Bootstrappers will shine in the startup depression

Some really smart people have commented publicly about the US and global economic crisis at hand and what that means for startups. Jason Calacanis was one of the first, followed by Fred Wilson and Ron Conway (my good friend Ian Clarke has jokingly referred to me as the Ron Conway of Austin because I'm an early stage investor in so many different Austin companies). As I've been fundraising for OtherInbox, I've talked with many other entrepreneurs, advisors and investors and wanted to share a summary of what i've been hearing and how its affecting my direction at OtherInbox. Each comes at it from slightly different perspectives.

Jason, an entrepreneur, takes a very introspective view of how he wants to respond to adversity and who he wants to be as a person. He says the three main causes of startup failure are poor execution, a poor idea or external factors (in this case the market) and advises startups to focus on execution and make the most of the down time by being lean and acquiring good talent.

Fred Wilson, a venture capitalist, explains the view of a well-funded company with cash reserves of its own and experienced investors with deep pockets to draw on in tight times. He points out that companies who are not profitable or growing could have trouble, but that companies that are doing well shouldn't have trouble because VC's have deep pockets and will invest more capital to help weather the storm.

Ron Conway, a prolific angel investor, looked from the perspective of entrepreneurs about to take the plunge and raise angel money. He cautioned them not to quit their day jobs until they have secured funding for at least one full year of operating capital.

Ajay Agarwall, a venture capitalist from Bain Capital Ventures and friend from when we both worked at Trilogy software, pointed out that the typical Series A investment takes 7 years to mature and that 7 years from now is probably the right timeframe for the economy to recovered and growing. Consequently, he thinks that the next year will be a great time for smart venture capitalists to make early stage investments. He cautioned that later stage companies that are not profitable and have a shorter time horizon are going to have a tougher time raising capital over the next few years.

My first company, SKYLIST, saw incredible growth during the last recession. I started it in 1996, but we really started to boom in 2000 as the dotcom bubble deflated. True, it was the first time when I was focused on it full time, and not going to college or working at Trilogy. But I think the reason for the growth was that we were riding the rising tide of online marketing and email marketing in particular.

Even though the overall economy was down, some forms of online marketing grew. Marketing budgets were scrutinized and cut. Broadband Internet became pervasive and online marketing boomed because the audience was finally there and it was more measurable than traditional advertising. Budgets shifted from offline to online. Even though the total budgets were shrinking, the total amounts allocated to online were growing.

One way to be successful in a down market is to find these niches that may be growing as a result of shifting budgets and priorities. With currency, when the value of the dollar goes down, the value of gold goes up. Where is the gold in the market now? What opportunities have been created as a result of the credit crunch?

As I've been fundraising for OtherInbox, the current market conditions have certainly affected my goals and risk profile. I'm inclined to raise more a little more money and make sure that I give myself a longer runway. I'm searching for ways to generate revenue sooner than originally planned to cut my burn rate.

This is where bootstrapping will shine. All things considered, I'm kind of wishing I was bootstrapping a startup right now and am looking for every way to make OtherInbox more like a bootstrapped company. Bootstrapped companies are lean and efficient. Bootstrapped companies delay every cost as long as possible. Bootstrapped companies are resourceful. But most importantly, bootstrapped companies are forced to focus on the Right Thing at the Right Time because there is no alternative.

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[Byron Van Arsdale]

Josh:

Drucker said:
“Because its purpose is to create a customer, your business has two purposes and two purposes only: Marketing and innovation. Marketing and innovation make you money, generate sales, produce profit. Everything else is an expense...”

Combine this with "enlightened" bootstrapping and you have a powerful combination in a down market.

Agreed re. looking forward to the year ahead.

Byron

[Byron Van Arsdale]

Josh:

Drucker said:
“Because its purpose is to create a customer, your business has two purposes and two purposes only: Marketing and innovation. Marketing and innovation make you money, generate sales, produce profit. Everything else is an expense...”

Combine this with "enlightened" bootstrapping and you have a powerful combination in a down market.

Agreed re. looking forward to the year ahead.

Byron

[Andy Meadows]

Josh,

I was thinking this about this very concept last night. In the face of a tight economy, it will be the bootstrap mentality of entrepreneurs (funded or not) that allows them to do more with less, innovate in the face of challenge, and be creative with their resources.

I look very forward to the year ahead.

Andy