David Piccione.com

Yesterday, I wrote that the current boom being experienced in the tech sector is about to come crashing down around us. To be honest, I didn’t anticipate the level of passion the article would stir up. There were a good deal of experienced opinions shared at ycombinator, and I may revisit the topic again soon.

For now, indulge the point I was making; is there anything that founders can do to isolate themselves as much as possible from the negative effects? Is it possible that even in a downturn, a particular company could find a level of success?

Of course it is. Back when the sector was hit hard in 2000, there were companies that managed to survive and grow. Even in a full on recession, the economy doesn’t stop. Knowing how to position yourself to take advantage of change will be key to your startup’s success in 2008. Even if I’m wrong, and the expected bust fails to materialize, following the advice here will give your organization better resistance to changing realities.

Understand Your Market

In a downturn, what will happen to the way your customers think? If you take a look at what’s happened in previous recessions, you can accurately predict the effects on your company. Traditionally, the mindset of a consumer changes in the following ways:

1. People pay more attention to purchases - Your consumer will be more critical of the value received from your product. This is especially true if your consumer is an advertiser. What you’ll need to demonstrate is a value for money that places your product high on the “need” list; the less likely your product - or the price of the product - is classified by consumers as a luxury they can’t afford.
2. People look for optimization rather than expansion - Your consumer is going to start looking to get more use out of what they currently pay for. It’s going to be difficult to launch a new product that requires a large investment. Instead, take a look at ways you can improve something a customer already uses for a smaller investment. Now is the time to check out the competition and see where you stand compared to them.
3. People act like the recession will last forever - Your customer will start to look at buying things in smaller amounts and lower price points. It’s more attractive to buy less of a product than more, even if buying more is a better value. Retaining the money in hand is a more pressing concern.

Play the Right Hand

If this is how your customer is thinking, you’ll need to position your startup to take advantage of their concerns. You can do this by adjusting your company as such:

1. Make sure your product is “real” - “Real” products address “real” needs. You’ll need to establish that your customer can’t live without your product - especially not now! Chances are, if you have end users that are already paying to use your product, this is a matter of perception. It’s time to focus on marketing: what does your product offer that others do not? What will the customer lose if they stop using your product? If you look at a company like 37signals, their products address needs that are perceived as essential. It’s doubtful that a Basecamp customer will cancel their subscription when they’re worried about their own sales. If you make your money from advertisers, take a look at what attracts them to your site specifically. How will you be able to prove to them that $10 spent with you is worth more than $10 spent with a competitor?
2. Offer efficiencies and savings instead of new features - Show the actual value in your product to your customers. How much time is it saving them? How much more expensive would it be for them to go elsewhere? If you know, spell it out for them. If you don’t, find out. Even better, look at your own efficiencies - are you doing things as best you can? Can you do them cheaper? Now is a great time to look inward and improve processes.
3. Focus on retention - In a down cycle, it’s difficult to translate a stay and hold mentality into a new sale. Because of this, put some extra effort into those customers that aren’t as happy with your service as they should be. Don’t let them become someone else’s win. Solve their issues, address their concerns, and put them back in your safe column. It’s the easiest sale you’ll make, and it’ll be easier to do now than when the market is up.

Things to Avoid

There are certain sure fire ways to ensure your company will implode as soon as people start to get jittery about their money. When you’re adjusting to survive, be sure to stay well clear of the following traps below. A special note however: If you happen to fall into one of these categories as a result of your deliberate strategy, it doesn’t need to be lights out. You just happen to be in a space that is particularly vulnerable, and you’ll need to be extra careful at the moves your organization makes.

1. Ad-based revenue models - One of the easiest cost savings a company can make is to cut its advertising budget. When this happens, you better be sure ads aren’t your only source of revenue. In 2000, almost all of the companies that went out first were those that relied on pay-per-click banner ads as their only source of income. It would be very optimistic to assume that more than one or two of our favourite multi-million dollar sites will be around in five years. Odds are that your startup is nowhere near their level. You may be able to mitigate the loss of ad revenue from switching to a pay-per-action model,- since the advertiser can then see real numbers - but overall it’s not a situation you want to be in.
2. Being recreational or “fun” - When people start to worry about their money, they reduce spending on leisure activities. In the depression, people were so concerned about making money that they actually took on extra jobs instead of having fun, which as seen as frivolous and risky. I’m not suggesting recessions are that bad, but staying out of this market is a good way to avoid being hurt unnecessarily by a slowdown. Admittedly, this isn’t a huge concern, but it’s something to keep an eye on.
3. Innovate at your own risk - In general, innovative ideas are going to be a tougher sell. The one area though where innovation will work is where it provides measurable efficiency improvements to the consumer. Case in point: Google. Releasing a search engine that provided a better result to the end user - saving them time - allowed Google to ignore - even capitalize during - the last market slip.

