A Recession is a Great Time for a Start-Up! (PART ONE)

2008 was a rough year for everyone and 2009 should prove to have its challenges as well.  Layoffs have been reaching record levels and it is rumored that the unemployment rate could hit double digits.  So how on earth could this be a great time for a start-up when well established companies who have been around for decades are collapsing?

In fact, many people who have been recently laid off and have the guts to remain resilient in these tough times have seen this as a great chance to start over.  Of course, starting your own company under good economic conditions is hard enough, so it takes some patience, courage and a lot of creativity to start one when times are hard.  No business owner has ever truly succeeded without taking some risks and hitting some major road blocks on the way.

In truth, some of the most successful entrepreneurs in the world have hit bottom more than once.  The proven business owners are the ones that have run their companies through both good and bad times.  It actually isn’t that hard to operate a small business when the economy is great.  For example, many very successful entrepreneurs in the real estate industry started businesses on the upswing of the housing boom and have made millions.  Of course, now they are realizing that planning ahead and being able to adapt to the unpredictable nature of cyclical markets is what will separate them from the companies that will not be here when the storm settles.  Even some of the greatest minds in business have overextended themselves and forgotten to learn from their mistakes a few times in their careers.

If you have a web-based start-up or are in the planning phases for starting your own online business, here are some creative tips on business planning, raising money, legal advice, Internet marketing, hiring, firing, money management, and operations during economically challenging times.

Business Planning: Having a comprehensive business plan sounds like an obvious first step for starting your own business especially if you plan to start shopping around for money.  This could never be truer than now.   If you are a first time entrepreneur, this is very important so read carefully.  You may want to enlist the help of other business owners, entrepreneurs, and financial analysts.  The main things investors are going to want to know are:

  • How your business plans to make money
  • When it will start making that money
  • How much money it will take to become profitable
  • What your estimated profit margins are
  • How scalable your products or services are
  • Who your competitors are

There is more to it than this but when you present an executive summary to a potential investor, who is most likely a very busy person (and will be more skeptical than usual in this economic climate), you want your key factors for success to stand out.  They will usually cut to the case and start asking these questions.  Your executive summary is extremely important because this is your only chance.  Nobody is going to thumb through your professional 60 page business plan before looking at the executive summary and brief management bios.  This is where you capture them.  Your business plan should include details on all the points above and realistic financial projections.  Naturally your plan will have the traditional “hockey stick” growth pattern and a sexy exit strategy but in my opinion, these days it is better to be more transparent and realistic with your projections.  Your investors will appreciate it.

In fact, one of the most interesting strategies I have heard of lately is presenting two business plans.  If you are currently in this phase you have most likely been working on your business plan for months and made significant changes based on certain externalities and feedback from friends, family, and investors who have reviewed your plan.  Your original plan may have been tied to certain revenue streams that may not be as feasible due to the economy.  Some companies you may have pegged for partnerships or strategic alliance may not even exist anymore.  Try briefly presenting the original plan and then show the investors your revised plan based on the “here and now”.  This will show them you are with it, wise, and realistic.
There are some great online services for professional business planning such as MarketingPlans.com.  This can be a great way to fine tune your plan and ensure the presentation is top notch.

Raising Money:  OK, so now it’s time to start looking for money.  You first need to determine what kind of money you need and how much because this will drastically affect your strategy.  You could start with friends and family money or your own savings (although I have always been a fan of using other people’s money!).  However, it can be very comforting to investors to know you have some skin in the game.  If you budget properly, friends and family money can go a long way and get you to the time for that next round.
You can consider debt money but that is very difficult to do right now on your first time out of the gates.  You usually need to show great credit, a large amount of liquidity, etc.  If you already have a business and this is your second or third time, you will need to show detailed personal financials for you and your business including aging accounts receivable, account balances, etc.  Even with one or two companies under your belt that are performing well, it is still tough to get a large sum.  So debt money for first timers is probably not the way to go right now, especially if the terms call for you to start paying it back right away.  The best way to secure debt money is from friends and family or an angel investor type.   Let them set the terms as long as it allows for at least a two year grace period before you need to start paying the money back.  You should include a clause that allows the option for them to convert the debt money into shares of you decide to open a formal round of equity funding.

If you are interested in looking for venture capital funding keep in mind how much money you think you need.  If your plan calls for $1 million or less, forget about VC money.  Even most boutique VC’s only invest in companies seeking more than $1 million.  They need to see that you need a lot of money, have great economies of scale, and will most likely need a second and third round.  Be careful about going this route even if your plan calls for $4 million in the first round.  Make sure you really need $4 million and that you are not just creating a business model to support the perceived need for that kind of money.  In my opinion, only experienced entrepreneurs should use VC’s for funding efforts because they know how the game is played and they understand when it is appropriate to involve a VC.  VC’s can provide fantastic resources for a new company because it is of course their goal to ensure that the company survives and grows.  Notice I said “the company”.  I did not say “you”.  Here is a quick list of myths and things that can be misinterpreted:

  • 9 out of 10 start ups do not fail.  Actually, about one third last a couple years, or more.  The reasons for when and why they fail, change models/directions, or dissolve vary from company to company.
  • When a VC says they are investing in your team, they really only mean that “as long as things go well”.  If things do not go well, then they will fire you.
  • When they say you are unique and that they can have some great doors to open as well as great “ins” to some companies you can partner with…be careful.  They will open the same doors they always do.  It is totally up to you to execute and hit your goals.  Remember, you started your own business to you can work for yourself right?  Well, if you choose the VC route, you will most assuredly end up working for them (not yourself).

Seek out possible angel investors through your own network.  You can also research local angle investment groups and go through their presentation processes.  Remember that angel investors will most likely have been hit hard by the economy just like everyone.   They are more likely to invest in proven entrepreneurs with one or two companies under their belt.  But if it is your first time and you can build a good relationship with a few angle investors, you can’t lose.  A great passive angel investor is an entrepreneur’s best friend!
One of the key factors to your original success will be this part of your strategy.  Create a plan for who you will target for fundraising and have plenty of back-ups.  Just because a few of your initial meetings go well; do not stop pitching investors.  Never assume you have any investment money until the check is in the bank!

Legal: Unless you are a lawyer, your Dad is a lawyer, or you have a friend that is a lawyer, you will most likely need to seek legal advice during this stage.  Of course, we all have a friend or friend of a friend that is a lawyer.  But you need some who knows what they are doing, has a good reputation, and knows how the fundraising game is played.  Just any attorney will not do.  Of course you are thinking how expensive that must be and generally you are right.

Look for a law firm that specializes in helping start-ups in your field.  Trust me, they exist.  They power of using a well-known firm when raising money can go a long way.  It puts investors at ease.  Sometimes firms can defer fees until capital is raised but it is not common.  Make sure that your attorney’s paralegal is doing the admin work (which is really most of it).  All you really want your $400 per hour attorney doing is negotiating with investors.  Everything else can be handled by younger people in the firm or paralegals.  Find firms than DO NOT bill for phone calls and emails.  Nothing is more infuriating (for anyone) than getting a bill for thousands more than you expected because of some phone calls and emails.  Communication never cost so much!

If all you need at the time is some documents for incorporation, then you can use online services such as legal zoom for a few hundred dollars.  Then at least you are legally legit and can focus on the larger details when the time comes.

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