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[Editor's note: It's no secret that online advertising is starting to slow down in response to the economic slump. Display ads, the meat and potatoes for companies like Yahoo, have been hit especially hard. So for companies looking to squeeze every dollar out of their digital ads, it might be time to abandon traditional content and behavioral targeting strategies in favor of a relatively new concept -- location-based advertising. Below, Placecast founder Anne Bezancon makes her case.]

Most people don’t know that 70 percent of all Web content contains geographic information — the names of places, addresses, maps, zip codes — and that more than 50 percent of all internet searches are local in nature. There’s a lucrative opportunity at the intersection of these two facts, yet targeted advertising strategies have oddly overlooked the significance of location — perhaps the most evolved basis for targeting ads yet.

On an average day, an individual travels through about nine different locations: their home, their office, perhaps the gym, grocery store or restaurant, etc. Increasingly, people in transit between stops are accessing the internet via laptop, cell phone or even GPS system. The goal of location-based advertising is to plunk relevant (and actionable) ads in front of people, tied to wherever they happen to be and no matter what platform they’re using, be it mobile, PC or wi-fi.

For advertisers, each of the locations we all frequent helps them break consumers into categories. From there, they can decide whether to have their ads pop up at a fast-food joint or a gourmet restaurant, in a high-rise office building or an industrial office park, at an airport or at a hotel. It’s the mission of companies like mine, 1020 Placecast, and more recently Google with its Google Maps AdSense program, to connect people and places to serve finely-targeted ads.

As human beings, one of our major limitations is that we can only be in one place at a time. The good news, of course, is that we now have the technology to take full advantage of that constraint. The computers, phones and navigation tools we use to access the internet from anywhere are increasingly equipped with positioning technology, most popularly GPS. Because the devices we use now know where they are, they pretty much always know where we are too.

Taking full advantage of this fact, however, is taking some adjustment. The Internet was initially designed to ignore location, so the ability to tie place and time with specific users hasn’t come easily. The last ten years have seen gradual progress toward better ad targeting, but there’s still a ways to go, and location-based methods are yet to be meaningfully tapped.

There have been three incarnations of ad targeting. The first was to match ads to the content of web sites where they would appear. The second was to serve ads to users based on their past and typical browsing behavior. Of course, this dredged up all kinds of concerns about protection and privacy. The recent demise of startup NebuAd and the current congressional hearings on privacy in behavioral targeting attest to the dangers and limitations of this strategy.

The third wave — ad targeting based on place and time — is only just emerging. No longer are users’ physical locations estimated based on IP address. This method, trapped within the bounds of the internet’s traditionally location-ignorant infrastructure, is inaccurate a third of the time. It’s an understatement to say it lacks the precision required to pull off true location-based targeting. At best, it can place a user in a geographical area the size of a city — pretty rudimentary when your goal is to point a consumer to a particular store within walking distance of where they are standing at that moment.

Imagine a world where every piece of information delivered via the internet is tailored to where you are now, or where whatever you are looking for is — or even the place you are tagging in a picture of you and your friends. Several savvy companies have developed algorithms that match ad content with information specific to particular locations (event venues, parks, restaurants, etc.). When a user expresses interest in a place by conducting a search or bookmarking something, those ads are called up.

For example, a user browsing event-based social network Eventful’s site for information on the next Coldplay concert might see an ad for the Toyota Scion with the address of and link to the closest relevant dealership. On the other hand, a user looking for outdoor activities in San Francisco might be served a localized ad for Subaru.

Location offers so many different insights into what users might be interested in at various moments in time that brands have the opportunity to get extremely creative with lower risk. So far, experience has shown that location-based methods translate into fewer wasted impressions, better results and more innovative messaging. All of a sudden, collecting tedious and exhaustive user data is not as necessary. Any one place can tell you what you need to know about the audience it attracts.

Place-based advertising will represent a major shift in digital advertising, impacting brands, ad networks and the way average people browse the Internet indefinitely. The propagation of sleek, position-aware devices like the iPhone, and software like Yahoo’s Fire Eagle (an app that lets you share your location data and find cool things nearby), will only add more momentum. It’s about time advertisers sat up and took notice. As with the technology itself, it’s all about where we are — and more importantly, where we’re going.

Anne Bezancon is the founder and president of 1020 Placecast, a San Francisco company that matches advertisers and publishers interested in serving relevant ads based on location. Previously, she served as vice president of directory services for online wi-fi hotspot catalog JiWire, and as chief executive of content management software company BEAP.

[Editor's note: With the economic downturn drying up venture capital in Silicon Valley and elsewhere, more early-stage companies will be forced to bootstrap their way to profitability. But what does that actually mean for the companies who go this route? Javier Rojas, managing director of equity capital firm Kennet Partners, offers his insights.]

Times being what they are, it’s encouraging to know that some of the world’s leading public companies got to where they are without taking any early venture capital funding. That’s right, Microsoft, Dell, Cisco, Oracle, eBay — they all “bootstrapped” it.

Others, like Siebel Systems, Checkpoint Software, Broadcom and dozens of others, have followed their examples to success. The early years may have been challenging for the new execs forced to turn down paychecks. But they kept the faith that focusing more on customers and real revenues than market sizing and early valuations would someday pay off.

There are many compelling reasons for young companies seeking venture capital to turn to bootstrapping, even when they have other options. Not only might it be a safer way to go today, but it’s also a smart way to build a business.

How it works

When you decide to bootstrap, you commit to fund primary development and growth through internal cash flow from real-life customers. You — the founder — and a limited number of early employees may forgo paychecks for quite some time to make this work. But to keep that strategy to a minimum, it’s common for bootstrapping companies to turn to consulting engagements, non-recurring engineering contracts, value-added reseller agreements and projected supplier contracts. In short, “moonlighting.” These funds go toward initial growth and expansion until the company can stand on its own two feet.

