Entrepreneurship

Growing your business in a recession

Posted on by Ed Sim

I read a great article by James Surowiecki in the New Yorker the other day titled "Hanging Tough."  In the piece, James gives a historical perspective on companies that thrived and grew during previous recessions by increasing spending on on advertising and R&D.  While I am not advocating that companies go out and blow their cash on ads and spending on far-out development projects, I do want my readers to understand that it is possible to gain market share during difficult times.

One way to read these studies is simply that recessions make the strong stronger and the weak weaker, since the strong can afford to keep investing while the weak have to devote all their energies to staying afloat. But although deep pockets help in a downturn, recessions nonetheless create more opportunity for challengers, not less. When everyone is advertising, for instance, it’s hard to separate yourself from the pack; when ads are scarcer, the returns on investment seem to rise. That may be why during the 1990-91 recession, according to a Bain & Company study, twice as many companies leaped from the bottom of their industries to the top as did so in the years before and after.

A personal example that sticks with me is of former portfolio company GoToMyPC which is now Citrix Online.  We had our huge exponential growth years from 2000-2004 during a difficult time in the technology markets.  And yes, we did increase our spending on ads and at one point in time became one of the largest advertisers on the web.  However, what we did was negotiate for pay for performance contracts where we would only pay if we signed up new customers.  While not a novel idea today, it was quite novel back in the day.  Subsequently we were able to turn a fixed cost that could have been a huge cash drain on the business into a variable cost.  In addition, our ads had tremendous impact because every other competitor was not advertising and our brand became quite recognizable.  Were it not for our creative and aggressive approach to acquiring customers, I would argue that while we would have been ultimately successful it certainly would have taken a lot longer.  So reread the article and think about ways that you can creatively grow your business by turning a fixed cost into a variable cost based on revenue growth and you may find a way to efficiently grow while managing your precious cash.  Remember in times like these, everyone is willing to negotiate and what may have been a hard deal to come by 2 months ago may be possible today.

Published by Ed Sim

founder boldstart ventures, over 20 years experience seeding and leading first rounds in enterprise startups, @boldstartvc, googlization of IT, SaaS 3.0, security, smart data; cherish family time + enjoy lacrosse + hockey

8 comments on “Growing your business in a recession”

  1. Ed,we’ve been hearing so much negative press about business growth and star-ups in this recession; it was refreshing to read your post and optimistic take on the current climate. This is a topic investors at upcoming FundingPost events will also be addressing.For more information about the next May 13 event in NYC you can visit: http://www.fundingpost.com/events.asp

  2. Ed, pay-for-performance is also the business model at our innovation consultancy Fahrenheit 212. Companies seeking to innovate for this recession and pull off the kind of positive outcomes enjoyed by Kellogg’s, Apple, et al [as Surowiecki’s piece delineates] should find partners who share the risks and rewards of bringing bigger ideas to market faster. That’s always been our M.O. at Fahrenheit 212. http://www.fahrenheit-212.com

  3. Ed, Very thoughtful article. What you are saying is so true. If we look at it with a positive frame of mind, this is actually the best time increase advertising. If we believe that advertising brings in sales, during times such as this the effectiveness of advertising is diminished because of the consumers’ inertia to indulge in spending. Therefore there is a need to increase the size of advertising now. Best part is, we don’t have to increase ad budget for this. Because everyone is willing to negotiate, even if we keep the ad budget same as last year, the number and frequency of ads may increase 50-60% now. Even the spending on online classifieds, which are used by small businesses is down over 30%. I just wonder how so many businesses failed to provide for tough times while making their business plans and business projections. I read some good content related to business plans and models from http://www.financialmodel.net. Check out their blog as well.

  5. Hey Ed,

    As you know, I was highly involved in the CPA work we did at Expertcity / Citrix. It was a fun time to have money and a great product. Publishers who claimed that they “never did Cost Per Acqusitions deals” did them with us.

    I wrote an article recently which focused on some of the other positive aspects of a downturn for startups, entitled: “10 Reasons To Start A Company In An Economic Downturn”

    http://www.infochachkie.com/downturn/

    Take care,

    John

  6. Nice post!
    Incidentally there is an interesting website that is specifically dedicated to recession victims.It offers help and discusses all issues related to recession- http://www.angstcorner.com. It’s worth a visit!

  7. I have a slightly different view. The lean survive and the fat don’t. Take that beyond advertising spending and apply to overall sales, marketing and promotion.

    The ones that spend more frugally and are realistic about their growth, survive.

  8. Yes, I’ve noticed the same. Ad networks and alike are definitely more receptive to bartering in tough times. I find that more people are looking to buy based on performance, which can be beneficial for both sides providing the volume is there. You can also obtain more standout if your competitors are cutting back, which is normally always a good thing.

Comments are closed.