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How to survive an economic downt

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									How to survive
an economic downturn
Foreword by David Hunter
MD, NESTA Investments
NESTA is the National Endowment for Science, Technology and the Arts, a
unique and independent body with a mission to make the UK more innovative.
We invest in early-stage companies, inform policy, and deliver practical
programmes that inspire others to solve the big challenges of the future.
Contents



Foreword                                            4
by David Hunter, MD, NESTA Investments


It’s about survival, not prosperity                 6
by Jon Moulton


Take rapid action and be realistic                  10
by Tim Cooke


Go the extra mile for your customers                14
by Martha Lane Fox


There are still opportunities to thrive             18
by David Rogers


Learn from others who’ve been there before          22
by Permjot Valia


Collaboration and creativity will get you through   26
by Sháá Wasmund




                                               Contents   3
    Foreword
    By David Hunter




4    How to survive an economic downturn
The recession is now upon us and as you will read
in this collection of insights from experienced
entrepreneurs, it is unlike anything we have
seen before. It is urgent that our portfolio
companies and other early-stage high-growth
businesses recognise the significance of this
recession and adapt accordingly.

NESTA’s research shows that there is a crisis in venture capital
funding. A total of 39 funds have been actively investing in the
early-stage space in the past five years and we now estimate that
there are only 13 funds that have more than £5 million remaining.
The number of early-stage funds created in 2008 decreased by
68 per cent relative to 2007 and we are predicting that angel
investing will reduce considerably.
For pre-revenue and pre-profit companies this outlook requires
immediate attention to consider what changes need to be
made now in order to prepare for a fundamentally new funding
environment. For many this new environment will require a
rapid response with significant alterations to business plans and
company strategy.
I hope that this timely insight from a range of experienced
entrepreneurs will provide a useful overview in considering how
your company will survive and thrive during these extraordinary
times.
David Hunter
MD, NESTA Investments

                                          David Hunter Foreword     5
    It’s about survival,
    not prosperity
    By Jon Moulton




6    How to survive an economic downturn
I’ve worked through a few recessions, in the
UK and the US, but this time around it’s much
nastier. In a very short space of time we’ve seen
a housing market meltdown and the collapse of
financial systems. Businesses need to adopt a
survival strategy and forget about prosperity.
People need to worry about being a survivor,
not about being a rich survivor.

The key to getting through the recession will be to preserve cash
and do everything you can to ensure you’ve got a solid banking
situation. Businesses need to cut capital expenditure, avoid
taking credit risks and make sure they’re not holding inventory,
which could be susceptible to deflation. Every company will
require exceptionally tight cash control and excellent forecasting
systems. It’s absolutely essential that those forecasting systems
are realistic. Managing the balance sheet rather than the profit
and loss account will bring rewards.


Zero-based budgeting
The sooner that businesses change their cost structures, the
more likely they will be to survive. I absolutely advocate a zero-
based budgeting approach, where every cost is questioned.
It’s all about having a highly liquid, strong balance sheet and to
achieve this, businesses can’t assume that a budget needs to be
10 per cent higher than the previous year.


                      Jon Moulton It’s about survival, not prosperity   7
    If redundancies are required, it’s better to fire too many people
    than too few. This might sound harsh but repeated rounds
    of redundancies erode morale and can eventually destroy a
    company. Businesses also need to take what they can from the
    government, whether that’s PAYE or VAT payment delays, any
    future reductions in corporation tax or grants for businesses in
    certain parts of the country.


    Opportunities for innovation
    When it comes to innovation, businesses should do as much
    as they can – as long as it doesn’t cost anything! For some
    companies, innovating may be the only way to survive.
    Taking over distressed companies can work if you grasp
    opportunities to come up with dramatically new ways to run the
    business, such as outsourcing parts of it or even closing divisions.
    Of course it’s always the case that recession will lead to
    opportunities for brand new ventures. The general lowering of
    costs can make some businesses viable when they wouldn’t have
    been before.
    Small, growing ventures are going to find it especially difficult
    to make progress in this market, with people less likely to be
    adopting new products or services. In particular, finding second
    or third round funding will be a real challenge and it might not
    be available at all.
    We’ll see some businesses do well during this recession, but not
    many. It’ll certainly be a good year for lawyers and accountants



8   How to survive an economic downturn
specialising in restructuring, but at least 95 per cent of businesses
will scrape through as survivors – hurt, but still operational.
.   .   .   .   .

Jon Moulton is the founder and Managing Partner of Alchemy.
He was previously Managing Partner at Schroder Ventures (now
Permira) in London and prior to that with Citicorp Venture Capital
(now CVC) in London and New York. He has extensive experience
in buy-outs, turnarounds and development capital deals in all
sectors.




                       Jon Moulton It’s about survival, not prosperity   9
     Take rapid action
     and be realistic
     By Tim Cooke




10    How to survive an economic downturn
I’ve worked through a recession or downturn in
every decade since starting my career as an IT
consultant at Logica in the 1970s. In the early
1990s I was chief executive of a large part of
Logica and when the dot-com bubble burst in
2001 I was chairing a range of start-ups. The
recession we’re now in is completely different
from those that have gone before.

Since everything fell off a cliff with the credit crunch in September
2008, we’ve been measuring this recession in weeks rather than
months or years. Such a rapid deterioration demands a rapid
reaction. All businesses need to act fast and must take the view
that things may stay like this for a couple of years. There is no
room for hoping for the best and you can’t place trust in anyone
forecasting recovery.