A solid foundation

Opting to be self-sufficient (either voluntarily or not) and rely on real revenue means one thing: The customer is suddenly king. This focus becomes baked into the company’s DNA. Its very survival depends on developing products that its target market actually wants and likes. Customers are often involved in beta testing and are encouraged to become involved in the process. And early on is the time when you want to solidify a customer base for future sustainability.

Bootstrapping companies can also be more rational and less speculative with their allocation of resources. Because they can’t afford to throw money at problems, they have real incentive to solve potentially destabilizing conflicts and errors before they become systemic.

How much bootstrapping is enough?

Raising the right money at the right time can make or break a company’s growth, so it’s important to know when your company has outgrown its boots. Here are some indicators:

- Market growth rate is accelerating: If the market is growing faster than your internal funding, you risk losing market share (and equity) by not catching up.

- Customers are buying products and sales are predictable: You can scale your sales team, and more effectively channel the VC money you raise. As a rule of thumb, you should feel confident that you can predictably bring in at least $2 in gross profit for every $1 you spend on sales and marketing. I recommend a $3 to $1 ration as an even safer barometer.

- Complementary products or businesses have become available: It may be time to expand your offerings through an acquisition. Can you economically acquire new customers through a merger? If you are considering M & A activity and need help financing your growth, it’s time to raise capital.

- The current economic cycle favors growth: This isn’t what we’re experiencing now, of course, but hopefully it won’t be too far off. If the market seems to favor technology investment, or you see new growth areas on the horizon, it could be wise to switch.

- Your balance sheets are weak, or you want to diversify risk: Co-mingled balance sheets can be a major challenge for bootstrapping businesses. A prudent decision for a company may be imprudent for its founder (scaling sales at the expense of cash-flow, for example). As a consolation, selling off some shares can let founders offload some risk as well.

Where do you go from here?

If you’ve bootstrapped long enough to face these issues, you’ve probably done a pretty good job establishing growth and maintaining an equitable personal stake. Now the question becomes, “What do I look for in an investor?”

My advice: Don’t just look for the money — look for a partner with vested equity interest to help you expand. After this point, many parts of your business and how you manage them will need to change. Your investment partner should offer substantial contributions in this direction, not just capital.

A disclaimer: Bootstrapping is not for everyone

Some startups don’t even have the luxury of bootstrapping. Their markets might require immediate action, and they don’t have three to four years to foster growth. Their concepts may be capital intensive, requiring funding from the beginning. And in some cases, founders simply can’t invest “sweat equity” in their businesses by waiving months of pay. Bootstrapping is only for the entrepreneur who has the time and wherewithal to heed all of these factors. But for those who do pursue it, it can lead to a great company and even greater financial rewards.

Javier Rojas is managing director of Silicon Valley-based Kennet Partners, which provides growth equity capital to bootstrapped companies in the U.S. and Europe. Kennet targets capital-efficient businesses with annual revenues of $5 million to $50 million.

[Editor's note: As we've reported, the economic downturn and frozen IPO market have been especially tough on health care companies. But that doesn't mean innovation has slowed across the board. Below, Clifford Reid, chief executive of genome sequencing company Complete Genomics, discusses the financial concerns and direction of one of the most buzzed about life science sectors.]

Individuals have enjoyed some access to their genetic information for a while now. They can use it to understand their susceptibility to some illnesses such as diabetes, breast cancer or Alzheimer’s disease and take preventative steps. But the real revolution in personalized medicine is yet to come. The day we can begin to aggregate the sequence data from a large numbers of genomes is the day we will be able to reveal the genetic underpinnings of our most complex diseases.

My company, Complete Genomics, is working to make such large-scale genome studies a reality. With the proper sequencing tools at their disposal, biopharma companies and research institutions will be able to advance diagnostics, drug discovery, and clinical trials by years if not decades. In turn, they will drive the creation of better, more personalized therapies and treatment strategies.

Overcoming the financial challenge

We know that many chronic and fatal diseases have a genetic basis. But we have only scratched the surface of potential genetic solutions. The medical need is definitely there – yet it is the expense of sequencing large number of genomes that is the main limiting factor.

The promise of personalized medicine lies in transcending the treatment of symptomatic forms of diseases like heart disease and cancers to address their underlying causes. At that point, we will have the power to develop the most effective therapy possible with the fewest side effects. And the sooner we can identify these therapies, the sooner we can get them to market.

We can’t deliver on this promise until the cost of genetic sequencing projects drops significantly. Currently, efforts to unlock and analyze the massive volume of data in the human genome require significant capital investment in both sequencing instruments and high-performance computing resources. They also require staff trained in sample preparation and operation of the sequencing equipment.

Complete Genomics’ third-generation sequencing technology, based on a combination of ligation biochemistry and DNA nanotechnology, uses much lower volumes and concentrations of reagents than existing second-generation systems, thus allowing higher throughput at a lower cost. These breakthroughs paired with Complete Genomics scalable service model will enable the company to offer its sequencing services at $5,000 per genome by mid-2009.

Applying genomics to real-world medicine

Studying an individual genome involves the close examination of each of its genes, as well as how they interact with each other and their surrounding environments. This is a complex and time-consuming endeavor and fewer than 20 human genomes have been sequenced in the entire scientific community to date. In contrast, the large-scale genomic studies that we are talking about would be capable of comparing the full genomes of up to 1,000 people with a certain disease against those of 1,000 people without it. Researchers would then be able to highlight the key differences and similarities between the two types of genome to determine how the disease develops and spreads.

This same tactic could also be used to shed light on how patients who share the same disease differ from one another when it comes to drug absorption, metabolism, tumor type and so on. For example, researchers could use genomic tests to differentiate between various cancer subtypes, with potentially different reactions to chemotherapy. With this type of information in hand, doctors could begin to tailor therapies to individuals.

Genetic information could also help minimize adverse effects. If for example, only some people are experiencing adverse events in a clinical trial and DNA is available for those patients, the researcher can look at the genetic profile of those individuals to understand their reactions to the drug being studied and learn how to avoid them.