It’s About Good Business

An economic downturn is a time to separate the wheat from the chaff in business. Your startup will need to survive the harsh realities of stingy consumers and ruthless competition. You’ll do it by focusing on real needs, and improving results to the problems that don’t go away.

Recessions and crashes don’t do much except eliminate ideas that are purely based on speculation. If you can ensure your startup focuses properly, you’ll have no problem building a solid organization. If anything, you can rest assured that if your idea can survive and be fruitful in a recession, it will most certainly cruise through an upswing.

Over the next couple of days, I’ll be talking about the fact that it looks like we’re heading into another technology crash. With all the hoopla around the current business activity on the internet, that opinion is sure to be unpopular. Nonetheless I believe it to be correct.

Today, I’ll tell you why I think that way, and tomorrow, I’ll give you my thoughts on how entrepreneurs can best avoid being left in the pile of 2.0 refuse.

A Tail of Two Corrections

First off, a caveat - Crash 2.0 will be nowhere near as bad as 2000 was. The hype back then was outrageous IPO’s based on unrealistic profit expectations. Now, we have private acquisition based on unrealistic profit expectations. The VC’s are still there, but they’re pitching to a different audience. It’s a different environment within our industry.

It’s also a different market overall. In 2000, the market was dominated by tech. The rampant speculation that was occurring had an effect on the average investor because there was no way for him to avoid being a part of the industry - dot coms were everywhere. Today, tech is only a segment of a market that is structured differently. This means that our little piece of over-valuation and acquisitions matter less to the average man on the street; he’ll be affected likewise.

The problem for those of us who are directly involved in web 2.0 is that we are now part of a market that we have less control over. Regardless of how secure our sector is, we’re going to be affected by the events in other areas. These events, as witnessed over the last week or so aren’t all that encouraging, to say the least.

Are we staring into a recession, or even something more serious? It’s possible, but still subject to healthy debate. Even the most optimistic however, don’t suggest that we are heading into anything but a bear market. Even the slightest correction in the index however will be magnified in effect in our sector - one built on speculation and venture capital almost exclusively. When the VC’s other earnings dry up, they’ll be less likely to take a chance on your latest Facebook app.

For comparison, 1987; a strong housing sector was destroyed by a correction in a market dominated by industrials. That’s very simplistic, but it serves to illustrate the point. At the end of the day, it was better to be a part of the index than a part of a booming sector within it.

Icing on the Cake

Given the conditions outside of web 2.0, what kind of security do we have within that will shelter us from a market correction? The truth is, our industry is speculative right now - as it was in 1999. Look at the leaders - Facebook, mySpace, Digg, YouTube. Being ad based, each of these companies generate no income from those actually consuming the product.

Consumer loyalty is directly linked to the amount the consumer invests out of pocket. Apple has a fiercely loyal base partly because they feel really stupid spending an extra $300 on a product that isn’t something special. With social networking sites the amount spent is zero - and the loyalty corresponds.

Facebook and mySpace are only as valuable as the next big thing. In other words: they are fads. Now, fads can be successful if they’re managed right, but they all share one thing in common - they won’t be around tomorrow. If you need proof, look no further than Frendster. In 2003 they had 20 million users. Today, they have less than 1 million die hards. Those are fickle crowds.

So, why is this a problem? Because eventually investors - be they VC’s or acquiring organizations - want to see some growth in their investment. With a fad-based industry, all value becomes speculative and opinion based. In order to make money, investors need to assume that tomorrow, the perceived worth of the product will be higher. Let’s pick on Facebook a little. Facebook now needs the next investor to believe it’s worth $2 billion at least. - invest $1 billion, recoup $1 billion. Sorry if I laugh a little.

This whole thing works until there is a measurable instance of a product demonstrating its actual value. It doesn’t have to be the product itself, just something close enough. If, for example, it came out that Digg was in the red, or not nearly worth as much as the $200 million BusinessWeek thought, Facebook would have a tougher time convincing potential investors of its value.

Any industry built on such rampant speculation is doomed to be as temporary as boy bands and leg warmers.

Facebook Apps - Beyond Madness

Bubble 2.0 takes things a step further. Not only do we have the general investor speculation in copycats (quick, how many Technorati clones can you name in 15 seconds?) but we have investor interest in products built upon other products. Ladies and Gentleman, the folly of the Facebook application.

