Tough Times Ahead for Startups

Ithought it would be a good time to post an article about the tough times ahead for start ups. Starting a business is never easy — let’s be honest. Starting a business in an economic crisis, when funding is non-existent and debt financing is almost impossible to secure — is arguably, just insane. So, the question I want to answer today is what is going to happen to start up companies and innovation — in general — over the next 12–24 months?

Well, here is my opinion on the situation.

Clearly, the economic crisis is going to be a real issue for all businesses, not just ones that are starting up and trying to get their products out into the world. Obviously, the difference is that established businesses already have revenue flows and are able to cut back on spending by reducing key sectors of their businesses which are “overweight”. That is, where spending has gone a little overboard and they are able to make significant cost reductions by simply cutting staff, slicing spending and so forth. Typically, this will start with marketing and communication departments and then be followed closely by human resource allocations — namely, people reductions.

The key question is not to ask what is going to happen to existing businesses, but rather businesses that are yet to even open to the world and ones that are just starting out. During times of economic crisis, most start ups are required to run on an absolute shoe-string. This is not necessarily a bad thing — since it requires to the founders to more than ever focus on the bottom line and do everything in their power to keep the business running and get the product released. Decisions have to be made which are economically viable and which provide real value to the business — everything else has to go to the wall. There is no point focusing on sections of a product which are not going to deliver real value when it’s released — the focus has to be on sustainability and revenue growth.

Evidently, businesses which require large start up capital to begin operations — such as biomedical and other medico companies — are going to find it extremely tough to innovate. Intellectual Property is the biggest ‘game changer’ for these type of companies and without it — global conglomerates can simply steal innovative products and reverse engineer them. Equivalently, companies starting out which don’t have real and sustainable business models are going to suffer as well. The times of ‘Facebook’ and ‘Youtube’ building products without any idea of how they are going to produce money are gone. These are, what I like to call, ‘boom-time’ companies that were created when money was flowing like water and capital was injected into these businesses with absolutely no worry in the world. The attitude of ‘we will figure it out later’ was uttered every time ‘business model’ was spoken.

Of course, on the flip side of all these arguments is that during periods of economic recession, businesses can really ‘strut their stuff’. Innovation, in it’s purest form, is all about the creation something new. ‘New’ being a word that is very broad in it’s application and meaning. It’s clear that new and sustainable business models need to be the focus for emerging startup companies and a clear plan to profitiability needs to be the focus — without this, these startups will simply not survive. The days of ‘boom-time’ are gone, and so is the ideology of ‘we will figure it out later’.

One such business model that I really like is the the idea of a ‘fremium’ business and I am really certain this is where innovation will start. ‘Fremium’ is a basically the strategy whereby you offer a product for free, and then charge for extra premium features. The key to this business model is, of course, that what you are offering for ‘free’ — people actually want. If the ‘free’ part of a product sucks, then there is certainly not going to be any ‘premium’. Get the free part nailed, and then offer some really cool extensions that you can charge people for and that they will want to pay for. If you can do this, then you will really start generating some solid revenue which can keep things running.

Another really cool model that I think start up businesses need to utilise — is the model of ‘high volume, low cost’. That is, the idea that you produce a really cool product and charge almost nothing for it. If the product is really great and people can relate to it — then the psychologically behind charging $1 — $5 dollars is really easily to put to consumers. If you can get 2,000 to 5,000 people a month at say $1 — then you are generating some real revenue that can start paying off bills and easing the cost burden to the overall business structure. I think that starting with a model such as this, and then adding the ‘fremium component’ over-the-top is really something that I hope businesses can integrate. Not every business needs to be “completely free”. I don’t believe that all consumers take this ideology on the web, or offline, nowdays that ‘everything has to be free’. Of course if you are offering a great service — people should pay for it.

Further to this, if you are offering a service that people are paying for — don’t include advertising. This may sound like Business 101 — but I have seen it and it sucks. You need to balance out advertising integration carefully. If you are going to integrate advertising as a revenue source into the ‘free’ part of your product, make sure that it fits with what you are doing so that people don’t get pissed off by it. To me — in your face advertising screams ‘click me, click me’ and ruins the products feel. Remember — if you piss people off, they won’t use the free part — which means they definitively won’t use the premium part either.

So to conclude, do I think startups are going to suffer during the next 12–24 months? Absolutely they will, no question about it. However, do I think that innovation is going to suffer ? No, I don’t think it will. Humans are naturally thinkers, and with so many problems existing in the world today — solutions have to be created. Sure, funding is tight and therefore products that would have previously existed without the need for a real business model will suffer — but this will allow for other people to produce the same product with a viable business model — and so the cycle starts again. While the enteprenurial spirit continues regardless of the economy — there is no question that it needs to be aware of it.

If you are starting a company and have just read this — don’t give up hope or become distressed. Manage your money, manage your team and cut back. Startup Business life was never meant to be easy. Grab a pen and a peice of paper, and start thinking of features and extensions that you can add onto your product which will deliver real value instead of focusing on ‘extra’s’ that aren’t going to deliver revenue, but are going to increase the number of product users. They real challenge is just to survive through the economic crisis no matter what. Once you’ve done that, you’ll be better off and a more prudent business person for it.

Best of Luck to Everyone : )