Recession and Growth and Economy and Finances and Small Business

Entrepreneurs say businesses must act quickly to survive recession

October 20, 2008

Indiana's most seasoned entrepreneurs aren't standing idly by as the nation slides into what many economists believe will be the deepest recession since the early 1980s.

Entrepreneurs and veteran business advisers say fledgling Hoosier businesses must act decisively to survive this downturn, no matter how severe. And some firms that make the right moves might even thrive.

"You always need to be looking for the opportunities the market gives you," said Barnes and Thornburg LLP partner David Millard, who works closely with many Indiana entrepreneurs.

"It's wrong to force what worked in a good economy on to a market that has radically changed. It's key to do an assessment of what opportunities this market offers. A changing market always offers opportunities. You just have to be more creative than anyone else about finding them."

But fast-growing businesses in their early years of existence operate under a thin margin for error. Entrepreneurs who hesitate to adjust to the recessionary reality will see their prospects rapidly disappear.

"Don't be the deer in the headlights," said longtime Indiana angel investor Bob Compton. "Watching a train wreck is not going to help you avoid getting hurt."

Entrepreneurship is a game that often attracts the young and ambitious. Compton, 52, worries that many of Indiana's most promising innovators have never endured a true recession. It's far more ominous than cyclical slowdowns in particular industries.

Compton vividly recalls the 1987 stock market crash. Back then, he was a venture capitalist with six young firms in his portfolio. A board meeting was interrupted when news broke that the stock market had just plummeted 20 percent.

Compton knew he had to act immediately, but wasn't sure what to do. Banks still had deep pockets, he said, but they stopped lending and began calling in loans--just as banks are tightening terms today.

"These are going to be tough and lonely times for Indiana entrepreneurs," he said. "The older entrepreneurs who've been through this before were taking action last week and the week before."

It's a cliche, Compton said, but in a deep recession, cash really is king.

Today, he is chairman of two of Indiana's fastest-growing high-tech firms, e-mail marketer Exact Target and voice messaging specialist Vontoo. In recent days, he advised both to immediately analyze their cash flow. Unable to secure credit of their own, customers will attempt to stretch their terms. And suppliers will lengthen their delivery schedules.

So entrepreneurs must contact all their business stakeholders as soon as possible. The priority is to reassure them of your own strength and continuity--and to gauge theirs. Compton suggests a personal touch is critical. Standard dunning letters are too easy to ignore.

"Those are actions you want to take right now," he said. "You don't want to wait another month to find out 20 percent of your receivables are now 90 days overdue. The longer you wait, the harder they are to collect."

As company coffers dwindle, executives are tempted to make draconian cuts in head count to balance the books. But small, entrepreneurial companies seldom have much fat to trim. Retraction can create a self-fulfilling downward spiral, because the only people available to let go are key players.

Instead, Compton said, a better strategy is to continue hiring strategically, focusing on bringing aboard employees who add revenue. There will be lots of quality talent on the market, as other companies retrench. And it'll send a signal of strength to existing employees.

Marketing is another area that's tempting to slash. But changes require the proverbial scalpel, Compton said, not the ax.

In a severe recession, startups need to spread their message to new customers more than ever. Compton said smart entrepreneurs will spend primarily on inexpensive advertising campaigns that spit back lots of precious customer research data.

Stay aggressive

Sticking with such aggressive strategies may take fortitude, particularly if economists' fears about the severity of the recession hold up. Many think it will be a far worse downturn than the 2001 or 1990-1991 recessions and also will be more prolonged, perhaps extending more than a year.

Even in a recession, there is an abundance of business opportunities. They're just different from the prospects available in normal markets, said entrepreneur David Becker, 54, who built successful IT firms like Re:Member Data Services and First Internet Bank of Indiana.

Most companies, for example, will concentrate on their core business. But that doesn't mean their needs for the downsized areas go away. Instead, companies will look to outsource.

"If you've got a great value proposition, it's a great selling time," said Becker, who mentors young entrepreneurs. "You can step up and win some opportunities."

However, that lesson is true only for established ventures. Brand-new businesses are going to face epic struggles getting off the ground, at least for the near future.

"If you've just got an idea and a concept on the back of a napkin, right now, you're SOL," Becker said.

Preserve profit

Indeed, many angel investors have seen their wealth shrink with the stock market, leaving less money available to invest in risky new companies, said Bill Joos, a consultant who once served as vice president of entrepreneurial development for legendary Silicon Valley venture capital firm Garage Ventures.

Joos, who will speak Oct. 27 at Techpoint's annual "Indiana Entrepreneur Bootcamp," emphasized that startups must approach increasing market share carefully in a recession.

There's still room for growth, Joos said. But investors won't have much tolerance to fund unprofitable companies.

"Earn more than [you] spend," he said. "Previously, the goal was often to capture market share first and have the investors cover the operating loss during this process, essentially trading market share now for profit later. Except for rare exceptions, this has now flipped."

Perhaps the most important advice entrepreneurship veterans share is psychological: Don't let the continual drumbeat of negativity that accompanies a recession wear you down.

Donald F. Kuratko, Indiana University's Jack M. Gill Chair of Entrepreneurship, said the strongest startups will emerge from the recession and flourish. The founders just will have to work a little harder to get them off the ground.

"This is not the time to be depressed and say this is a horrible time for entrepreneurs. Instead, this is a time to spawn a new entrepreneurial age," Kuratko said. "Buckle up. It's going to be an interesting ride."

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