Let’s put this into perspective: We have a product that has a monetary value of zero to its users being used to build further products of negligible value - and these products are actually being sold or invested in!

Let’s avoid the elephant in the room - putting 100% of your chances of success into the outcome of someone else’s business plan - for a second. There is zero evidence that Facebook users value the site enough to pay to use it. There is zero evidence that Facebook advertisers value the site enough to maintain a long term relationship with it - and thus ensure that any market is there for your application. Somehow though, there’s enough money to be made on a small fraction of that user base to recoup a sizable investment, or so the thinking goes.

I just don’t get it. And Facebook only scratches the surface. I’m sure that some fool, or collection thereof will purchase Twitter - only to lose a heck of a lot of coin - any day now.

How Could This Bubble not Burst?

Let’s take a look then at situation then:

1. We’re heading into a bear market, if we aren’t already there.
2. The boom in our industry is fueled primarily by speculative values and notional potential future revenues
3. The social network audience is fickle, investing little and demonstrating high mobility.
4. We have people investing in products that are naturally restricted by the success of a product that is - as of yet - of dubious long term stability

I’m sorry to those that are caught up in the madness, but you have to have a few screws lose to think that we’re not in the middle of a bubble. There are scary signs all over the place right now, and it seems that many of us won’t be as wealthy this time next year as we are now.

So what do the smart start-up do? Tomorrow, I’ll take a look at some of the ways that an entrepreneur can avoid being left out to dry when the inevitable happens.

I spent some time watching Canada’s U-20 team eliminate themselves from the world cup on the weekend, and set a record in the process. Canada is now the only host nation ever to not score a goal in the history of the tournament. We can now add this to our other distinguished record of being the only Olympic host nation never to win a gold medal - twice.

It seems there’s something in the Canadian psyche that doesn’t lend itself to being good at finishing the task at hand. While we as a nation tend to be good at consensus building, we lack that ability to seal the deal, we collectively lack the killer instinct.

As a leader, you need to be able to develop this touch in both yourself and your team in order to be successful. Those of us in sales positions see this as a given, but it’s equally important for the rest of us as well. Finishing as deliberately as we start is the way we are evaluated by our peers and ultimately, it’s the way we evaluate ourselves.

Just Say It

There is an element of reckless abandon built into those that possess the instinct to close. In some cases this comes naturally and for others it is developed, but regardless, it exists. Otherwise known as getting to the point, this skill can sometimes cross the boundary of situational manners into the land of foot firmly in mouth. Nonetheless, for every misstep there will be at least an equal number of wins.

Actually having the strength to say anything at all is a good first step, as anyone who has ever approached a complete stranger will attest to. Learning to say the right things comes with practice, and even the best sometimes get it wrong.

The art of saying what you mean is critical to providing understanding even if it ruffles a few feathers, and is a great first step to establishing a killer instinct.

Just Do It

In a similar vein to saying what you mean, doing what you mean is key. It sounds ridiculous, but it’s important to ensure that our actions are intentional; we do only what we want to do, the efforts required to bring us closer to our goal.

Often, we can begin with a clear start and end up working in a manner that is more reactionary than intentional. Once this happens, we lose the power to win. As in sport, the key to the game is forcing the opponent to play to your strengths, and not the other way around. Momentum is the way to win, and the same holds true in all tasks that we undertake.

When we control the momentum, and control our actions to ensure we do things that we’re intending to do we increase our chances of being able to finish with the results that we expect.

Just Finish It

As hard as it is to start a task, it’s even more difficult to finish it. Many times it’s hard enough just defining what “finished” is.

The art of the finish starts with well defined goals. Allowing your team to know and understand the end game enables them to continue to work towards it, and you to know when you’ve reached it. You should prioritize work and effort towards your goals, making those tasks that get you closer to the end most important. Again, obvious; but not so much.

In addition to this, to be a successful finisher you’ll need to understand some Voltaire: “The perfect is the enemy of the good.” In other words, being finished is equal to “good enough”. You’ll never be able to look at a task and say, “I have nothing left to do” so don’t equate that unreachable state with being finished.

It’s About Confidence

In the end, the killer instinct comes from confidence. The less confident you are about your teams abilities, the less likely you will be able to finish and win. The only way to build confidence is to practice. By practicing we fail, by failing we learn and by learning we build confidence.

Monitor and gauge your ability to seal the deal (both literally and figuratively) and you’ll avoid setting the records you’d rather not be remembered for.