What sort of startups will work in 2009?
January 5, 2009
Does this describe your startup? In the wake of the greatest destruction of wealth in human history you should ask yourself what sort of business are you running and how you are running it. We glorify companies that grow quickly. Just look at awards such as the Inc. 5000 - ‘The Fastest Growing Private Companies in America’. What is so great about fast? What do you give up when you go fast? Quality? Sustainability? Responsibility? Morality? Profitability? The judges at Inc. don’t even pretend to care about and of those things. They explain what it takes to make the list:
“If your revenue in 2005 was at least $200,000 and revenue in 2008 is at least $2 million then you may have what it takes to make the 2009 Inc. 500|5000 list. Send us an email to receive the application today! Please note that independent contractors and public companies are excluded.”
In the old days entrepreneurs would build their businesses to succeed; requiring a focus on profits. Revenue didn’t really matter as long as you grew profits. Wall Street helped entrepreneurs understand that profits didn’t matter as much as scale. Get as big as possible regardless of the financial or moral costs. Take big risks, bet the farm.
If you demand and depend on profits to run your company you are forced to go slower, take fewer risks and as a result you are often more aware of the way you run your company. When you are going at lightspeed sometimes you don’t notice the people you are running roughshod over. When you are taking it slow, focusing on organic growth you can’t help but be a better corporate citizen. Slower growth means you can spend more time with your family. Slower growth means you don’t need to raise as much money (don’t count on being able to raise much in 2009/2010). When you slow down a little you make as many mistakes, but they are almost always smaller and easier to resolve.
Wall Street has proven that everything we thought we understood was wrong - or at least it is wrong now. Michael Lewis has a great article in the New York Times titled, “The End of the Financial World as We Know It” and points out something that scared me when I read it, “Good God, the world seems to be saying, if they don’t know what they are doing with money, who does?” I remember getting offered shares of the AudioNet IPO. Looking at the business model I was fairly sure it would never work. Of course, AudioNet turned into Broadcast.com and then was purchased by Yahoo! making Mark Cuban a billionaire. The good news for guys like me (i.e. entrepreneurs who prefer to bootstrap their businesses), this sort of stuff is going to happen less and less.
Don’t get me wrong. Had Mark and Todd focused on slow growth at AudioNet they would have most likely failed - the velocity of their company made them rich. But I think it is time to accept: that was then, this is now. I wouldn’t recommend starting a company that won’t generate profits in the nearterm. There will be exceptions like Twitter and WordPress. Tried and true models - selling stuff for more than it costs to make. Providing services for more than they cost to provide. Building and selling things. These are the sort of companies that will work in 2009.
Don’t worry, while you are generating those monthly profits, paying yourself a decent salary - you are building enterprise value. Maybe in five to ten years it will be time to sell - time to take some money off of the table. But maybe you will simply enjoy growing your $1-10MM company and the fruits it allows. The vast majority of people who liv
e in all of those big houses in Highland Park and Preston Hollow built their companies slowly over the course of years and decades. Slow down and live - you can’t help but get rich along the way - 5-10% growth wont get you in the Fast 50, but it will double the size of your business in five years without betting the farm to do it.
For me? There are scores of amazing treasures just ripe for the taking. Kiss a bunch of frogs and find a few princess. Over the past month we took over SevenLayer and Friday made bid to buy JPG Magazine. The hard part is trying to decide which ones we should buy. Worst case, we just buy goats (inside joke)… :)
