Should the pandemic stop you from starting your new company? What are the risks? Are there companies that started during a crisis and survived? In the 3rd episode of Open For Business, Blair Lyon, VP of Marketing at Linode, and Swapnil Bhartiya tried to get answers to some of these questions.
Here is the rush transcript of the show:
Swapnil Bhartiya: I’m your host, Swapnil Bhartiya, and welcome to Open For Business with Blair Lyon. COVID-19 has really disrupted our lives, but it has not brought the world to a standstill. While we are locked inside our houses, we still need resources to be functional and also run our businesses.
Like any other crisis, this pandemic has created an opportunity for new businesses, and I have talked to some businesses they just started, and those businesses did not exist before because they see some problems that they thought they could solve. I have talked to them and they said, “Yes, this is an unfortunate time but it also is a time when people need help.” But starting a new company in these troubling times has its own set of challenges. In today’s episode, we’re going to talk about some of these challenges and how you can successfully start a business during the pandemic.
Blair, is it really a good time to start a new company?
Blair Lyon: This is the number one question I get from entrepreneurs. And, launching a startup is always going to be a challenge, but there can be real advantages to opening a business during an economic downturn like what we’re experiencing now. For example, I mean, we all know the email service provider Mailchimp, right? I mean, they launched in 2001, right when the dot-com bubble burst. And, they now have a valuation of, I think, like over 4 billion and revenues of over 700 million.
Or Warby Parker, the eyeglass company, founded back in 2010 by Neil Blumenthal and his partners during one of the worst economic recessions in history. Today, the company is worth 1.7 billion.
Other examples from that kind of 2007, 2009 time period, like Uber, Square, Venmo, Airbnb, and others. I mean, they all were successful starting their business in a down economy.
Now, when I first started my company back in ’99, tech companies were on fire. It seemed like there was a big announcement almost every week of companies selling for millions or going IPO.
I went through like the normal process of starting my company, bootstrapping it for the first year, raising friends and family the following.
Then, in early ’01, hey, found myself with a legit company with revenues and some name-brand customers. But, by this time several VC firms were courting us, and we ended up closing a $15 million round at a $45 million valuation. You know, things were good until the economy fell off a cliff, when the dot-com bubble finally burst.
It seemed like overnight, our customers paused their projects and the world was turned upside down. Now, we were lucky to close on our funding when we did, but we faced a tough road ahead in a market that suddenly stopped buying. My company was a marketing tech business and when a recession hits, kind of the first and easiest thing to cut, of course, is advertising spending.
So over the next year, we have plenty of hardships, but we also benefited from some of the opportunities that can arise during an economic downturn. So I wanted to share a couple of them with you.
So first, when times are tough customer needs and ROI, return on investment, really rule. For us, customers had less to spend but what that meant was that what little money they had had to go further and drive better results. So we had to really switch our whole messaging. So we quickly realized that our kind of cool product demo and our flashy marketing technology, we weren’t getting any meetings anymore with that pitch. We had to change our messaging and approach to one that focused on performance marketing and demonstrating higher returns than the other traditional tactics they were using. The result was prospects responded and we started to grow again.
So, that was a really good one. Another one is that the reason why now might be a good time is when money is more scarce, you end up kind of focusing and learning faster, no matter if you are just raising your first round or like in an early growth phase, scarcity of money can really help you laser in on what matters and how to build a solution that customers actually want to buy.
Now another key benefit can be less competition. The bigger companies aren’t as quick to build out that new product that competes with your idea, and the other entrepreneurs may be hesitant to jump into a market that’s under stress. I saw this really firsthand with my business when the pace of new competitive offerings went from what seemed like, God it seemed like one every month, to like nothing.
Another thing that was interesting when I was preparing for this call swap was, I talked to a friend of mine who’s in the investment community and he reminded me of another really cool benefit that you get during these downtimes. And his comment was, “A recession leads to less noise and more signal.” Now what he meant by that is getting actionable insights on, let’s say, product-market fit or customer experience or competitive differentiation, and so on, is hard. And even harder in a noisy, crowded market. During a recession, it can be much easier to kind of see and validate those signals from the customers about your offering that will allow you to more effectively solve customer needs and build a more successful business.
Let’s see. I would say finally if you can grow during a recession, then you’re on fire in a good economy. Just goes back to what I said earlier, in these downtimes can really help you focus, learn faster, zero in on customer needs, pick up on those cues from the market that can help you win. And yeah, it may be like a lot harder in certain ways, but it can also be easier for you to pivot and tune your business when you are small and growing. If you wait, when you’re big and slow, it can be really hard for you to adapt to the market to be successful.
Swapnil Bhartiya: It’s a tough time. So there are unique sets of challenges. I mean, of course, there are opportunities, but unique set of challenges because, as you rightly mentioned, companies will be cutting their advertising budget, and other companies may be looking at going a bit thin, they may be laid off. So, what are some kind of challenges which are unique to this crisis, which entrepreneurs face? I mean, it’s not that we have seen crisis every now and then there was last recession and now we are most probably going into the next one, you have been through one, as you mentioned. So what are some unique challenges that companies face and how they should weather them?