A growing market

The field of personalized genomics has generated a lot of buzz over the past several years – it seems to hold such amazing potential. Yet, there’s a dearth of published genomic data, underscoring just how much information is waiting to be gathered, analyzed and applied.

The government continues to fund projects in this area like the Cancer Genome Atlas, and nonprofits like the J. Craig Venter Institute are making progress. But the time is right for genomic analysis to move into the commercial sector. More than ever, large pharmaceutical companies are interested in developing targeted treatments and integrating DNA information into clinical trials.

The implications of DNA sequencing cut across many different markets including diagnostic discovery, clinical trial optimization, drug rescue, toxicology studies, functional genomics, biomarker discovery, extreme phenotype studies and oncology. Also, as the price tag on personal genome sequencing declines, it will be used increasingly in regular clinical settings and may also impact trial success rates.

The vision

By the end of 2010, Complete Genomics, for one, plans to have the ability to sequence 20,000 genomes per year for its commercial customers at its own genome center (predicted to be the equivalent of more than 50 percent of worldwide human DNA sequencing).

The ability to cost-effectively conduct large-scale human genome studies will further elucidate the pathways of complex diseases and drug responses, enabling medical researchers to truly deliver personalized medicine with tailored drugs, diagnostics and advanced disease prevention techniques.

Clifford Reid is chairman, president and chief executive of Complete Genomics. Previously, he founded two software companies: Verity, a text search engine, and Eloquent, a digital video communications company. Both eventually went public before being acquired.

[Editor's Note: We focus a lot on how hard it must be to raise money as a startup in this economic climate, with little attention paid to how agonizing it must be for VCs to pick and choose who is to survive. Below, Silicon Valley venture capitalist Bruce Cleveland offers his take on what firms are looking for, even though it might be too much to ask -- including some thoughts on spin-in startups and how they could help get things moving.]

Every few years, venture capitalists like me have the tables turned on us. Suddenly, instead of evaluating investment opportunities, we become one ourselves — shifting gears to raise money for our next fund. Having just forged through this process for InterWest Partners‘ tenth fund, I’m pretty attuned to the scrutiny portfolio companies are forced to bear during this recent downturn. And the heat is definitely on.

Clearly, early stage companies are going to be hit hardest. Mature startups know the ropes and pose less risk. It’s much easier to decide whether to invest in a company that is already actively growing its customer base and market share. But these days it’s harder for any startup to attract money from outside investors, no matter how many years it has under its belt. This is doubly bad for the youngest of the pack, which now have to raise even more at the outset to meet the stringent benchmarks required for the next round — and that’s skirting the issue that they’ll probably have to wait longer for that infusion regardless of what they do.

The critical factors for success are what they always have been: an experienced management team, a technology based on unique intellectual property, a growing market, and a compelling strategy. But now the bars on all counts are higher (and more challenging to reach).

Take management for example. In a volatile economy, strong leadership is vital to success, but it’s also much less likely that the best people will jump to fledgling ventures. A good downturn manager has rarefied skills. He or she needs to know how to drum up more deals despite low cash flow, when to save, when to spend, and how to prudently cut costs without losing the faith of the staff. This kind of expertise comes through years of experience.

VCs are carefully watching how current portfolio companies stack up against these measures. When a growing market freezes up, many wonder whether or not to “double down,” or do more than they normally would to help struggling yet promising startups through the storm. When it comes to this, I know what I look for. Companies that develop, market and sell products that help other companies optimize their revenue. Some may think it wise to invest in technology that portends to help companies cut costs. But you’ll find that even in a recession, every company’s goal is still to make more money with fewer resources at hand.

You won’t see a lot of this doubling down if the IPO market doesn’t open up soon. It’s never been more important (or arguably as difficult) to grasp profitability as soon as possible. Those that achieve this milestone will control their own destinies, and will be that much closer to surviving through to an eventual upturn. Those that don’t will either fail outright or turn into easy acquisition targets.

Larger companies, which admittedly already have an easier time, have developed an interesting strategy to avoid this hurdle. It’s called the “spin-in.”

Typically, spin-ins are startups founded by people from a more established parent company. They usually work to develop products and technology aligned with the goals of the mothership, but keep track of everything (including venture capital raised) on a separate balance sheet. If certain technical milestones are hit, the spin-in is then absorbed back into the company, which it can then ride to profitability or leverage to raise further rounds. Cisco Systems has long been a major proponent of this strategy, and it’s clearly worked for them.

But there’s also another way to do it. A spin-in doesn’t have to be a simple technology play. Instead, the parent company works with investors (since it has the clout) and the management team to build a real company with real revenues of its own. That way, if it gets gobbled back up after two or three years, it can be immediately accretive to the parent company. This is an attractive option for bigger companies looking to balance their investment in innovation against dilution of corporate earnings. Not to mention that it will help both venture firms and management teams address the issue of liquidity in a world where IPOs, mergers and acquisitions are becoming few and far between.

It’s this brand of creativity (paired with disciplined execution) that will see some shaky operations to the end of the tunnel. In that light, I wouldn’t be surprised if the market leaders of tomorrow emerge from this downturn with different values and sharper tools — and that could be the best thing for the market yet.

Bruce Cleveland is a partner at Menlo Park, Calif. venture capital firm InterWest Partners. Previously, he was one of the first executives at Siebel Systems. He blogs at Software-as-a-Service.

[Editor's Note: It's well documented that social networking sites don't pull in as much money from advertising as they potentially could. It's a climate that promotes experimentation, right now breeding more failure than success. Among those seeing positive initial results are entertainment networking sites like Amuso. Below, the company's co-founder Barak Rabinowitz looks at why monetization has been so difficult for these platforms, and what sites like his are doing to sidestep the typical challenges.]

There’s an elephant in the room of online advertising. An elephant in the shape of 400 million social networkers creating and consuming content, clustering around shared interests and activities — all who have yet to be tapped in any major way by web marketers.

