SmoothSpan Blog

Amid a weakening jobs outlook, Apple’s worst trading day in 32 months,  the NASDAQ had its worst day in nearly 5 years, and a variety of pundits predicting an imminent and severe dot com crash, it seems likely we’re looking at a recession to be declared some time in 2008.  There may still be time for the Fed to cut enough, and it certainly helps to have an election year where neither party really wants to terrible an economic scenario, but the economy is very much a momentum engine.  Currently that momentum is bound towards recession.  It will take a lot to reverse it.

Suppose we do get a recession, what does it mean for tech?  Below are my thoughts about strategy and trends to consider in a time of recession.

1. Choosing #1, #2, or #3?  Expect a flight to quality

People get conservative when times are tough.  This accounts for the normal “flight to quality.”  When things are already tough, people are dealing with too much uncertainty.  They want to improve their odds by going with proven quantities.  Bet on the sure thing.  Don’t get too close to the edge.  The Ciscos, Googles, Microsofts, Oracles, and SAPs can all benefit from this effect, although their numbers will often stink during bad times.  Nevertheless, they have the momentum and reserves to hang in when others suffer much worse.  If you’re #5, #6, or #7 in a market, it’s time to get realistic about your chances, and about how much you may have to change to survive.

We’ll see the flight to quality phenomenon manifest in a variety of other trends and strategies below. 

2. Experimentation by Business Buyers will go on hold;  Consumers will experiment more

Businesses will move away from starting new projects in tough times.  If nothing else it will be that much harder to get budget for something new.  Existing projects will be reviewed to see which ones may be cheaper to cut now than see through to the finish line.  Projects that offer near term ROI and especially cost savings will be prioritized over projects that largely offer softer benefits.

Curiously, as long as it isn’t too expensive, consumers may experiment more.  Many will want to take their minds off their troubles, so jumping on the Internet is a way to do that.  Don’t look for them to click through on ads very much though.  It’s a time to build mindshare not pocketbook share.  Save monetization for when the recession “all-clear”  has sounded and economic growth resumes.

The intersection of these two will be the grass roots.  Big IT projects will find it hard sledding.  Grass roots adoption of things like Enterprise 2.0 or SaaS will happen despite IT because Business Users can make it happen cheaply.  Now is the time for IT to get on board those trains or get left behind.  Projects that succeed in hard times have much higher visibility than those that succeed in good times.  The same is true of failure.

3. It’s an opportunity to gain share, so be hyper-competitive, sell like you’ve never sold before, and don’t forget customer satisfaction

Speaking of gaining share, it’s a well-known competitive move to double down your bets when times are tough and your competition are tightening their belts.  Whatever your company does best, you need to find a way to do it even better in tough times.  If you are the low-cost producer, find a way to cut costs further.  If you build the best product, take this time to widen the gap between you and your nearest competitor.  Share taken in markets like these is hard to win back when the pendulum swings and times are good.  The reason: the share taker picked up momentum in bad times that will only accelerate in good.  Those that hunkered down by the side of the road have to accelerate a lot further to catch up.

Selling in a recession is what will separate the players from the poseurs.  Negotiation becomes key.  Fewer deals will close, so maximizing the returns on the ones that do without losing them in the process will make a big difference.  Terms can really matter a lot.  At the same time, your customers will be under a lot of pressure, and they’ll smell fear if you show any.  If you depend on partners to sell your product, now is the time to find out which ones are really your friends and support the heck out of them.  Deepen those relationships even if it means cutting lose some of your weaker partners. 

None of this will work if you don’t have customer satisfaction.  There can’t be a worse time to have unhappy customers than during a recession.  Invest in your best customers, and invest in the people in  your business that keep your customers happy and who have the relationships.

4. Capital will be harder to come by unless you already have it: another flight to quality

For those starting up, or those raising funds from limited partners to invest with, capital will be harder to come by in a recession.  Depending on how deep the recession is, angels can often peter out as they become concerned about their own portfolios and stop investing further in speculative ventures.  Those companies that already have capital and are demonstrating good traction will be able to get more capital.  Those that are iffy are going to have a hard time.  It’s another flight to quality:  better investments and better investors.

