How hi-tech start-ups can survive the economic crisis

When economies contract, companies with new ideas arise to supplant former giants.

By MICHAEL MORADZADEH
March 14, 2009 22:35
computers 88

computers 88. (photo credit: )

The economic crisis has shaken up the start-up and hi-tech community, with the credit crunch squeezing the life out of many small companies. However, crisis is often a powerful breeder of innovation, and with the stimulus bill pumping $787 billion into the US economy, there are powerful openings for savvy start-ups to both survive and thrive. It will not be easy, of course. While real estate and finance were the first to be hit, the crisis has hit hi-tech and retail with immense and obvious force. Most experts believe that this will only get worse as the next wave of retail slumps, debt defaults, bankruptcies and layoffs approaches. As the "Great Recession" spreads and people start worrying about another possible Great Depression, start-up companies are finding it harder and harder to find financing and grab the markets that seemed so large only a few months ago. To make it through the downturn, hi-tech start-ups should concentrate on the following rules of survival: 1. Innovate Economic down times pave the way for future innovation. The limited resources characteristic of down economies in certain ways create a more competitive environment. Larger companies that would otherwise be trying to dominate the market are focused on mere survival, leaving room for smaller companies to edge in. Meanwhile, smaller companies and their shareholders tend to focus on the long term rather than simply seeking a quick exit. Past recessions have caused companies like IBM, Sun Microsystems and Montgomery Ward to step back and make way for companies like Microsoft and eBay. Smaller companies that can survive, pick up a small market share and refine their product will be poised for fast growth when their target market rebounds. In short, when economies contract, companies with new ideas arise to supplant former giants that hurt most during economic downturns. 2. Lower costs without sacrificing quality Whether you are self funding or searching for financing, this is a time to lower your company's costs as much as possible without sacrificing quality. But cutting costs doesn't mean cutting corners. If you reduce your company's value, fail to protect your intellectual property or make your valuable employees feel their jobs are not secure, you will simply be unable to compete. Look for waste wherever you find it, and consider alternative, less costly approaches to solving routine operating tasks. For example, I started a virtual law firm of top attorneys from the best law firms in the United States, but without all the overhead of a typical large firm. By removing all the waste and overhead, we are able to provide the same service of a premier law firm at a third of the price. We did this by keeping our most valuable asset - our highly skilled attorneys - and unloading the expensive office space, outsourcing labor where the location of the workforce was not material, and removing the high costs of redundancy, on-the-job training and recruiting. Look for similar waste in your business with a fine-tooth comb and innovative strategies, but make sure you do not lose any talent or major assets in the process. This is not the time to let cash fall through the cracks, but it is also important that you stay competitive in the market place. 3. Reduce reliance on outside financing Securing financing, whether through equity or debt, is extremely difficult. In this time of hight uncertainty, banks, venture capitalists and angel investors are holding on to their cash until they feel confident that the worst is behind them. For many businesses, this means depending solely on their own revenue to fund future growth. Consider focusing on a sector of your business that is particularly profitable or that generates the most value, and hold off on expanding peripheral sectors until you are in a more stable position. Allowing a financial foundation to harden before building up might not instantly propel your company to great heights, but it's preferable to collapsing the entire enterprise when you try to add a new level. This way you will achieve a higher return on investment in the short run, which will help you survive this economic slump. That being said, venture capital firms and angels have not stopped investing altogether. Our firm is still helping our clients get angel and venture financing, and there are still many financial players looking for places to put their money. If you are looking for financing, look for venture capital firms and angel investors that invest heavily during economic down times. A great way to find such capital sources is to search out venture capitalist firms and angel investors who invested aggressively during the last recession. If a fund's portfolio contains several investments from 2001, then it is probably more likely to invest during this current economic slump. 4. Take advantage of opportunities An economic crisis brings new economic opportunities, including new demands in the market and government spending. In the market, businesses need solutions that will help them survive, and companies that best provide those solutions will be very successful. For example, software that reduces expenses, a service that helps companies more effectively find financing or a service that will help companies more easily renegotiate debt will find very open markets. At the same time, the entertainment sector is already seeing rising demand as the public seeks inexpensive ways to temporarily escape their economic worries. Similarly, businesses tied to government projects are sure to experience a surge in business due to President Barak Obama's economic stimulus plan, such as the clean technology sector. This is partly because the price of oil is expected to rise again, and partly because the Obama administration will create incentives for investing in clean energy. So, although it seems that we hear nothing but bad news about the economy, start-ups and hi-tech companies will find there is still plenty of opportunity. By reducing wasteful costs and focusing on what your company does best while also increasing innovation and protecting your assets, your company can position itself well for the next economic upswing. The writer is the CEO and cofounder of Rimon Law Group, Inc., a corporate law firm specializing in hi-tech and emerging companies.


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