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Starting a company in an economic drought(DARE)

With so many people around the world focusing on holding onto their jobs, what would you think if a friend told you that he or she is thinking of starting a business now?

Around the world, economies are contracting, demand is falling, companies are cutting back their purchases, bank credit is increasingly difficult to obtain, and risky projects are being canceled. Perhaps India—one of the few economies in the world that still registered healthy growth in the past six months—is less hard-hit than others, but still, starting a new business during the economic equivalent of drought season seems like a mad idea. Or is it?

Our case in this month’s issue of DARE seems perhaps to tell a cautionary tale. Manish Sharma started his first company right after graduating in 1995. It was a web solutions provider that entered the market at the perfect time. Attempting to build on this success, he started a second venture just as the dotcom bust took hold, and this company was unable to survive that lean season. It took several years before he was ready to start his third venture, Printo, with his wife, and this venture has prospered in part by riding the rising tide of India’s remarkable recent economic growth. So is the lesson here “Wait until the business cycle is rising before you start a new enterprise?”

Such a dictum is far too general to be useful. Sharma’s second venture failed because it was the wrong kind of business to start at the time: an innovative product company. In contrast, rigorous academic studies show that many successful companies are started during down periods in the business cycle, and often they are more robust in the long run than those which were founded during good times. However, the kinds of businesses that survive in challenging times are not the same as those that thrive in more prosperous eras.

Businesses that typically do well in a downturn solve pressing problems (usually saving their clients money) without requiring much up-front investment or cash. This is not a great time to start a product company that requires a lot of investment and a long runway before it breaks even. It is also not a great time to start a company whose offering would make your customers’ lives better if they bought it, but which would not be missed if they did not. Companies that thrive in harsh economic environments usually save their clients money right away. Most businesses and consumers are looking for ways to conserve cash, decrease investment outlays, and lower their total cost of ownership. Firms that can help them achieve such goals often perform especially well during a recession.

If you have an idea that fits these times, there are still a few pitfalls to avoid. First, ensure you can reach prospective customers at low cost. If you have a product or service that will save people money, but you can’t make them aware of the opportunity until you spend a lot of money on marketing, you may run out of cash before you build up enough revenues to sustain your enterprise. Startups who grow via word of mouth or inexpensive search engine optimization are much more attractive than those requiring heavy marketing communications investments.

Another pitfall is paying insufficient attention to collecting your accounts receivable. Making money isn’t the only thing that matters in tough times—getting cash as early as you can is at least as important. Many an entrepreneur has grown impressively on paper, only to run out of cash because customers made late or partial payments for work that cost money up front. The more your business can be structured in pay-as-you-go fashion for customers, the brighter its prospects.

A third pitfall is relying too much on credit, especially for investments in equipment or inventory. Entrepreneurs often fall into a growth trap when expanding their business requires them to borrow in order to sustain a growing stock of working capital. Even if your top line is growing, you may find yourself in a squeeze when you hit a credit limit and find that sources of debt financing have dried up. Work up a spreadsheet showing how your credit needs will grow as your business expands, then ensure your growth does not outpace the amount you need to borrow in order to sustain it. Then, build in a safety buffer and stage your growth accordingly.

Businesses with the right configuration—saving their customers money visibly and swiftly with low marketing costs, a short sales-to-cash cycle, and manageable investment outlays—enjoy a number of advantages when they are launched in tough times. Costs are lower and vendors may be more willing to help out an enterprise that has promising growth prospects. Talent
is more readily available and key employees will become more loyal if treated well and given opportunities. Niches are less crowded with rivals, and it is harder for competitors
to overwhelm you by spending lavishly on marketing, channel coverage, or direct sales.

Challenging times also present another opportunity: rejuvenating sound businesses that have run into trouble because they were configured for growth. In 1965, the US sociologist Arthur Stinchcombe introduced one of the most influential ideas in modern management thought: “organizational imprinting.” Just as a duck is imprinted at birth, attaching itself to the first object it sees and treating it like a mother, so organizations are imprinted by the conditions in which they were founded. For example, Stinchcombe studied college fraternities in the US, and found that in the 1950s, those started in the mid-18th century continued to be much different than those founded decades later. The environment at the time an organization was launched shaped it in ways that were still visible a century later.

The Printo case in this month’s issue of DARE is an interesting case in point. Any digital printing business founded by professionals in 2005 would almost certainly be configured around a fast-growth strategy, as Printo was. The kind of people one hires; the pricing strategy one pursues; the amount of attention that any one location gets before the founders open another, and dozens of other factors reflect the growth pressures that typically drive firms in eras of economic expansion. They are built for growth, and expanding rapidly is in their DNA. Printo is unusual because its founders recognized in 2008 that they had to rethink the fundamental nature of their business. Most entrepreneurs do not—they operate “bicycle” businesses that move forward smartly as long as they have momentum, but that tip over when their forward motion slows to a crawl.

If you start a business in 2009, you will have opportunities to take customers away from businesses that were started several years ago and have not yet gone through the painful change management required to shift gears and run lean. You will also have opportunities to partner with such ventures in cases where they have access to customers but are not configured to save them money right away. You will also have opportunities to buy cheap assets from businesses that are fundamentally sound but that have overextended themselves because they were built to succeed in a different era.

