23 Nov 20081 Comment
Is this a good time for startups? In the midst of the greatest financial turmoil in most people’s living memory and with several posts about the challenges of startup finance, it’s time to counter with an optimistic message about startups.
Perhaps I’m sanguine, having almost always raised capital against some of the worst macroeconomic cycles, such as the Asian Financial crisis in October 1995, the Quebec Referendum of 1997, not to mention the technology meltdown of 2000. In the end, although closed at less favourable valuations, the financings got done, proving to me that businesses can get built in the midst of even the toughest economic and market conditions.
These experiences taught me that perhaps the best time to launch a startup may well be in an economic downturn. As counter-intuitive as it may seem, it worked for well known companies like Skype, Google, Expedia and Apple’s iPod. Here’s why.
First of all, innovations which involve disruption to existing pricing models, are likely to be most successful during economic downturns. Businesses and consumers, looking for ways to reduce cash burn, are way more open to new ways that optimize their cash burn. Startups need to focus on this fact at such times.
Secondly, tough times mean less competitive pressure and marketing noise. With fewer over-financed competitors to deal with, getting noticed is easier and customer acquisition costs are significantly lower.
In essence, as Sam Palmisano, Chairman and CEO of IBM says, “win not by surviving the storm, but by changing the game”.
Mark Organ, founding CEO of Eloqua, tells of the challenges of raising his first angel round in April 2000, during the tech meltdown. Closing that round was discouragingly difficult. That being said, by making small, measured investments around a fine tuned strategy leveraged by working with SalesForce.com, he and his team, built the business during very difficult times for software businesses.
This is great news for Verdexus portfolio company Iotum, which launched the premium service of Calliflowerb on the west coast at Under the Radar – Mobility a week ago. Check it out. Right now, when cash is king, the integrated features and disruptive pricing could save your company money on all those online meetings and conference calls.
In the end, most entrepreneurs are have strong passion for what they do. They are accustomed to swimming upstream and being considered contrarians. And, as we’ve shown, many times such contrary times are the best launching innovative startups.