5 Ways to Brave the Great Downturn of ’08

Surviving the downturn

No doubt keeping the money flowing during a financial crisis is tough for many sectors of the economy, and Web 2.0 startups aren’t excluded.

After all, some companies, such as social networking site TheLinkUp.com and video-on-demand provider Akimbo, didn’t make it.

But the situation doesn’t have to be as dire as reports often make it out, with experts saying there are a number of ways to keep your Web 2.0 company running — and even position it for success — despite the downturn.

#1: Concentrate on real value

When companies and consumers stop buying, it’s more important than ever to have a product that meets a need.

“A core principle for survival, which in practice is far less common than it would seem, is being able to articulate clear customer value,” Sean O’Driscoll, founder of CGT Consulting, and former general manager for community support at Microsoft (NASDAQ: MSFT), told InternetNews.com. “Too many Web 2.0 tech and/or solution providers lack a verifiable or differentiated value proposition.”

O’Driscoll said many companies aim to do too many things and lose their focus. “The temptation is to be a tool and therefore have broad usage scenarios,” he said. “They want clear value attached to a clear business goal, and preferably with proven success stories.”

Anil Dash, chief evangelist for blogging software company Six Apart, said that when offering value, the product should be something worth paying a premium. “Make sure you have something valuable enough so that people will get out that credit card and write you a check,” he told InternetNews.com. At Six Apart, corporate clients such as Jupitermedia, this site’s parent company, rely on products such as Movable Type for its blogging platform.

Seth Sternberg, CEO of instant-messaging service Meebo, also viewed the downturn as an opportunity to offer value. “If your product is one that people need — make people money, save people money, give them a key piece of functionality — they need you even more now,” Sternberg told InternetNews.com.

“Focus narrowly on your core capabilities,” Sternberg advised. “Meebo’s core is Web live communication, so we keep ourselves narrowly focused on that,” he said. “It enables us to get better utilization out of our available resources.”

For social networking giant Facebook, success in growing its user base has been due to the company’s focus on allowing users to share and connect, which led to rapid success.

“Focus on something that people will love,” Josh Elman, platform manager at Facebook, told InternetNews.com.

These days, Facebook is aiming to monetize its massive user base, a process that hasn’t always gone entirely smoothly. Still, that doesn’t mean that the company doesn’t have sound advice on what advertisers are seeking.

“Make sure you’re providing a verticalized advertising experience that they’ll want to pay to reach,” Facebook’s Elman said.

#2: Aim for 18 months

Tim O’Shaughnessy’s company, LivingSocial,
launched in February as a tool on Facebook that enables users to review everything from movies and books to restaurants and beer. In July, the company secured $5 million in venture capital funding from Grotech Ventures and former AOL chairman Steve Case.

[cob:Special_Report]As a CEO at the helm of a Web 2.0 startup, O’Shaughnessy said he believes a key factor in outlasting the downturn is reducing cash burn as much as possible to get through the downturn — whether that means reducing headcount or pushing a sales cycle earlier in the company’s life.

“If you can live to fight to 18 months from now, you’re going to come up and half of your competition will have died and gone out of business,” he said.

According to Guy Kawasaki, venture capitalist at Garage Technology Ventures and co-founder of online media aggregator Alltop, running lean may mean reducing headcount in the business-development department.

“Fire the MBAs and business-development people,” he told InternetNews.com. “In these times, there’s no time or money for ‘strategic’ stuff. Every employee is either making it, selling it, collecting it or supporting it,” Kawasaki explained.

Page 2: Talent on the cheap

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#3: Buy the best talent at a bargain

While consumers may be taking another look at their shopping habits, that doesn’t necessarily mean that you should follow suit — especially when it comes to scooping up talented employees.

“Don’t be the last to cut expenses, but if you have the cash or cash flow, it’s a brilliant time to shop for talent,” O’Driscoll said.

“Having management experience really does keep things together in a tight economy,” Dash commented.

With more talent available as companies make personnel reductions, companies have more to choose from. “One positive is that it’s going to be a more quiet market,” Dash said. “It’s going to be easy to find talented people laid off from companies.”

#4: Market online and offline

It’s also critical to remember that, yes, business did manage to get done before the advent of online social networking. As a result, experts urge up-and-coming firms to avoid overlooking the necessity of offline social networking — like pressing the flesh during an in-person meet-and-greet.

Turning to those tried-and-true methods of getting your name in front of potential customers, and hopefully sealing the deal, may be just what your Web 2.0 company needs to do to compete in a tight market.

Although it’s “probably unsexy for Web 2.0 companies, they still need to make those calls and meet with clients in person,” Six Apart’s Dash said.

While it’s important to use online tools such as social networking, Twitter and blogs to produce new leads, don’t forget print advertising and face-to-face meetings, he added.

“A lot of companies that have money to spend are not sitting there reading your blog,” he explained. “You have to go reach them where they are.”

[cob:Pull_Quote]Nevertheless, it’s important that companies leverage the social networking and search-engine optimization tools that have become the norm in today’s online marketing. Kawasaki recommended keeping a close eye on search positioning, and added that social media startups such as Twitter can prove a valuable part of a company’s survival plan and marketing strategy — assuming those services, Twitter in particular, make it through the downturn.

“I sure as hell hope so, because it’s indispensable for my business,” he said of Twitter. “There’s 5 or 6 million people on it.”

#5: Don’t look for funding as a lifeline

With the sales climate increasingly chilly, there’s also the temptation to hunker down and plead for more money from your backers. Not only are they not having it, it’s not a wise use of your time.

“Getting more and more rounds of funding is not a business model,” Dash said. He advised that companies use these cash avenues strategically.

“You have to have enough financing to sustain your cash burn until you’re sustaining a profit,” he said. “You can’t rely on some big surprise,” he continued. “You have to be cash-flow positive and be realistic on how to get there.”

Dash noted that Six Apart was founded in 2002, following the downturn of 2001.

[cob:Special_Report]”There was very little funding available,” he recalled. “We have products that people paid for. We self-funded and bootstrapped to get the company started.”

Still, with the next 12 months or so looking to be difficult economically, LivingSocial’s O’Shaughnessy advised to keep an eye out for funding opportunities, since they may be few and far between. Whether it’s a venture fund, an angel fund or a private equity, “make sure you’re very prepared to accept the funding when you start having those conversations,” O’Shaughnessy said.

Also, it may pay to keep nontraditional avenues of funding in mind. Facebook, for instance, recently announced FBFund, an initiative to fund 25 companies with $25,000. Users will vote on which companies will win funding.

Moving forward

As Web 2.0 companies try to stay afloat through these harsh economic waves, companies that are focused and offer tangible benefits have the best chance to survive.

As Six Apart’s Dash said, despite the tough economic climate, even if you’re a small company of two people starting in a garage, keep thinking about how to find the right partners and make the right connections.

“If you start thinking about how you fit into that piece, you’ll be more successful.”

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