Determining how to best reach these people is an ongoing struggle, one complicated by the soaring rate of user-generated content. For the first time, advertisers accustomed to the leading edge are now running to catch up. The conversation is no longer about display ads vs. text ads. Rather, the burning question has become: Who is going to profit from the opportunity presented by social networks, and how are they going to do it? Below, I’ve broken down good, bad and ugly efforts to capitalize on these platforms and rake in the bucks.

The ugly

Industry leaders agree that many social networks have built winning combinations of community and e-commerce capabilities. But most advertising concepts stall, or somehow fail to sell to consumers while letting them pursue their own interests and creations at the same time.

An article by Kevin Kelleher in Wired magazine earlier this year observed the paradox of expanding network memberships and weak monetization. At that time, display ads were bringing in just 13 cents per thousand views on MySpace and Facebook. The broader the audience, the more difficult it is to target ads (and in turn charge more). On the other end of this spectrum, smaller or focused sites like LinkedIn can charge more per thousand views because the audience is more specific. Applications on these sites are having an even tougher time. On one blog, app developers reported ad CPMs (cost per thousand views) far below a dollar.

It’s clear that a new, more effective model has yet to emerge.

The bad

Most social networking sites and Web 2.0 platforms rely solely on revenue generated from banner and text ads. Yet, even when marketers try to shake things up, users don’t take kindly to major changes.

Social video-sharing sites are a prime example of this. Most web surfers prefer YouTube because it doesn’t require them to watch ads or sponsorship messages before or during the videos they want to view. Sites that integrated these features after existing ad free for a while have experienced a negative backlash. But this is only part of the reason video sites have missed opportunities to make money from user-generated content. The other part is that sites with the most popular appeal (those that allow their users more free reign) are generally more vulnerable to copyright infringement lawsuits.

The bad news for all social networking sites — video portals especially — is that users generally don’t have the mentality to view and click on ads when they are on these platforms. This is why search continues to be the most lucrative advertising strategy. Users are specifically seeking information in that arena. On social networks, people are primarily concerned with communicating with their friends, not looking to buy items or services.

The good

This is not to say that all advertising strategies on social networks are doomed to failure. Not by a long shot. These sites still manage to gather consumers into engaged and accessible groups. Many sites coming out of the woodwork — even if they haven’t monetized to a full extent either — have pioneered bold new concepts that prove the principle of “if you build it they will come.” These are the ones laying the foundation for the next generation of social networking innovators to answer the question of monetization.

International social network site Badoo, for instance, allows its users to pay a minimal fee to increase the prominence of their profiles. Right now, 20 percent of the site’s 12 million members take advantage of this service, which costs around $1. The site hypothesized that people would pay to be popular, and it appears to have been right.

OurStage, a site that hosts competitions for aspiring musicians, filmmakers and comedians, has seen tremendous revenue growth by selling ads targeted to viewers who vote for their favorite artists. To keep both artists and other users engaged, the site pays out a $10,000 monthly cash prize to winners.

Last but not least, Amuso, the site I co-founded, charges users a small amount to enter contests and game shows created by them and their peers. Players who buy in can upload photos, videos, text and audio files in order to win prizes. The platform allows amateur models, pop stars and comedians looking for industry exposure to turn a profit themselves by creating and promoting shows. And of course the site gets a cut too.

There are a thousand other strategies like these yet to be pursued or even thought of. And in this light, even failed attempts can be considered promising. As more developers and entrepreneurs fumble toward creative and unobtrusive ways to profit from the networking masses, successful tactics are sure to emerge and push Web 2.0 toward its next incarnation.

Barak Rabinowitz is co-founder and chief operating officer of Amuso, a site that allows users to create and participate in entertainment contests and game shows. Previously, he advised on mergers and acquisitions for Morgan Stanley and helped Yahoo and Sony implement new business strategies.

[Editor's Note: One of the benefits of inviting guest columnists from the business community is the ability to present first-hand accounts of their experiences (good and bad) -- and the lessons they've learned. Below, venture capitalist and founder of user-generated media startup Pinnacle Systems, Ajay Chopra, digs into his personal history with economic downturns to offer a candid executive survival guide.]

Having raised initial rounds of financing, many startup CEOs are needing to find ways to survive with no venture infusion on the horizon. In my previous life, I was one of these guys, growing my company, Pinnacle Systems, from startup stage to IPO through three economic downturns. As you can imagine, I learned some valuable lessons — oftentimes the hard way. Because I’ve sat in that founder seat before and respect the challenges and tough decisions many of you are facing, I wanted to offer the wisdom from my experience in an effort to help.

1. Laser focus your team behind a single, clear goal — and communicate it crisply.

A few years after its inception, my fledgling startup faced a life-threatening challenge. The economy was in recession, and another large player in the market introduced a competitive product that tanked our sales. We had to rethink everything. There wasn’t enough cash to sustain our current business and produce a response to our rival. So we took a risk, putting all our resources behind a competitive response at the expense of all other efforts.

This clear focus, coupled with team spirit (and perhaps a little desperation), drove us to deliver arguably the most significant product in the life of the company. And it was this product that eventually led us to an IPO. In times like these, when you don’t have the luxury of experimenting with multiple ideas, singular focus is vital. Once you know what that focus is, communicate it to your team in simple terms. Those that are on board get to stick around; those that aren’t should be asked to clean out their desks.

2. Devise a survival plan — and track it carefully.

Based on the goal you identify in step 1, develop an honest and conservative financial plan. This is your survival plan, which should ideally drive you to break even without any further financing. If that’s not possible, calculate the minimum additional capital you’ll need to break even. This plan will guide all of your other decisions — where to spend money, which team members are critical, etc. Question your assumptions and be as conservative as possible. In my experience, these are probably the most realistic plans ever conceived by most CEOs — probably because they know they can’t afford to be wrong.

