Startups in the Downturn

Date:   Monday , June 01, 2009

During these difficult and recessionary times, it becomes particularly important for entrepreneurs to know the rules of the startup game. The bar has been raised for startups. It is significantly harder for entrepreneurs to attract capital, build teams, and attract customers. Yet, now is the best time to launch your next venture. There is tremendous opportunity for the bold and the brave to seize this unique timing as the market has hit the bottom.

Now is a Great Time for Startups
A lot of entrepreneurs are wondering if this is a good time to start their ventures. My answer to them is that downturns represent strong opportunities for daring entrepreneurs. The reasons are 1) Big companies are pulling back, making room for startups to fill the gap, 2) VCs are slowing down, hence there is reduced competition overall, which makes it easier for the current entrepreneurs, and 3) The current job market also makes it easier to build your ’A’ team.

Entrepreneurs typically think counter intuitively and given that the world is obsessed with the financial crisis, recession, etc., now is a great time for entrepreneurs to draw upon their eternal optimism and build companies.

Where are the Opportunities?

The big question for the entrepreneurs is, where are the real opportunities? Markets have changed, consumer and business spending has shifted, so where are the new areas of demand and investments? Let us look at it sector by sector.

Enterprise IT

This is a good time to look at a new class of applications that have become must-have investments for enterprises. These applications stem from the key learnings of the current financial crisis, fall outs of poor corporate governance, challenges of global warming, energy management and green operations, social networking techniques within the enterprises, next generation facilities, building and campus infrastructures leading to new models of collaboration, urbanization, and globalization.

Consumer Web

Entrepreneurs can look out for new applications of e-commerce or social networking or vertical search areas that have been overlooked thus far. The examples include areas like smart home applications, consumer collaboration through video and other new media, and the new class of consumer financial applications to protect against future financial fallouts. The trick is to look for areas where there have been some fundamental shifts or learning and apply the entrepreneurial creativity to those areas.


A number of clean technologies are becoming viable, which raises the need for a new class of energy operators and service providers that can creatively complement the services of traditional utilities and grids. A good example might be the notion of creating a ‘neighborhood’ or ‘community’ grid, as a complement to the big utilities. Or, developing services for retrofitting traditional buildings into smart, energy efficient buildings. While the bulk of venture financing is targeted towards finding the newest and best technologies for clean-tech, there seems to be a gap in the service methods of innovative service providers who understand how these clean-technologies are actually brought to the market for businesses and consumers alike.

Knowledge Services

KPOs are still going to be a strong area of opportunity for entrepreneurs. Areas like digital marketing, compliance services, security services, legal process outsourcing, brand enhancement services, Web intelligence services, and market research are still ripe for further service innovation.

Getting off the Ground?

The hard part these days is how to get off the ground. The VCs are not investing, which means that it is hard for you to get going with your idea. I would suggest getting creative with your financing options. Consider consulting in the area of your business to kick-start your cash flow and leverage your increased credibility and then building your business. Raising money from friends and family is an option too, though the consulting route can genuinely help create an ongoing cash-flow, helping you launch your idea or venture even in a tight venture environment.

The other part of the venture equation that has become harder is sales and customers. How do you get your initial customers? The trick is to build a ‘founding team’ in such a way that the collective network of the team will allow you to get your first dozen customers to validate your concept. Of course, this means bigger founding teams, more dilution overall, yet it will ensure greater success rate for the venture.

In a nutshell, good startups will be born by the daring exploits of entrepreneurs despite the current downturn. These entrepreneurs will be creative in understanding the fundamental shifts in the market. They will also demonstrate creativity in their sales and financing strategies that give them ‘unfair’ advantages over others in the marketplace.