Down cycles bring a very interesting time for entreprenuers. With all the current economic issues, the Bernard Madoff scandal, the layoffs and the bailouts I figured it would be a good time to look at this economic time for entreprenuers.
Bailouts are bad for entreprenuers, most of the time. The financial bailout could be beneficial if it were to open credit but I have serious doubts that the money will cause that result. Bailouts allow existing companies with an existing model to last longer. That isn’t as good as it may sound. By letting these companies last longer, new businesses with new models are put at a deadly disadvantage. There are plenty of new automotive companies, such as Tesla Motors who are being put into a financial whole that may keep them from attempting scale and growth to profitability.
Bernard Madoff created a recent scandal. Google him… You will see. He basically was lieing about the return his fund was able to provide to investors. He built up a name in the market as a golden return guaranteeing money back for investors at a very healthy rate. He was able to keep building up because he would payout the investors at the return promised, but would cover that loss by new investment capital. This was creating a cash hole that built upon itself and made recovery impossible. This all fell apart when there was a large enough run by investors and no new money.
There is a very important lesson here for entreprenuers. Do not lie to investors. You may stretch the truth with outside entities or organizations as part of your sales and partnering endeavors, but be honest with the investors. They should have known the risks and potential rewards, and if you lose money, they know that is part of growth. VC’s, for example, know that the company will not go right to success but will suffer, burn capital, and lose value many many many times before they boom. They bank on it in the terms they will try and put into the contracts for follow up investing. If you lie to investors, they will catch you eventually, and they will not put any cash into your company, or any company you are involved with again. If you are honest, they will see the steps and process, and though you fail or falter, they will probably be willing to re-invest or boost capital.
Layoffs are AWESOME for startups. Talent gets CHEAP! Right now top quality people are available for almost ridiculously low amounts of money. People often look for businesses that require no talent, with the web being the key. I used to do that exact same thing. I have the advantage of being a coder by trade, so I could handle the technology aspect, but more and more I bring in coders to handle that. Quality people are a requirement. I don’t care if you are an e-commerce company, an affiliate business or a financial services firm, the people make the business. Doing software development cheaply overseas is a viable option, but you are banking that THEY recruited the right people, or you had better have a project manager that is capable of handling the issues that come with outsourcing.
You can look for mergers with down cycle valuations that make them really attractive and you can position yourself well for the upcoming growth cycle. I have found there are very good, complimentary businesses to purchase in the down cycle. If you are an affiliate marketing company, such as one of my holdings, now is a great time to find an e-commerce front, technology platforms, and other such businesses. Now is also a great time to argue commission rates as an FYI. If you are like another holding company of mine, an AI system, then now becomes a great time to actually acquire end user points. We are looking at some assets that could be direct revenue streams and growth points for our system with integration and then in the up-cycle we would be able to re-sell the assets and keep a smaller stream throw a license for our systems.
But there is a hitch to down cycle investments and entrepreneurship. CUT THE EXPENSES. You want to last through the cycle while growing. This means working out of an apartment. This means no company outings. This means no wasted PENNIES. I know you are thinking that you are frugal and penny pinching, but why are you taking cabs instead of walking or buses or trains? Why are you flying to see family? Why are you going to a bar for drinks with your friends?