3. If you need to cut headcount, cut early, cut once and cut deep.

Layoffs are much tougher at startups where early employees are usually close friends. It’s easy for young execs to get overwhelmed by the sense of failure they signify. One year after my company completed its first round of funding, it became clear that we had expanded our employee base too fast. I decided to cut costs, but, in retrospect, went about it the wrong way. I didn’t have a survival plan. Instead, I naively estimated that I should cut headcount by 20 percent. That turned out to be far from enough, and the next six months saw three increasingly traumatic waves of layoffs. By the time I was done, we were down to 50 percent of the original staff.

As I look back on that period, I realize that emotions got in the way of clear decision making. I was hoping to escape with minimal pain and guilt. But hope is not a strategy — and my approach had the opposite effect on the team. My leadership was questioned by the very same folks I was trying so hard to protect. I didn’t realize that slow-burn layoffs can demoralize a team and chase top performers out the door. CEOs need to have enough confidence and information at hand to make one firm sweep of cuts and to promise remaining teammates that no one else will be affected. This’s what builds loyalty and rallies troops.

4. Cash is king — remember the only way companies go bankrupt is by running out of dough.

Many a savvy CEO survived the dot-com crash by hunkering down and emerging as the last man standing in their particular space. They won by default because they didn’t run out of money. In a downturn, cashflow management is far more critical than revenue growth. You could consider stretching your payables, or urging your customers to pay early, for example.

Mostly, though, there’s the cost cutting. Non-payroll expenses add up. Now might be a good time to look through every check your company wrote over the past quarter. You’ll be surprised to see how many opportunities to save you’ll identify. One technique I highly recommend: discuss departmental expenses in detail during weekly staff meetings. This way, managing cash won’t fall exclusively on the CFO’s shoulders.

If things are still looking grim, it might be a good idea to look at all avenues of fund raising. Maybe your investors would be willing to back you with an inside financing round subject to progress on a particular plan or product. You might be able to negotiate an extended payment schedule on any venture debt or lease line you have. And if all else fails, you can always go knocking on the doors of larger companies in your market segment who might think now is an opportune time to take a strategic equity investment in your startup. This can be a good way to snag extra capital (if the deal is structured favorably).

5. Be intellectually honest with yourself, your team and your partners — practice what you preach.

In a recent talk at my current employer, Trinity Ventures, Joel Peterson (noted Stanford business professor and management guru) summarized this point succinctly: “Trust is a precious currency, especially when times are tough.” In fact, it might even be easier to reinforce trust in difficult times. Back when I decided to reduce headcount at Pinnacle, we simultaneously instituted substantial salary cuts for executive staff members. Sharing the pain is an important gesture (and also helps save, incidentally).

6. Be positive.

During another tough period, the vice president of sales at Pinnacle installed a “new order bell” in the main office area. Whenever a big order came in, we would ring the bell and cheers would ripple down the hall. Soon the bell was ringing more and more frequently. It turned out to be a very simple, yet effective way to communicate. It required no words, and resuscitated our progress.

I know that much of the above might sound like common sense, but you’d be surprised by how many business leaders have been taken down because they neglected the basics. One would be hard pressed to name a successful, or even sustainable enterprise that hasn’t had to weather a downturn. Good leadership during bad times mean taking prudent steps toward not only fortifying an organization, but also positioning it well for when things start looking up.

Ajay Chopra is currently general partner at Trinity Ventures where he focuses on digital media, Internet services and mobility solutions. Before that, he cofounded Pinnacle Systems, a consumer-generated media company that grew from a startup into a $350 million public company. He invites you to further discuss the issues raised in this column. You can reach him at ajay@trinityventures.com.

[Editor's Note: Back in April, venture capitalist Paul Grim painted a somewhat bleak picture of the future of mobile WiMax networks, pointing to Sprint and Clearwire's inability to strike a deal as one of its prime weaknesses. Last week, the Federal Communications Commission finally gave the agreement its blessing. But is this enough to rescue WiMax? Below, Grim revisits the topic in light of recent developments.]

While the world was busy celebrating the election of Barack Obama on Nov. 4, a less visible part of the government quietly pushed through some momentous changes. The Federal Communications Commission conditionally approved three milestone deals: a merger between Verizon and Alltel, the opening up of “white-space” airwaves for public use, and of course the Sprint/Clearwire deal (finally). Some observers say that, paired with a new administration promising broadband for all U.S. citizens, these deals could give mobile WiMax — which was arguably close to game over — a new lease on life.

Based on the evidence I’ve seen, I’d say this is still a little optimistic, though not unrealistic. Watching the great broadband battle between cell phone carrier standards (long-term evolution and high-speed packet access systems) and the Internet network standard (WiMax), I and others have argued that economies of scale will inevitably tilt the playing field in favor of cellular. Just look at the numbers — there are 3 billion users who subscribe to the cellular carriers, versus a handful on the alternative.

No matter how much money is thrown at promoting WiMax over the next several years, it would be nearly impossible for it to catch up to these cellular juggernauts in terms of pricing. More importantly, there is no substantial qualitative difference in the end-user experience between the two (WiMax fanboys may take issue with this, but here’s an illustrative example of WiMax vs. HSPA signals). If consumers don’t have a compelling reason to switch, few will.

The meaningful difference between the existing cellular systems and WiMax is more behind the scenes. Basically, cellular operators only need to make minor tweaks to base stations to upgrade their networks, whereas WiMax networks require potentially major hardware upgrades to achieve the same effect. This is about as fair as pitting Obama’s $600 million war chest against McCain’s $84 million (and we all know how that turned out).

But before we find ourselves giving up on mobile WiMax again, let’s look at these big FCC decisions from last week.

The $14.5 billion Sprint/Clearwire agreement has become mobile WiMax’s last great hope. Combined, Sprint’s 50 million subscribers (many of whom may migrate to WiMax) and a $3 billion investment in the deal from Google, Intel, Comcast and Time Warner may secure WiMax’s short-term future. The deal also commits to opening the network to all devices and applications, a key reason the FCC gave its stamp of approval.

