that businesses throughout the world are in trouble.

Earning Your Stripes

Now is the time when a manager earns his stripes. Any manager can ride the tide of prosperity and lead his business during seasons of plenty. But the mark of a truly able manager is defined by how he overcomes the unexpected and weathers the storm. Managing crises is the most defining aptitude an entrepreneur can develop because the very nature of entrepreneurship is inherently ambiguous. In the case of my friend, it is too early to predict the future as there are too many variables that affect his business; a corporate failure would likely be attributed to much more than the economy. But if he is looking for an opportunity to prove himself, now is the time.