Start Now: 6 Reasons Why This Economy Is Good For Startups

By Dharmesh Shah on December 3, 2008

The following is a guest article by Jason Cohen.  Jason is the CEO and founder of Smart Bear, Inc. Smart Bear creates tools for peer code review.  Jason "gets" software startups.

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Doom and gloom. Layoffs, bankruptcy, insolvency, bailouts. Blah blah blah Wall Street, blah blah blah Main Street.

It's a terrible time to start a company, right?  Wrong!

Here are six reasons why you should start your new company right now.

1.  Low opportunity cost

When the economy is booming, staying in a regular job makes sense. Generous bonuses are common when revenues are soaring, stock option grants are valuable when an IPO is imminent, your resume is improving in direct proportion to the success of the company.  Upside and safety! Fabulous.

Of course that scenario is almost non-existent today.  Most companies aren't hiring; many are laying off. Salaries are low, bonuses are suspended, stock options are as worthless as a vote for Pat Buchanan.

So if the alternative is working for low pay without job security, why not work for yourself and build your startup? You'll be investing your time and energy into something with more potential upside in future. If you're talented and have always toyed with the idea of a startup, financially it makes sense to do it now.

2.  Cheap Talent

It's hard to hire good people because they already have a job.  But right now that's not true -- companies are exploding and laying off everyone, even the stars.

If you're starting a company you're probably looking for a co-founder more than an employee. Even better. In an environment where few companies are hiring, lots of stars (or, better, potential stars) are out of work.

The market is flooded with good people.  Maybe you yourself just got laid off with some co-workers you like!  Just keep your hiring standards high and dig into your social network. (Or go get a social network now. See? That Facebook account really was a good idea.)

3.  Cheap Stuff

Need cheap office space? Layoffs mean newly empty desks in empty offices with phones that still work. Look for subleases where someone is trying to recoup some costs -- often they'll throw in Internet as long as you don't abuse it.

Need cheap furniture?  Companies are dumping stuff into used furniture stores and there aren't a lot of buyers.  Drive a hard bargain.

Need cheap advertising? Ad revenue is drying up as companies down-size marketing budgets and miss their next round of funding. Combine that with lower readership (especially in print) and ad deals are everywhere. Don't listen to the protestations of ad reps -- they're under duress and will take almost any offer. (I'll post later on ways to wrangle with ad reps.)

With everyone hurting, deals are everywhere.  Your expenses will never be lower than right now.  Low expenses mean getting to profitability faster -- exactly what a new bootstrapped company needs.

4.  Eager customers

When budgets are tight, people need to get stuff for free.  Good for open source projects, bad for companies, right?

Good for startups.  Remember, with your first twenty customers you'll be giving away your product for nothing.  You need to -- your product isn't fully-formed, they're helping you work out the kinks, you're counting on them for testamonials, and you need to prove your product works in the market.

You'll be a Godsend to companies who need your product.  Their (lack of) budget prevents them from buying anything else, including competing products that are better than yours. They'll be ecstatic to get something for free or cheap.

Here's a trick: Trade your product for a customer story (that you write and they approve). They'll be happy to tell the world how you bailed them out of their crisis.

I'd like a side of grated cheese, please?

5.  Competitor carnage

Is there an 800 lb gorilla blocking your market?  Or a few hip companies you're afraid to compete with?

They're all in SOS mode now. They have overhead, recurring bills, 12-month advertising contracts and 5-year office leases. Their prices are high and are hard to lower.

They're eating cash.  Those that are unfunded are watching cash reserves fall, computing months-remaining before they'll have to close the doors.  Venture-backed companies are in a bigger pickle -- they weren't profitable before, cash is now disappearing at an alarming rate, and many of them won't get fed again when they run out.

Perfect, if you're a little startup.  You have none of these pains; you're sipping cash with no overhead and lots of time to devote to coddling new customers.  While your competitors convulse, shed talent, and invent stories to calm their doubting shareholders, you've got nowhere to go but up. While they're figuring out how to wring more money from their existing customers, you're acquiring new customers they can no longer entice.

6.  "Now" is always the right time

The most common day for starting a new company is the same as starting a new diet: Tomorrow.

Take the leap.  Not tomorrow.  Today.

The third-hardest thing you'll do is to take the leap. (The second-hardest is getting through the first fifty sales, the ones well before the chasm, when you're sick of tech support and wondering when the real money is going to show up. The hardest is firing someone.)

Never mind all that. Get started. "Now" is always the right time to start, because otherwise odds are you'll never start.

If you don't start, you're doomed to a life of trudging through jobs, depending on someone else for salary and bonuses and health care and retirement, a life's work without ownership or upside.

You're better than that.  That's why you're reading this blog.