Speaking of open networks, the concurrent FCC approval of unlicensed use of “white spaces” (the unused frequencies between broadcast digital TV channels) is being hailed by proponents — including Google — as the birth of “Wi-Fi on steroids.” The reality is that these white spaces can be used with with Wi-Fi, WiMax, or WiAnything (though power levels may be limited to cut down on signal interference). This decision has cellular carriers howling in disgust at what appears to be a free giveaway of valuable airwaves (seeing as how they had to pay for theirs), but their cries are falling on deaf ears. This is an enormous opportunity for small regional WiMax carriers to come out of the woodwork, a trend that will no doubt be encouraged by the FCC.

Finally, the $28 billion merger of Verizon and Alltel looks like a clear win for the cellular team — and probably is. But the consolidation will also mean less competition in the field and fewer alternatives for consumers, making WiMax a more attractive option. WiMax operators could really capitalize on this opportunity if they push the envelope on opening networks to more devices and applications, and by controlling their prices.

Meanwhile, the number of WiMax networks in existence is starting to grow globally. Right now, the total is 126, according to Telegeography Research, though that figure includes fixed networks (home Internet access, for example). Fixed networks make good economic sense for rural regions and developing countries — competing with DSL and cable modems — but should not be lumped in with mobile WiMax networks, which vie for cellular customers. Nonetheless, the expansion of both types of WiMax will help drive down the cost of the technology in the long run. Intel has also announced plans to include WiMax in its next-generation Centrino platform. This will cut the cost of device chips in laptops and handsets, but won’t make new base station equipment any less pricey.

Facing pressure from both licensed and unlicensed operators using WiMax, the big cellular carriers are rushing to become more open and available. But their decades-old mentality of testing, quality control, protection and interference concerns may be hard to shake. Sure, the major carriers are big and can buy cheap, but they move slow. And it’s hard to deny that team WiMax just got three big boosts from the FCC. They should do all they can to power ahead before the battleships start to turn.

Paul Grim is a general partner at SunBridge Partners, the U.S. affiliate of Japan-based SunBridge Corporation. Previous investments include Allen Technology, Eclipse Aviation and Salesforce.com. Prior to co-founding SunBridge, Paul served as general partner at Equitek Capital and spent ten years in Europe at Gemini Consulting and IBM.

[Editor's Note: There's been so much doubt and hysteria surrounding the recent economic downturn that few have turned their eyes to the opportunities actually being provided by the crisis. Below, venture capitalist Pascal Levensohn explains why he's more optimistic about the startup climate than ever. He also cites a counter-intuitive Harvard Business School study on employee motivations that he says predicts some shakeups in the coming months and year.]

Is it possible that tough economic times actually make entrepreneurs feel less inhibited? Freer to duck out of negative or stifling situations to pursue concepts of their own? From my perch as managing partner at a venture capital firm, I see it happening. And this unbound spirit has been confirmed by a recent study showing that business professionals are prioritizing power and autonomy over financial gain. Interestingly, the results can be broken down by gender too.

The survey data, gathered by Dr. Tim Butler and professor Noam Wasserman at Harvard Business School, indicates that young entrepreneurs between ages 20 and 29 in particular (think prospective Silicon Valley startup leaders) are more motivated by power and influence (men) and autonomy (women) than a hefty paycheck. In fact, money ranked ninth for females in this age bracket — fourth for men. Here’s a brief summary:

Motivators for female & male entrepreneurs, ages 20-29

The numbers for older entrepreneurs reflect roughly the same attitude. Autonomy remains the top concern for women across the board during their thirties and forties. Shellye Archambeau, chief executive of MetricStream, a Palo Alto, Calif. company that makes management and compliance software, says that independence is a logical driver for women at all ages and could play a major role in their decisions to strike out on their own.

“The data is consistent not only with my own personal motivators, but what I hear from my female peers,” she said on a panel held as part of the Forum for Women Entrepreneurs & Executives in late October. “Autonomy gained from entrepreneural pursuits affords us the ability to integrate our professional and personal priorities, despite working longer hours, in a way not achievable in the typical corporate role.”

It appears that men also grow to prize autonomy in later decades, perhaps as they become more focused on family and their personal lives. And this is not the only point at which male and female interests converge over time. Altruism also rises in importance, and new job qualities like work variety and intellectual challenge enter the mix. Notably, financial gain never rises above no. 3 on the list of priorities for both men and women in their thirties and forties. In fact, it never breaks into the top four for women. Here’s a quick rundown showing how priorities evolve:

Motivators, ages 30-39

Motivators, ages 40-49

So if money is not the force pulling your strings — as seems to be the case with many business-minded individuals today — what’s to stop you from diving into the entrepreneurial pool sooner than later? In my 14 years of experience in venture capital, I’ve seen more people decide to leave even secure corporate jobs during tough financial times. With everyone making less money, a downturn tends to underscore other, less quantifiable interests. As talk of snowballing layoffs circulates through large corporations in the Valley and elsewhere, more professionals are feeling uneasy about their futures. For long-time loyal employees, doubt can fuel simmering feelings of frustration and personal angst. Perhaps just enough to decide to do something about it.

In this context, an economy characterized by climbing rates of unemployment, scarce credit and a shaky stock market may set just the right stage for an entrepreneurial surge. As a businessman myself, I believe there’s no better time to start a company than when the playing field has been leveled by broad macro-economic factors. Suddenly, what may have seemed impossible is now very likely. Sure, venture funding may be a little tighter in some areas, but burgeoning businesses will have access to cheaper facilities and a greater pool of talent to choose from. Beyond that, founding a new company today that stimulates e-commerce will pour unused capital and spending power back into the flagging economy — renewing it just in time to infuse your enterprise’s later-stage growth.

Perhaps the moral here is for policymakers in Washington. If America is going to find a positive and self-sustaining way to grow coming out of this crisis, it’s going to have to support the innovation-sector companies that create jobs. With this in mind, I am certain that great new companies will emerge from this period of turmoil and continue to succeed once it subsides. Crisis breeds opportunity, and the government and VC community will have to follow suit.