2009 is a great time to start a business for entrepreneurs whose ideas, abilities, and connections fit the spirit of the times. If you can get your first couple of customers very quickly, save them money in the short run, and soon generate more cash than you consume, then you will seldom find more fertile ground to till. If, however, your passions take you in a different direction—for example, toward wanting to invest in breakthrough innovations that temporarily raise your customers’ spending—then bide your time. In both good times and bad, it is important to understand what you love to do and do well, then pick the right moment to start the kind of business that feeds off your passions.

organisation

ORGANIZATION: 

VIJAY LODHA MBA(FIN.)LLB,MCOM

Regardless of whether you already have hundreds of contacts or are just starting out with a close-knit group of personal acquaintances: Successful networking is all about managing, maintaining and deepening those contact ties. Wishing them a Happy Birthday if one example of this (check out our convenient reminders here) – but more importantly still it is the ability to identify and be aware of your contacts’ needs, skills and positions, and then to make use of these to your advantage.

Do you know which of your contacts is based in    mumbai, which in dubai and which in London? Who can speak spanish in your network? Who’s a whizz at Photoshop? Who has good contacts in mechanical engineering? It is at times when time is pressing that it pays off most to have a highly organized network.

Generally speaking, the following features are designed to help you organize your contacts more effectively: Bookmarks for yet-to-be-contacts, and tagging and memos for existing, confirmed contacts.

I bookmark people whenever I want to make contact with someone, but at a later date. This could for example be the case if a person is recommended to me, but when I know that the person in question only accepts specific, project-based contact requests or requests from people they have already met personally. Of course, you can then view your overview of bookmarked people at any time.

There are diverse capabilities and advantages of tagging. Adding keywords enables you to manage many contacts at once with great efficiency. It also, for instance, makes it much easier to invite contacts to events or recommend them to others. This makes this tool, in my view, THE key feature for successful networking!

I usually use memos to note down whether I am on first name terms with a contact or not, as well as other important information about the person that I might otherwise forget about over time. Conveniently, the memo also includes the exact text and date of when initial contact was made. Although that said, you don’t have to be a personal contact to write memos.

So I highly recommend investing a little time whenever you make a new contact or come across a potentially interesting one and make use of the organizational tools at your disposal. Take an hour to sort through your contacts if you haven’t already done so – you’ll find it is well worth it!

DANGEROUS WORDS IN BUSINESS……….

VIJAY LODHA

MCOM,LLB,MBA(FIN.)LONDON

At least we all recognize it when we hear it.

The really nasty language in business consists of normal words with abnormal meanings. Here are 12 words that should get any alert manager’s bullish*t detector working overtime.

Just

This is used to make a huge request or error seem trivial, as in, “Could you just do this (500-page) document by Monday?” -- a request best made late on a Friday afternoon.

But

Remember, whatever is said before but is b*****ks, as in, “That was a great presentation, but...” or, “I would like to help, but...”.

From

From is much loved by advertisers, as in “Fly to Rome from £10″ -- excluding £100 of taxes and other “optional” extras for a flight leaving at 4 AM and going to an airport about 100kn away from Rome, and only if you book the ticket one year in advance.

Might (and any other conditional verb)

Might is used to achieve two thing. First, it sets up a negotiating position, as in, “I might be able to do that if...” Second, it lays the groundwork for excusing failure later on: “I would have done it, if only...”

Only

Closely related to just, this is an attempt to make a big request or problem seem small. “It was only a small error.... We only dropped one nuclear bomb over London...”.

Important (and urgent)

This is used to puff up any presentation: “This important new product/initiative...”. Important to whom? And why? Maybe it is important to the speaker, but why is it important to me?

Strategic

Important, with bells on. See Strategic Human Capital Division, formerly known as the Personnel Department. It's alternatively used to justify something that has no financial justification at all: “This strategic IT investment (which costs £100 million and has no identifiable payback) is essential to the survival of the business.”

Rightsize, downsize, best shore, offshore, outsource, optimise, redeploy, downshift, re-engineer

How many ways are there to avoid saying straight up: "We are going to lay off staff"?

Thank you

Normally, thank you is good -- except when used by automated voices at call centres saying, “Thank you for calling; we value your call... (and we have so much contempt for our customers that we can't be bothered to answer your call promptly, so we will put you on hold until you give up and try to use our impenetrable and useless online help instead).”

Interesting

Fear this word. When your lawyer uses it, you are doomed. When your doctor uses it, check that your will is up to date. The recession is certainly interesting. A slightly less interesting time would be preferable.

Opportunity

Because the word problem has been banned in business-speak, all problems have become opportunities. This means many opportunities are problems. There is a limit to how many opportunities I can solve. Interesting and strategic opportunities really scare me.

Investment

Investment was first hijacked by the British government to justify wild and uncontrolled public sector spending. Spending is bad, but investment is good, so it simply reclassified all its spending as investment in the health, education, and future of the country. The businesses that followed the government’s lead by going on a spending/investment splurge are now going bust -- unlike the government, they can't print money or raise taxes.