So go for it.

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So, what are your thoughts?  Are you convinced yet?  Still think that toiling away at that (ahem) "stable" job at that Fortune 500 company is the right thing to do?  I realize that taking the leap is hard, and situations vary, but it's good to at least think about it.  Lots of other people are thinking about it (or doing it) too.  The OnStartups group on LinkedIn now has 34,000+ members.  Of the 170,000+ groups on LinkedIn, it's in the top 10.  So, you're not alone.

Topics: strategy
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Dealing With A Downturn: Selling More Services

By Dharmesh Shah on November 20, 2008

If you’re involved in the operation/management of a startup, you’ve already heard a bunch of advice over the past couple of months.  Much of this advice can be summed into about two words: Reduce Expenses.

I did a bit of paraphrasing (there are lots of variations and extensions to this, but it’s close enough).  The advice is intended to accomplish one thing:  give you more “runway” so that you can survive the down-turn.  Overall, I think this idea of increasing the time that you can continue to operate your startup is a pretty good thing to solve for.  The more time you have before you run out of cash, the higher your chances that you’ll actually succeed.   I’ve said this about long-term startup strategy before:

Part of your long-term strategy should be to survive the short-term.” 

If you don’t live long enough to see the long-term, all that strategic planning and world-changing vision is not going to amount to a hill of beans (I have a running assumption that the value of a hill of beans is negligible, though it does seem odd to me that we’d use this as a benchmark — but I digress).

So, back to the advice:  You need to survive, and so you should reduce expenses and thereby increase the time you have to figure things out.  That’s great, but it’s only one part of the equation.  In reality, the length of time you will survive is a function of how much cash you’re burning.  Your expenses contribute to this cash-burn, but there is this other variable in the equation that people don’t seem to talk about a whole lot.  Revenue.  It’s almost like we’d forgotten about that. 

When software companies are born, there’s this vision of building a great products company.  Software startups tend to make a conscious effort not to emphasize services.  The reason is simple:  The margins in selling a product are usually much better.  Further, it’s hard to get venture-funding if selling services is a big part of your strategy — for the right reason.  So, many startup people (including me), shy away from selling services.  We accept that it’ll likely become necessary over time, but we hold-off on it as long as we can.   Now, I’d argue that in today’s climate, things are a wee bit different.  If faced with the decision of having to scale back expenses (which is usually means letting go of people), generating some service revenue might not be such a bad thing.  Sure, as a software company, selling services may not have been part of the original plan, but neither was this massive economic downturn. 

So, here are a few thoughts on selling services for revenue.  Note:  These points primarily apply to B2B companies. I’m also drawing these points mostly from experiences at my prior company (not my current one). 

Thoughts On Product Companies Selling Services

1.  Selling services (related to your offering) is almost always easier than selling product.  If you don’t think you can sell services to your target market, I’d be concerned about whether you can sell your product.

2.  Offering services to your existing client-base often works well.  There are two benefits:  You get some revenue and you help your customers get more value out of your product. 

3.  You should be careful that the services you sell don’t center around customer-specific modifications to your product.  That’s a high price to pay for revenue.  On the other hand, if a customer is willing to pay for enhancements that you think would be valuable to a meaningful percentage of your target market, it might be OK.

4.  You might find that offering a bundle of services along with your product increases your probability of a sale.  Some customers might be more wiling to buy if they knew they could get your help.  This could include training, data conversion, implementation, and customization.

5.  Though services margins are definitely lower than that of product, one of the nice things about selling services is that it’s easier to manage head-count.  For example if you’re trying to figure out whether to hire/keep someone, trying to figure out whether they’d be accretive is simpler to figure out in the services business.  Not easy (particularly in this economy), but easier.

6.  I’ve found that the people delivering services on behalf of your products company are often great at uncovering sales opportunities.  For example, you might have a consultant that is helping a customer complete an implementation.  During this process, she could identify how your product could be used in a different division of the company, leading to an upgrade.

7.  Services are often a very effective way to guard against attrition in some of your recurring revenue stream.  If you’re delivering services to a customer on an ongoing basis, and they’re thinking about cancelling (in which case you’d lose maintenance/subscription revenue), you’ll likely hear about it sooner and have a chance to do something about it.

In closing, one important point.  I’m not suggesting that you use the service revenue excuse to refrain from cutting expenses that you should be cutting.  If you need to let people go, you need to let people go.  Also, keep in mind that expense cuts are immediate and generating revenue (even service revenue) takes time. 

Summary:  You likely had lots of good reasons to not sell services when the company started.  But, times have changed, and you might want to revisit some of those decisions and arguments.  Selling services may be the lesser of two evils.

Topics: strategy
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