Pascal Levensohn is founder and managing partner of Levensohn Venture Partners, a San Francisco-based information technology venture capital firm. He is a member of the National Venture Capital Association’s board and chair of its education committee. He blogs at pascalsview and podcasts at VC-InsideOut.

[Editor's Note: One little-discussed byproduct of the economic downturn may be a bump in cases of corporate corruption and financial fraud. Not because companies are under more pressure to hit their targets, but rather because VCs -- jolted awake by losses -- are suddenly aware of situations they overlooked during fatter times. Below, Silicon Valley investigator Justin Hibbard explains how due diligence on all sides of funding deals can help prevent sticky situations going forward.]

When fear of recession crept into the venture and startup worlds, commentators predicted that VCs and entrepreneurs would start paying more attention to due diligence. Their forecasts are probably accurate, since historically investors and beneficiaries have tended to clamp down when the economy has soured.

As an investigator specializing in due diligence, I believe it’s always a good time to make diligence a high priority — not just because it helps my business, but because I’ve seen people get burned under all economic conditions. In October, federal prosecutors filed a complaint against the former chief executive and chief financial officer of Entellium, a private CRM software company in Seattle that had raised over $50 million from VC firms like Ignition Partners and Sigma Partners. The complaint charged the executives with wire fraud and alleged that they had deliberately overstated annual revenue to the board and investors for nearly five years. In one case, they allegedly reported that the company booked $3.9 million in 2006 revenue when the actual figure was $582,079 — an overstatement of 589 percent.

The Entellium case is reminiscent of fictitious-revenue schemes revealed in 2000 and 2001 at software companies like MicroStrategy, Critical Path, and Lernout & Hauspie. Similarly, those cases came to light at the onset of an economic downturn, and the allegations concerned events that happened during a recently-ended economic expansion.

Intuitively, one might think that financial-statement fraud increases during recessions as management teams grow ever-more desperate to make their numbers. Not so. A recent study at the University of Minnesota’s Carlson School of Management found that financial-statement fraud is most likely to occur in relatively good times. Think, for example, of the real-estate boom of the 1980s, which was followed by the S&L crisis and revelations that rampant fraud had occurred during the go-go period at institutions like Lincoln Savings and Loan. Or, more recently, recall the stock-market bubble of the late 1990s; not until the bust of the early 2000s did prosecutors discover the shenanigans that Worldcom and Enron had pulled at the market’s peak.

Now, cast your mind back to 2003. The U.S. economy was recovering from the recession and terrorist attacks of 2001, and the tech industry was just getting over its worst meltdown since the bursting of the PC bubble in the 1980s. Suddenly, the stock market sprang back to life. Record low interest rates enabled condo flippers to quadruple their net worth faster than ’90s dot-commers. Venture capital started flowing again. And “Web 2.0” was on everyone’s lips.

It was under these conditions in 2004 that Entellium’s management raised $4 million in venture capital, allegedly by presenting phony numbers. I’m not privy to the due diligence that was conducted or whether anything could have detected such a fabrication. But a cursory database search from my office today revealed that in 2004 the IRS slapped Entellium’s former CFO with a $117,690 tax lien — not a good sign for the executive overseeing your company’s accounting (the lien was released in 2007). I don’t know whether anyone followed up on that detail. As the University of Minnesota researchers found, investors are more likely to overlook warning signals during buoyant periods like the post-2001 recovery.

That’s why in a recession VCs should examine not only current financial statements but also those that were reported — and contracts that were executed — during the most recent economic expansion (if the company’s history extends that far). Even if fraud isn’t apparent in past documents, prospective investors may find that management made assumptions and estimates during happier times that didn’t account for how drastically conditions could change. Assumptions may be found, for example, in lease, employment or financing agreements contingent upon achieving improbable milestones.

VCs often rely on the due diligence of colleagues at other VC firms when they look at deals on referral, participate in syndicated investments or provide follow-on financing. Avoiding duplication makes sense, but the risk profile, objectives and procedures of VC firms can vary significantly. They should never assume that their brethren have performed the same type or degree of diligence that they would perform. When relying on second-hand diligence, VCs should always assess the level of risk independently and, based on their conclusions, decide whether additional diligence is warranted — especially if prior research was conducted in a bull market.

Many of these imperatives apply to entrepreneurs, too. VCs build their reputations largely during prosperous times. When their portfolio companies go public or are acquired at attractive multiples they look like prescient geniuses. But VCs prove their true mettle when they shepherd companies through economic downturns and inhospitable financing environments without resorting to desperate measures. A smart entrepreneur who is conducting diligence on a VC firm should scrutinize how the partners behaved and how their investments fared during previous recessions.

Company founders should also inquire about the financial stability of limited partners, especially those of relatively new VC firms. During the dot-com bust of the early 2000s, young VC firms that had raised funds from newly-minted Internet millionaires suddenly found that their limited partners were having trouble making capital calls as their paper fortunes dwindled. I predict that in the coming months more than one institution with heavy exposure to securitized mortgages, credit-default swaps or money markets will be unable to supply the cash it promised to VC funds.

Also check whether a VC firm will be able to raise new funds. Entrepreneurs want investors that will be around for the long haul to participate in follow-on financings. Many pension funds and endowments are currently struggling to liquidate distressed investments and can’t imagine committing additional capital to yet another illiquid 10-year venture fund. For all but the top 1 percent of VC firms, this will lengthen the time it takes to raise funds and may cause some firms without glowing track records to throw in the towel.

Finally, remember that just as no two deals are alike, no two due diligence projects should be alike. Too often people take a cookie-cutter approach to the process, dutifully slogging through the same checklist in every instance. They search the web, run some database reports, call former associates to press for candid comments, and call it a day. Sometimes their intent is not to discover anything, but simply to document that diligence was done — always a mistake.

