[Editor’s note: Since the economic downturn deepened several months ago, VentureBeat has been receiving advisories and commentaries from all sides prescribing one-size-fits-all solutions for startups to survive to slump. But this overlooks the fact that companies will experience tough times differently based on who they are and what they sell. Below, venture capitalist Michael Fitzgerald offers several more tailored strategies.]
With liquidity and credit drying up, startups face the prospect that the next 12 or even 24 months will be extremely difficult. No one knows for certain how long or deep the downturn will be, or exactly how it will unfold. But in this environment, it’s all about staying alive, not out-sprinting competitors.
Sure, almost all companies can improve their chances of survival by crafting conservative plans aimed at breaking even; quickly adjusting tack as market conditions change; taking a longer-term view than usual; and substituting “time for capital” (after all, time is plentiful and capital is becoming dearer every day). But startups in particular will have to address challenges that are specific to their particular stage of development and market sector.
When planning with their startup management teams, VCs must consider how market conditions will impact each of their portfolio companies individually, and advise them accordingly. Some may suffer as others weather the storm, and still others may even prosper. Here is the outlook for companies in different phases and sectors:
Companies selling big ticket, capital-intensive items
Startups in this category will likely have the most difficulty of anyone, and their large-scale projects may have to be put on hold or even cancelled. In the technology sector, for example, there will be a major crunch on companies selling products for upwards of $100,000 (large hardware items like blade servers and data center systems, to name a few). These companies must be incredibly realistic in their revenue projections to reflect the fact that fewer products will probably be made, and those that are will be slower to sell. Sharp-eyed balance-sheet management is critical to ensure that these companies don’t go through so much cash that they get to the point of bankruptcy.
Companies selling consumer goods and smaller-ticket business items
Lucky for them, companies selling products that businesses consider “must haves” (i.e. data backup systems and IT security), or services that sharply reduce operating expenses should be able to progress on a fairly normal course.
Software-as-a-service (SaaS) companies may even see strong growth despite the slow economy because they provide inexpensive, high-return applications, usually on a subscription basis. Constant Contact, a B2B e-marketing company based in Waltham, Mass., is a prime example. Its offerings help small and medium-sized businesses reach customers and web site visitors easily and affordably with targeted email messages based on their defined interests. The company’s revenue growth has continued to be robust over the last several months.
Companies selling “nice to have” products (the latest smartphones, for instance, or wide screen monitors and GPS systems) will probably not fare as well. These firms need to be extra careful about conserving cash in order to stretch out the time in between funding rounds. If they are burning through reserves in order to rapidly build business, they will find themselves in a tough spot trying to raise money in what could be an even tighter economy. Instead, these companies should opt to cut staff, new hiring, and as many non-essential expenses as possible. These strategies are ideal for lowering spend-rates while still growing at an albeit slower, but reasonable pace.
Companies close to breaking even
These players are in a pretty good position if they can continue to make progress toward breaking even. While the current climate may create opportunities for new startups designed to lower costs and streamline processes, finding funds could become almost prohibitively difficult. As others have observed, first rounds may still be relatively easy to come by for truly standout ideas, but second and third rounds are becoming all but impossible to snag unless a break-even point is clearly within reach. Based on this, the best chance any company has is to strive for this new brass ring. If anyone is going to get increasingly scarce financing, it will be those closest to hitting profitability.
The longer the current credit freeze persists, the longer and deeper the slide for startups will be. They must focus fiercely on keeping dreams alive. For those that can determine and meet the challenges particular to their stages and markets, keeping a good reign on balance sheets and a long-view attitude will be the first steps toward the downturn becoming just another bump on the road to success.
Michael Fitzgerald is co-founder and managing general parter at Commonwealth Capital Ventures. His investment activity is focused on early-stage technology and service companies, with an emphasis on the software industry.