July 2011 Archives

Staying Stealth

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When I started angel investing, staying stealth seemed to be partially in vogue. There were still a lot of entrepreneurs who wanted to stay stealth and they would ask me to sign an NDA before talking about their startup. Unfortunately, I can't sign NDAs in my business; if I did, I would quickly not be able to talk to anyone! But the world seemed to move to a more open working relationship and those who really wanted to stay completely stealth seemed to dwindle in face of the hordes of startups who didn't care.

Staying stealth was also a barrier to many startups working in the consumer space. At one time, if you could get on Techcrunch, you'd find yourself instantly with 100K users within a week and things would take off from there. You wanted to get out there as fast and as broadly as possible so that users would know about you and come and try you out. More importantly, there were not as many startups back then; thus, competition was always a danger but the rate at which competitors popped up seemed manageable.

Lately, though, I have found myself advising at least two recent startups to now stay stealth as long as possible. While their stealthness wasn't during the fund raising or development process, I thought it was now a bad idea to announce themselves to the organizations that cover or announce startups and is normally read by other current and near current entrepreneurs. This is because now the world has changed: it is much easier with today's tools to create a startup, and since so many people want to become entrepreneurs today, the likelihood of somebody just copying you is much higher than ever before. Internationally, there are already teams working solely with the aim of copying US based startups and launching them in their local countries.

Today, in my search for startups, I try always to work with startups with no or very few competitors; it's one of the most basic concepts for investment selection and in today's climate, it is back to being one of the most important. But given the ease at which competitors pop up, it now benefits a startup to keep from announcing themselves to other potential entrepreneurs for as long as possible so that you can get a headstart on your operations, customer acquisition, product development, and dominance. This is much easier if you don't have the typical 5-10 guys who seem to suddenly pop up every time a startup with a new idea gets funded (Or think Groupon, who has HUNDREDS of competitors).

My new word is: stay stealth for as long as possible to the places where other entrepreneurs tread often; go public only because you have to in order to gain customers and in those places which reach the general populace, which unfortunately does contain entrepreneurs but you can't really do anything about that.

The Economy as an Accelerant

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Definition:

Accelerants play a major role in chemistry. Most chemical reactions can be hastened with an accelerant. Accelerants are catalysts which alter a chemical bond, speed up a chemical process, or bring organisms back to homeostasis. An accelerant can be any substance that can bond, mix, or disturb another substance and cause an increase in the speed of a natural, or artificial chemical process. [source: Wikipedia: Accelerant]

It is probably obvious that the economy can act as an accelerant to a startup's success. It is more obvious when the economy is rocketing skyward. Rewind back to the dot-com boom years of 1995-2000; the stock market was rising on the backs of tons of internet IPOs. Confidence was high, people had money and to spare. No matter what people did, it seemed that they could make money and spent it accordingly, confident that more money was coming in. Thus, startups of all shapes and sizes can ride an economic boom to success because there is free spending power to jump in the path of, from both individuals and corporations.

When the economy is bad, most people think that this puts the brakes on businesses and startups. However, I don't think that is completely true. I think that a crappy economy can also act as an accelerant to startups and their success, even as those companies built to last in booming economies falter.

Let's take a look at a snapshot of our current crappy economy, as posted by 24/7 Wall St. in http://ds.ly/lXDPgt:

1. Inflation is rising, despite the Fed's efforts to keep it in check.

2. Investments have begun to yield less.

3. The auto industry seems to be coming back, but prospects aren't good. Auto sales are a sign of consumer confidence and if sales don't rise, then the auto industry will tank again.

4. Oil prices are at their highest, putting a huge dent in consumers' wallets just to get around and to work.

5. The federal budget sucks and the Republicans and Democrats are sparring with our livelihood on trying to get a measure passed to deal with the debt ceiling, and how to reduce spending overall.

6. The Chinese economy seems to be slowing down, which will cause American companies to earn less.

7. Unemployment is still super high. And unemployment benefits and checks are ending.

8. The debt ceiling will probably be reset but austerity measures to reduce debt aren't going to have a positive effect across the economy.

9. There is lack of access to credit across the board, hurting small businesses especially.

10. Housing and mortgage issues still abound. Huge numbers of consumers can't pay their mortgages, and distressed mortgages are still on banks' balance sheets and can't be rid of easily.

We're in a world where a lot of the population have lost their jobs (and their unemployment checks are ending), can't find new jobs, or are earning less in their current jobs. But, the price of everything is rising, like gas. People need to make at least minimal ends meet but can't find jobs anywhere. Or their current company is downsizing and moving operations elsewhere, or eliminating them. If consumers don't or can't spend, there is the trickle down effect to all corporations down the chain, and eventually all these positive earnings that companies are reporting are going to stop.

You'd think that early stage startups would have little chance of succeeding in a world where consumers have no money to spend, or corporations are unwilling to spend even if they have large hoards of cash (although perhaps this is changing finally?).

However, I don't think that's the case. There is evidence that startups that are built on the backs of the crappy economy are thriving. Here are some:

Flash sale sites (Gilt Groupe, Ideeli, Rue La La, Hautelook) given consumers their luxury brand goods, but at much lower prices than normal. Despite having less or no earnings, people can still get their goods at least until their money *really* runs out.

Deal sites (Groupon, Living Social) are enormous juggernauts, again, where people can get deals on anything from restaurants to interesting things to do, to great places to travel to.

Sites that allow you to make money off your own stuff or skills (Etsy, AirBnB, GetAround) are flourishing because people under pressure to make money to survive may find it much more worthwhile to just start renting out their extra rooms or cars, or start a business themselves.

Small business and crowd funding sites (Kickstarter, Profounder, IndieGoGo) are also doing well because people who want to start businesses can't find funding anywhere else in today's bad economy where banks won't lend.

Given the crappy state of the economy today, what other ideas can flourish besides those above?

HOWEVER, if you try to start a startup in today's crappy economic environment which requires a great economy as an accelerant, you might as well be trying to start a fire in a pouring rainstorm. Ignoring the economy when designing your startup could be fatal; in my post, Mark Fletcher at Startup2Startup and the Evolution of Startup Business Strategy I talk about Mark's advice on startup building in different economic conditions and how he changed the way he approached his startup due to the conditions at the time. I now add that the state of the economy has a dramatic effect on what you're building too - if you choose something that does not take advantage of the economic conditions at the time, then you could be doomed to fail no matter what you do.

[Still, this also means that if you launch the same idea in a different economic climate, it could work beautifully - is it time for the new pets.com to emerge yet?]

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This page is an archive of entries from July 2011 listed from newest to oldest.

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