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Smart Startup Advice: Don't Panic - Profit

man with head in the ground.jpgVCs and angels sent out a series of "look out!" warnings to their charges last week. Now we're starting to see slightly more positive takes from other investors to their startups: Something along the lines of "Look out! But take advantage of the openings".

John Borthwick, who heads up the Betaworks incubator/"business acceleration platform" (investments in Twitter, Tumblr, someecards, etc.) sent out his own memo out to his portfolio companies Saturday afternoon. The following is an abbreviated version (John suggested we use the art to the right):

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Out east, a downturn has been evident for a while, and most of you have already started to make adjustments to your plan. But two things did change this week:

(a) The credit crisis and the crisis of confidence in our markets got way worse.
(b) Silicon Valley woke up to the fact that something had changed.

The first point is the one to focus on. The second is a distraction.

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You need to think about things differently. Things have changed and your priorities should change. I broke up our thinking into two blocks. The first is what you should be thinking about in terms of your business. The second outlines some thoughts on what this means for the market.

oh no dollar.jpg


#1. Priorities for you and your business:

Things look ugly, but with distress comes opportunities. Scarcity drives innovation. Always has, always will.  Do more with less: A trite one liner that you need to make part of your companies DNA.

There will be more emphasis on user value, more ways to make money from that value. We will finally fess up to the fact that many of the ad models of web 2.0 don't yield results, and we will invent ones that do. All around there will be more innovation.

It's counterintuitive, but during an up cycle people accept conventional wisdom, and during a down cycle people challenge it. That's good. Very good. And the cycle will winnow competition.

Follow the money
Many of you are running your businesses very cheaply right now and break-even is within reach. Get there.

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One of the headline shifts that is taking place is that people (partners, investors, the market) are going to shift focus from audience + revenue to just revenue.  This happened in the last downturn and a lot of entrepreneurs didn't adapt to the shift till it was too late. Cash is king. Cash gives you flexibility and options. Once you get to break-even the whole world will look different.

Making money, like everything you do, takes work, time and attention. It will take longer than you expect and it happens in ways you can't plan. Start working on it now. If you have just raised money or are raising, get it closed. The cost of capital is going up. Think runway, cash and revenue.

Watch your spend, make necessary cuts now   
If you think a piece of your product needs two developers to build it, do it with one. Be excessively creative in thinking about revenues and trying those ideas. Rethink *all* your projections, looking at how reductions in cost and accelerations in revenue strategies affect the numbers. Then redo them again. You'll be stronger.

Face reality as it is, not as you wish it was. Change the mix of sales and performance-based employees.  Think about what you can outsource -- and how you can distribute your costs. It's hard and it requires different workflow, but when it works it can change your whole business makeup.

And if you need to make cuts, make them now. Don't cut 10% now and then another 10% early next year -- make the change in one fell swoop. Piecemealing your way through change kills momentum, hurts culture and the team and is a chickenshit way to run a business. Figure out what your runway looks like and do more with less. Figure out how to extend your runway till you get to break-even.       

Know your data
You have heard me rant about this before, but you have to know what's going on. Know your data really really well. Financial data, your burn, your cash flow, revenues, runway and site usage data. There are a lot of things you can do to improve everything from burn to traffic. But first you need to know where you stand.  So every week you have a picture of your position. Make this a habit.

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I used to hate to do this, but once you make it a habit it becomes a tool. During an up cycle you can follow instinct, and usually your raw instinct is what you should follow. But during a down cycle your instinct can lead you far astray.  

Compete
Take the offensive. Many of your competitors are not as well positioned as you. This is an opportunity to take share. These points are in order of priority -- once you know where you stand, where you are making money, what your burn is -- think aggressively about growth and market share.

This is my favorite slide from the Sequoia deck (link to the deck is below):


sequoia chart.png

#2. Big, broad changes.
With the economy heading into the worst setback most of you -- most of us -- have ever seen, it's time to think about big, broad changes.  It's been a long week, but let me try to anticipate a few.

Momentum and change 
Some of our business is based on momentum. That's taken a turn for the worse. You have to adjust fast -- that's your job. As humans we accept change as something that someone else needs to adapt to.  But that's not true for your business: You have to change, not someone else. And remember a Welsch maxim: Control your own destiny or someone else will. Change before you have to.

Cost of capital
The cost of capital has gone way up. Don't panic, just make sure you realize the rules have changed.

Advertising
There will be a flight to quality; this always happens. But this time I think it's going to be more than that.    For TV and print this has been an unusual year: The shift to online has been stemmed first by the Olympics and second by the election. But year-over-year  growth in ad spend has been down across the board (see slide 32 of the sequoia deck, linked below). Expect the next year to be ugly and different. I think spend will move online, very fast, and print may right downhill.  And people will look for ROI -- real measurable results. Monetizing social media is hard. Much to do here, much money/share to make/take.

Beyond advertising
Much of Web 2.0 was about advertising to the tail -- the wonders of Google and AdSense. The truth that most people haven't spoken up much about is that (a) neither Google or Yahoo did a great job of monetizing much outside of search and (b) the Google business is still mostly in the head of the curve, not the tail.

The scale focus on auction-based ad buying has distracted us from other business models. This week I had a bite with the CEO of Hi Media (who bought Fotolog): They are an ad network, but they are now making a lot of money on payments. And a significant chunk is via "microfame" payments -- Fotolog users voting each other up in popularity based boards. In September, some users spent more than $2k each voting on these boards. Many of our companies are experimenting with payment models -- Tipjoy, Ideeli, IILWY, Covestor, SomeEcards ... there is money to be made here -- from payments to item sales to t shirts. Businesses to be built.      

The elephants will dance
Pieces are going to move on the chess board. Big pieces. This shouldn't be your focus, but things are going to have change around your business, and they might affect you. Yahoo is going to be sold or bought. Ebay will either be sold or bought or broken up. Facebook is going to have to change (cut spending, focus on revenue) or it will be bought. Same for Linked in. Microsoft, News Corp. TWX and other media companies will be buyers. What does Google do in this cycle -- freeze or be bold? The newspapers -- do they act out of fear or freeze up?  Telco's and cell cos; cable cos -- do they jump upstream?

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Why should you care? Because as these pieces move around the chess board, they may well affect your future. So watch carefully. If Paypal -- which by some estimates is now 50% of the value of Ebay -- gets spun out of ebay, then they will accelerate services beyond advertising. Etc. etc. So consider the moves the elephants make. The equation for them, public or private, has changed.   

Openness

I think this cycle is going to drive another significant shift in how open and interconnected the Web is. This is good news for you, and this is bad news for the Facebooks of the world, who tried to replicate the walled garden strategy of Web 1.0.

Think about what happened through the last cycle. Start with AWS.  In the 1990s, Internet companies had to own everything top to tail. Today you can use Amazon and other services to pop up a new box for hundreds of dollars, if that. Thats a huge shift, and it's also a shift towards interdependency.

We are all now dependent on the Amazon's of the world for parts of our infrastructure. I think this turn of the cycle is going to drive a lot more openness.  This in turn ties to the market figuring out how to rapidly establish bottoms-up standards. This is about working with others and figuring out how to do things without having to do all the work.  

betaday

Next week at betaday [Betaworks' portfolio companies presenting to investors] will be a great opportunity to present your companies to many potential business partners. These partners now more than ever will want to know how your business scales, earns revenues and profits.  Take this opportunity to have clear responses to these questions. There will be a greater emphasis now on this, so be prepared to specifically and persuasively answer these questions -- before they get asked. Think about your burn, how you can do more with less. Think three years out, not six months.




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