Blair Lyon: Well, I mean, on the bad news is that a lot of things will be harder now, but the opposite, the good news is that with every negative, there’s also a positive opportunity. So let me talk about a couple of these.
So first, starting your business in a recession will typically result in you starting smaller and staying a smaller business longer. But the benefit as we touched on earlier is that it also creates more discipline, more focus, which means that your business is going to end up being stronger. So when times are good, you will grow that much faster and be more resistant to competition or other marketing market challenges.
Now sales could be harder. Yeah. I mean, that could be true, like I experienced, but it can also be easier. When times are good, your prospects really, won’t have any reason to change. It’s that whole kind of, why change, why now? Why your product message?
So why should they change? Things are good. They’re making money. Adopting your solution means work and risk for them. So often it can be easy to get happy meetings or someone to try or demo your product, but actually really difficult to get them to adopt it.
When a recession hits, prospects are now motivated to find new solutions that deliver better results for less. Often, jobs are at stake and big money is at risk. So you really have to pay attention to that.
Also, marketing is often more difficult, but alternatively, advertising costs could be a lot more affordable. So, that’s a potential benefit.
And, another one you’ve got to watch out for is that if your product or service is kind of a luxury item or a nice to have, it’s going to be more difficult for sure in a recession, but like it was for me, if you can switch your messaging to more of an ROI based message, it can actually be much easier to get meetings and to get companies to adopt your offering.
Now, starting funding conversations is always difficult, but I think during a recession, it’s especially difficult to kind of kick start those initial conversations, but once you’re in, it can actually be easier or faster to close a deal.
So recessions tend to slow the pace of new startups, which means less competition and a surplus of investment capital that needs to be spent. So if you can kind of get into a slot with a potential investor or chew, you’ll find sometimes that closing your deal will actually go faster.
Another one is you will raise lower amounts of investment capital at lower valuations, which isn’t great. The good news though, is that overall costs could actually be lower. Recessions’ means better access to talent at lower rates, cheaper advertising, better-negotiating power and so on. So you may not need as much capital as your business plan initially forecasted.
And then also you really need to be able to always demonstrate revenue. And if you can do that in a down market, then your business will be that much stronger when times are good. So that’s another thing to kind of keep an eye out for, if you can really demonstrate revenue, then go for it. I mean, I don’t see any reason why you should potentially wait.
Swapnil Bhartiya: If you can successfully start and run a business in a tough time, of course, you will have a much more smoother sail in, when everything’s calm around it. But just for a lot of companies that I’ve seen, they’re putting a pause on their expenditure and all those things but is it like when you can see market forecast and you see how it’s based on this crisis, which will be over soon, we might have a vaccine and the economy will start to open up. Does it kind of make sense that, “Hey, no! Why? Just, let’s wait!”
Blair Lyon: I think we’ve already kind of outlined that there’s a lot of companies that have been very successful, not waiting. And I think there are some real advantages to going for it, but I think there are a couple of points that you should pay attention to. Right.
So, if you’re a luxury offering like I mentioned before then, yeah. Maybe you should wait. Or if you want to maximize your valuation. You want to get the most money for the least amount of equity. Yeah. You might get better deal terms in a growing or up the economy. Or if you think your window of opportunity is really long, like you’re not a rush then drop into the market when it’s convenient for you.
Or if you’re shooting for the moon and revenue is a long way out then, yeah. You might want to wait a little bit because you might want to maximize kind of the amount of capital that you can raise at the lowest possible valuations because you know it’s going to be a long time, you’re going to have to raise multiple rounds potentially. So, if you need maximum capital and revenue’s a long way out then, yeah. You might want to wait.
Swapnil Bhartiya: Yeah. It’s not a good time to start a hotel, a restaurant business, for sure. So, okay. Let’s say that you are willing to pull the trigger and you’re like, “Yo, I want to go ahead and, and move forward. And to start a company in these times.” Are there any kind of precautionary measures that they should take? So as to ensure that they are lowering the risk, as you said, to maximize their profit before they actually start the company?
Blair Lyon: I think it’s really doing your due diligence on the investor. So, check the performance of the other companies in the investor’s portfolio. Like what stage are they at? Their success rate? Have they had any big exits? This will really tell you how aggressive they will be or how desperate they are or how comfortable they will be, and kind of looking at the longterm.
So really look at those and try and find the right partner for your business by really investigating that say venture capital or angel round investor.
And then also just keep in mind what we’ve talked about that focus your offering on what people need, because if you’re a needs-based solution or solving a core problem, you’ll thrive when markets are low and you’ll thrive when markets are high.
So that’s kind of the always fundamental guidelines. We always give entrepreneurs.
Swapnil Bhartiya: Awesome. Thank you. There was some good piece of advice. And, after listening to what you said, I think there is no right or wrong time for starting a company. If you think you’re ready, if you see a market there that’s the right time. So once again, thanks for talking to me. I hope, I think that next time you’re taking your vacation, so we will be missing our show next week, but we will see you after that week. Thank you.
Blair Lyon: All right. Thank you, Swap.