Mohanbir S. Sawhney November 27, 2008
UNUSUAL ENTREPRENEURS
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 start a new company or to grow a start-up 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 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 per cent and unemployment spiked at 10.8 per cent.
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 US 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 start-ups and innovation? There are several reasons. First, when funding is easy to come by, as it was during the dotcom 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. Start-ups 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 start-up 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 US got into trouble when banks lent them more money than they should have, venture investors tend to pressure start-up 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 start-ups is that customers become more demanding about value for money. So start-up 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.
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.
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 Start-ups contest that is currently ongoing has received over 500 entries. The range of industries and markets these start-ups represent is amazingly diverse—from traditional domains like IT, Internet, media, outsourcing and retail to newer domains like healthcare, cleantech, 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 per cent 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 organised retail market continues to hold immense opportunity as it still stands at only 4 per cent of the total retail market. The silver lining to the devaluation of the Indian rupee is that revenues for start-up companies focused on the US and Europe are almost 25 per cent higher in rupee terms than they were six 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 start-up 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 is “servicise to learn, and then productise 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 fuelled by venture capital.
Sharpen your value proposition: As customers become more demanding, you can’t afford to be wishy-washy about why they should be 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 optimised 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 start-up company, it is a good idea not to have all your eggs in one basket. If you focus exclusively on one market, you are more vulnerable to sharp downturns in that market or in currency fluctuations.
For instance, the US market looked very lucrative a few years ago for Indian IT companies, but an over-dependence on the US is now hurting them. As an entrepreneur, think about how you can make your products and services relevant to the Indian market as well as to developed markets.
Variablise your assets: Fixed assets are the bane of start-up 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, 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 centres, use virtual “cloud computing” services like. 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 start-up 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.
Variablising your assets makes you leaner and more agile, putting you in a better position to ride out the storm.
The spirit of entrepreneurship lives on in times good and bad. Entrepreneurship may 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.
—The author is McCormick Tribune Professor of Technology and director, Centre for Research in Technology and Innovation, Kellogg School of Management.
http://indiatoday.digitaltoday.in/index.php?option=com_content&task=view&issueid=82&id=21101&Itemid=1§ionid=3&completeview=1
Courtesy: India Today
