What If There's A Downturn?

  • by , Featured Contributor, January 31, 2008

I spent some time this week at the AlwaysOn conference in New York City, which focuses on technology start-ups and venture capital with Silicon Valley lenses. I'm a big fan of conferences, so I like it even more when they attract a great crowd -- this one did -- and especially when they're in my city; this one was. The mood of the conference was very positive and upbeat, as you might expect given the strong tailwinds that this industry sector has had for the past couple of years, and has had generally for the past couple of decades. In spite of all of the optimism, one issue popped up several times in sessions related to the advertising marketplace or to the financing and mergers and acquisition environments: "What if there's an economic downturn?"

Most folks had pretty good answers to the question, or at least pretty good rationalizations for what they might do, or why their particular market sector was likely to be insulated from broader consumer spending patterns. However, I wonder how seriously most of these folks are taking concerns about a potential slowdown in the U.S. economy in developing and executing their business plans. While I'm personally bullish on the online ad sector, I have run start-ups through a couple of downturns and one big bubble burst, so I do have some thoughts in this area. Whether or not a downturn is imminent, or already here, this is probably a good time for advertising-focused start-ups to take a breath and do a full evaluation of their business, their revenues, their expenses, their sources of funds and their exposure to a market downturn. At the least, they may end up a bit smarter about their businesses.



What should start-ups be looking at?

  • First, they need to look at their costs and their ability to control them. More start-ups are killed by large, long-term fixed cost contracts than almost anything else, so be sure to check out contracts for real estate, computer hardware, software, technology services and trade marketing. It seems only yesterday that I walked through some Silicon Alley streets in 2002 after the bubble burst and companies had their high-tech furniture on the sidewalk with signs to take it for free. If revenue drops below projections and new capital becomes too expensive, you need to know where you can toggle expenses.

  • Second, they need to take a hard look at their revenue projections. When things are going a bit crazy, as the online as market has, no one worries about sharpening the pencil too much on the revenue line. Now is the time to do it. Now is the time to take a very objective view of the sources of that revenue and really ask if those sources would still spend that amount if consumer spending dropped across the board. It's a good time to ask what would happen if revenue growth went flat. It's not something to wish for, but something to be aware of.

  • Third, it's a good time to have a heart-to-heart with existing investors and other potential sources of capital. Find out what they are thinking. Find out if they have dry powder available. Find out what kinds of deal terms might be available if things slow down. It's much better to have the conversation too early than too late. It also could strengthen the relationship and trust between management and investors, since they are probably worried about this at the moment and may not want to bring it up themselves.

  • Fourth, it's a great time to be looking at attractive talent, assets and businesses in the market that might be freed up if the economy slows down. Slowdowns are not just a time to tighten up the business, they are also times to make opportunistic moves when competitors can't or won't. Some of the next start-ups launched during downturns on the backs of great folks that were laid off by companies without the vision or staying power to see through to the other end of it.

Is this about doom and gloom? Absolutely not. It is about start-ups being smart and doing the best job possible to prepare for those things that they can't control. I personally feel very good about the future of online advertising and don't see any big slowdown crushing the industry, but I do think that a number of companies may find themselves spending more of their investors' money faster than they should, at moments when going a little slower might be a good thing. What do you think?

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