5. Hiring will ease, but good people need never fear.  Plus, it may get easier to judge the quality of your employer.  Don’t forget to network!

The most talented software developers, engineers, salespeople, managers, and all sorts of other talented people suffer much less in a recession.  These folks are unlikely to get cut.  Plus, companies that do cut often look to make it up by using smaller teams of better people.  If you’re really good, you will find a position.  The good news is that the recession may help you to evaluate the quality of potential employers.  Companies that manage to grow during recessions are usually onto a good thing.  When times are good, it’s hard to tell whether sock puppets selling pet food on the Internet are truly a good idea or just lucky for a little while.

Tough times also help companies to evaluate their people and see who is committed and making a difference and who is not.

As Robert Scoble suggests, now is the time for maximum networking.  Get out and meet people.  The contacts will be easier to make because a lot of folks will be looking for one thing or another.  Make those contacts and they’ll pay off long after any potential recession has ended.

6. Exits will be less lucrative but possible: yet another flight to quality, and expect M&A more than IPO

If you’re hoping for an exit or liquidity event, the recession doesn’t help at all.  IPOs are much less likely, and the best companies will often choose to wait for better times so they can get a better price on their offering.  The Mergers and Acquisitions game shifts the advantage very much to the buyer, and especially to buyers with cash.  Such buyers will be more cautious and choosy.  It’s just one more example of a flight to quality.

7. The ad model will be tough unless you’re a proven quantity

Like everything else, there will be pressure on advertising.  Companies will have less budget to go around, and the dollars they have will be spent on areas that are known to work.  Experimentation will be minimal.  If you’re building a company on an ad model, now is probably not the time to push for monetization.  Focus instead on building mindshare and fine tuning your offering.

8. It’s not a bad time to start a company, but you should focus on bootstrapping and efficiency

It takes a long time to grow a new startup to a size where competition and many other things matter.  Starting when the chips are down means your company may spend its early developmental time when the competitive landscape is pretty quiet anyway.  All that talk about it being a bad time for experimentation and there being a flight to quality can be viewed as saying the world is even more sheeplike in bad times.  That can be a blessing, because it means your Big Idea may not be noticed or pursued by others until you are pretty far along.  And when the winds change to growth, you’ll have your product all tuned up so it flies fast and far.  The secret is to be as capital efficient as possible in lean times.  Focus on bootstrapping, pay with equity not cash, and hire talented driven individuals who are bought into the dream, not the paycheck.  Buckle up for a hard ride, but one that may turn out to be better than the usual boom time ride.

Also bear in mind that potential investors and customers will be extremely selective.  That’s a good thing.  Like the note on using tough times to evaluate employers, it also works to evaluate ideas.  If you’re getting traction in tough times, you have a winner.  Double down!

9. Any recession benefits recurring revenue and less friction:  think SaaS and other Services

Recurring revenue will be king in bad times.  Its revenue that comes without having to go resell the proposition all over again.  Yes, you can lose some of it too, but hopefully you’ve got strong enough customer satisfaction that this is unlikely.  Businesses that are focused on one-time revenue such as perptual-license software or hardware have to start every quarter from zero.  That’s a hard position to be in when times are tough.

While we’re at it, let’s think about lowering friction in our businesses.  Do it on the web.  Do it via telephone.  Make it easier than ever for customers to learn about, buy, use, and love your product.  This is what the web was made for.  If you still aren’t using it to its fullest, get going, you’re behind the curve and there’s an ill wind blowing.

And, as Seth Godin says, the time to change your business model is when you have momentum.  It may not hurt to also use a recession as an excuse to help customers and investors understand the need for change.

10.  Watch out for overseas competition

If you have competitors in markets that are not touched or much less touched by a recession, watch out.  This will be a prime time for them to double down while you’re belt tightening, and they’ll have a lot healthy business to help fund that strategy.  This is another reason the truly big stay big: multinationals get diversification across many markets to tide them over when one market is sickly.

Recession = Opportunity, But With Different Rules

I hope there is no recession coming, but I suspect most have already accepted that there will be one.  It doesn’t have to be the end of the world.  Yes, it is harder, but it also opens up new opportunities for those who are thinking ahead instead of worrying.