This last week the Federal Reserve finally gave in and admitted that the economy wasn't where it was supposed to be: high unemployment, US budget out of control, stimulus that wasn't stimulated without the US Government pumping more money into our economy, creating pretty much an unsustainable loop. That took interest rates on US Treasuries to record lows and the stock market didn't like that either. Too bad you optimist stocktraders - it still amazes me that anyone can think that recovery can happen with so many people out of work. Who is going to spend money if they aren't making any money? Duh!
We're in for a long haul here. Double dip, single dip, whatever. The economy sucks and now the general population is pulling back its spending after realizing that things weren't getting better even as the Fed was blowing sweet smoke our way. If people keep spending less, then how can businesses make money? So they are pulling back also and not investing as much. And the cycle continues.
But what this means for startups is...it's harder than ever to make money. Back in my post, Mark Fletcher at Startup2Startup and the Evolution of Startup Business Strategy, I noted how Mark smartly adjusted his funding and operating plan based on the environment at the time. He noted three stages that he had raised money and built startups in; now I believe we're entering into yet another stage. This is because we're in an economic downturn AND I believe there is a serious bubble forming in internet only startups.
What's a startup to do?
Raising money doesn't seem to be a problem. If you have a star team and a decent idea, you can woo one of the many super angels or micro VCs. They are all operating on the strategy of investing in what I call "exploration" which is to give you enough money to leave your job and then work for a year or less and see if you can get anywhere. Regular angels can also be part of this effort, although I'm sitting on the sidelines (see my bubble post).
However, if you want this to NOT be a 6-12 month sabbatical into the world of entrepreneurship, at the end of which probability says you're gonna be left without a job because you couldn't get your idea developed into a business, you're going to have to do things a little bit differently.
Item 1: The general population is pulling back in spending.
This means either whatever product or service you're making has to be EXPONENTIALLY better than the competition or else you'll never get enough users on board to pay for your service. INCREMENTALLY better might have worked when there was no bubble in internet only startups or in an economically better climate. But now you'll have next to zero chance.
Corollary: Go for revenue from the get-go.
Going for revenue has been talked about extensively, but I still meet entrepreneurs with no notion of monetization. Now that the available pool of consumer cash is shrinking, the fight for their cash is going to be even more fierce.
Item 1a: Businesses sense the consumer pullback and they are pulling back too.
The pullback trickles through businesses to your B2B startup. Internal budgets are tightening up as companies conserve cash as they don't know where the economy is going to go. So building something EXPONENTIALLY better for them is critical too, rather than incremental improvements on what's out there.
Item 2: Competition is ridiculous.
Corollary: Instead, tackle a business that NOBODY ELSE is tackling.
This is a serious problem of the bubble. Competition pops up everywhere. To me, the unsexy is in, as these are the last bastion of untapped areas where the internet can go and disrupt. But still people want to make photo sharing and social networking just a little bit better. Too many people tackle the sexy problems and not enough of the unsexy problems.
The other areas besides unsexy are completely untapped business opportunities. Yes, it's tough to find these. But still, I meet entrepreneurs who have found them. If they can find them, why can't you? No more social networking photo sharing apps please! Nobody said entrepreneurship was easy; it's damn hard to find business opportunities that are completely untapped.
Item 3: Users are bombarded by too many services AND now they have less money to spend. Likewise, for businesses, their budgets are being cut.
Corollary: One year is not enough, two is barely enough, maybe need more time. Startup austerity is IN now more than ever.
Still people are raising for one year. I can't see how anyone in this climate can get to any kind of breakeven in one year. Of course there are always outliers, but most of the ideas I meet won't get there in a year. I have been telling people to plan for two years (remembering there are two levers here, what you raise and what you burn) but with the economy the way it is, I am wondering if even two years is enough. It seems that our super smart folks in the US Government aren't doing the right thing to truly stimulate the economy, and I say that knowing the trying to drive the economy is not an easy thing (and especially cleaning up the mess created by all our nice lobbyists, politicians, and Wall Street greed). It's going to take years for us to get back on track, now that the inertia of consumer confidence is moving downward.
No matter what, austerity in spending whatever you raise is going to be even more important. You need to survive as long as possible, giving yourself the maximum amount of time to try things and to pivot several times if necessary, and along the way praying that the economy is going to come back.
But it's obvious to me that many entrepreneurs are unwilling to go into starvation mode for that long. All I have to say is, good luck to you and let's talk at the end of a year after your raise.
Item 4: More entrepreneurs keep piling into the internet space.
Corollary: Radical idea: Try creating a startup in another space besides the ultra crowded space of internet only startups.
You have strong entrepreneurial desires? Then why try to build a business in an industry where everybody who wants to be an entrepreneur is piling in en masse? I am getting connected to startups in other industries and there are some really interesting things going on out there in the world beyond the internet. In my bubble post, I posted about an emerging space that is hardware plus software plus internet - what other spaces could use your entrepreneurial energy to go and disrupt? Are there any industries that are adjacent to what you learned in school, or where your interests are, or where your previous experiences lie? How about another location where there is growth like another country?
Someone once said to me that in times of economic distress, there were tons of opportunities and investing in these times could yield some amazing results as long as you reserved some capital to do so. These are definitely some interesting times as an angel investor. Like Mark Fletcher, I am doing the smart thing by watching the economy closely and adjusting my investing strategy based on the conditions of the environment at the time. More entrepreneurs could do better by applying this tactic as well.
DISCLOSURE: I am not a direct investor in Stocktwits but rather an indirect one through my investment in betaworks. I love what they do, so go and sign up for Stocktwits newsletters and read everything they send you.