Every diligence project should have its own plan based on the unique risk level and circumstances involved. If you were loaning $100 to a long-time friend, you wouldn’t spend much time researching her ability to repay. But if you were putting $10 million in the hands of a stranger who promised to double your money in a month, you would want to learn as much as you could about him and his methods. Lesson one: Let the amount of risk determine the scope of your due diligence.

The Internet makes so much information readily accessible that people often try to conduct all of their due diligence by themselves. That may work for small, low-risk deals. But remember the adage about people who try to act as their own attorney: They have fools for clients. Any manager with an MBA can analyze financial statements. However, a major diligence project requires specialized research skills, interviewing skills, and covert investigation skills that aren’t taught in business schools. Even an experienced auditor may miss certain red flags because she’s trained to render an opinion on the fairness and presentation of financial statements, not to detect fraud.

Serious due diligence requires expertise. For a large-scale project, you’ll want accounting specialists combing financial statements for glitches, legal specialists scrutinizing contracts and intellectual property for hidden liabilities, and investigative specialists checking backgrounds for past problems and conflicts of interest. In addition, you may want a technical expert to examine the viability of a company’s proprietary technology or information systems. To find these experts you can ask reputable law firms, investment banks, or professional services firms for referrals.

Economic crises can make even the most cold-blooded capitalists prone to overreaction and susceptible to misinformation. As the recession deepens, don’t expect a tsunami of scandals to crash down on the VC and technology industries as it did in the post-dot-com era (unless your industry is somehow joined at the hip with the financial sector). Just remember as you conduct your diligence that if recently-concluded good times seemed a little too good, they probably were.

Justin Hibbard is principal at Quidnunc Group, an investigative services firm in Burlingame, Calif. Previously, he was a correspondent at the Silicon Valley bureau of BusinessWeek and a senior writer at Red Herring.

[Editor's Note: It's been several weeks since Sequoia Capital's ominous meeting with its portfolio companies warning of tough times ahead. Not much has changed since, but the message has sunk in across Silicon Valley. While Sequoia was full of directives for withstanding the downturn -- many illustrated by scary looking charts -- communications consultant Lou Hoffman says its advice might be overlooking the obvious. Below, he offers up some common sense to skittish startup execs.]

Most of you have seen the slide set Sequoia Capital delivered to its anxious startups early last month. Cleverly titled, “RIP: Good Times,” it continues to cause quite the stir.

With a mind-numbing parade of statistics, the presentation made the case for startups to focus on preserving capital as a counter measure to an ailing economy that probably won’t recover anytime soon.

Now, I have nothing against preserving capital. My mom always told me to save for rainy days. But it’s revealing that Sequoia’s call to arms neglected to offer a communication strategy to companies. That is, unless “reviewing salaries” and “making cuts” count as forms of communication. I suppose it’s easy to forget in hectic times that the act of talking to people, both inside and outside a company, can actually impact the success of a business.

Employees will always be attracted to and work harder for companies where they feel a personal connection. And customers like to buy from companies that express a little personality — or better yet, establish an emotional bond. Communication affects these perceptions.

A key example is Mahalo, a search startup that just laid off 10 percent of its staff. Chief executive Jason Calacanis used his blog as a soapbox to clue his employees into the rationale behind his actions, explaining in detail how precautionary cost-cutting measures taken now will help the company gain runway into 2012. This decision earned Mahalo good will from its employees and the outside press, which didn’t have to guess at the cause of the firings.

On the other side of the coin, you have Bluetooth headset maker Aliph, which let go 30 percent of its staff just a few days ago due to the downturn. To its detriment, no official information was released until an anonymous source had already leaked the news. After that point, it’s no longer about crafting a message — it’s about damage control. Ironically, both Mahalo and Aliph are Sequoia portfolio companies, demonstrating how an across-the-board action plan might have been beneficial.

You’ll notice this definition of communication doesn’t mean slogans and ads and clever branding campaigns. It doesn’t even mean public relations. I’m talking about the chief executive and the rest of the management team sharing their personalities, stating their actual views, and explaining their actions in an open and transparent fashion with both their staffs and the market.

As the kids who grew up with Friendster, MySpace and Facebook become employees and customers, they’re going to expect the businesses they work for and buy from to communicate using the same social media tools. I don’t know Digg founder Kevin Rose personally, but by virtue of his blog, Delicious page, Flickr photos, tweets, etc., I’m guessing his staff knows him pretty well. He’s an open and likable book, and that inspires people. Digg continues to grow even as the economy slows, attracting 16 percent more visitors this month than last — so it must be doing something right. And you don’t need to be a major Web 2.0 player to put the same tools to work for you.

The Sequoia presentation ends with the words “Get Real or Go Home.” I couldn’t agree more with the “Get Real” part, though my interpretation doesn’t involve number crunching. To me, it means talking like a human being, not a scripted drone. It means engaging both online and in-person — recovering that lost art form known as conversation.

I would argue that enlightened communications (both internal and external) could give any startup a real competitive edge — one that won’t come from cash preservation (though I do see the merits of keeping the lights turned on).

Why?

Because in spite of all the blather about “engagement,” most companies still adhere to a control mentality when it comes to communication. They believe if they control a message, that’s what people will believe, write about and recycle. But in this era of transparency, everyone — not just employees and journalists — has the means to call out the emperor for lacking attire. If anything, the current economic climate demands more honesty, more personal consideration.

Startups needs to tap into the energy that comes from everyone believing in the mission and knowing what it takes to win. Fostering this attitude in turbulent times requires genuine dialog. Staying on message no matter what isn’t going to cut it.

Hitting this point home, former General Electric chief executive Jack Welch — a figure universally hailed for his leadership skills — was recently asked how executives should ride out the turmoil. His answer: “Don’t stop talking.”

Lou Hoffman is chief executive officer of the Hoffman Agency, a public relations firm. With multiple offices in the U.S., Europe and Asia, its client roster includes Friendster, Google, Siemens, and Sony. Hoffman blogs at Ishmael’s Corner.