Choosing a course of action
As I see it, there are three types of companies and each needs to
take a different course of action to weather the downturn. The
first type of company is the cash-rich business. These businesses
will have been well managed and already recognise the value of
cash. Cost control is fundamental and even cash-rich companies
need to keep costs to an absolute minimum. Cash-rich businesses
should be looking to make different kinds of investments, such
as improving their business model by focusing on high-margin



                          Tim Cooke Take rapid action and be realistic   11
     business or improving systems. If you can afford to hire people
     then it’s a great time to do so. It’s much cheaper to bring in quality
     people with rare skills now than it would have been a year ago.
     The second type of business is cash-poor. No business can
     assume that its banking arrangements will be renewed when
     the time comes or that major new sales really will happen, so
     businesses that lack cash resources must consider how they can
     survive without bank debt or with significant sales reductions. If
     the business is experiencing problems, it’s important to talk to
     your bank or venture capitalist sooner rather than later and try to
     negotiate new arrangements. Companies in this position should
     also look around to see if there are business angels who can offer
     support, even if the terms are tough.
     The third group of businesses are those for whom the economic
     climate provides massive opportunities, such as firms that can
     buy distressed assets. One of the companies that I chair acquires
     distressed software companies, and being able to buy and
     resource more cheaply means that 2009 will be a good year for
     them. Another is looking to acquire a much weaker competitor.


     Reassess the business model
     It’s essential that all businesses reassess their business model.
     Remember that innovation can be about commercial processes as
     well as technology, so use any spare time and capacity wisely to
     re-examine areas like profit margins, customer relationships and
     joint ventures. Investing in people and infrastructure now will
     enable the business to move quickly when the economy picks up.



12   How to survive an economic downturn
For start-ups, now is a good time for preparing to go to market
as this is a process that takes around 12-18 months. Again, time
spent on this now will put you in a strong position for the upturn
when it happens.
Anyone running a business needs to stay grounded and realistic,
especially when it comes to sales forecasts. Having been through
various downturns before, I do think it’s important to keep a
sense of perspective though. This isn’t the end of the world and
things will get better – hopefully in around 18 months. We can
afford to keep one eye looking across the valley to the uplands.
.   .   .   .   .

Tim Cooke is Chairman of NESTA’s portfolio company Six to Start
and was previously Chairman of our portfolio company CamFPD,
which was sold to Microsoft in 2007.




                        Tim Cooke Take rapid action and be realistic   13
     Go the extra mile
     for your customers
     By Martha Lane Fox




14    How to survive an economic downturn
I feel fortunate as I have not had to work
through a climate as tough as this before, but
steering Lastminute.com through the 2001
stockmarket crash and beyond certainly taught
me how to cope when your company is being
battered. This downturn is very different from
2001 though. When the dot-com bubble burst,
the financial crash was much less severe and
the effects weren’t felt on the High Street.

There has been an absolute explosion of media since the last
downturn and with this multitude of coverage come some scary
headlines. There is no arguing that it’s going to be horrible but
despite what the headlines suggest, society is still functioning
– people are still going about their daily lives, going to the
supermarket, buying the odd treat, going out for occasional fun.
It is important not to become carried away with what the papers,
TV or web is telling you. Instead, you need to focus on what
you’re doing and what your organisation is doing.


Lean thinking for lean times
All businesses need to look closely at their cost base. I’ve always
operated a lean organisation in my businesses, but it’s an essential
practice at the moment. Cash is crucial in this climate and it’s no
time to be wasting it.




               Martha Lane Fox Go the extra mile for your customers    15
     Some businesses will find that the downturn creates opportunities
     for growth, but for most it’s a case of finding a way through by
     changing, disrupting and continuing to innovate. You need to
     keep things interesting for your customers and make changes
     with confidence. Remember that innovation can come in lots of
     forms – it could relate to your product, a clever marketing idea or
     a new pricing strategy for example – and it doesn’t have to cost
     a lot of money.


     Deliver greater value
     I was once lucky enough to hear Bill Gates speak. One of the
     things he said that has stayed with me was that if you’re not
     worrying about your customers, someone else will be. When Brent
     Hoberman and I were setting up Lastminute.com, our mantra was
     ‘don’t just aim to satisfy customers, aim to delight them’.
     Businesses that can go the extra mile and deliver greater value
     for their customers – and perhaps some light relief – should come
     through this downturn well. At Lucky Voice, we recognise that
     this January might not be as busy as last year, so we’re offering
     free room hire to low-paid public sector workers. Running this
     offer won’t cost us anything and it’ll help to generate customers
     for the future, but more importantly we’re doing a good thing.


     Online opportunities
     Online usage continues to go up. In November 2008 the buoyant
     financial results from ASOS showed us that there are still
     enormous opportunities for taking a share of the online market.



16   How to survive an economic downturn
I’ve also seen the potential for online growth through my role as
a non-executive director of mydeco. The rate of growth may be
slower than it was, but it’s still fast.
If your business is just starting out, it’s going to be an especially
tough time. Like any business, you need to look at your cash flow
and conserve cash as much as possible. If you’ve just managed
to raise money, resist the temptation to splurge and instead
consider lying low for a while longer than you would have done
in other conditions. Whatever stage your business is at, the key
to surviving the downturn will be cash and funding.
.   .   .   .   .

Martha Lane Fox launched Lucky Voice, in 2005, which aims to
bring singing back into daily life, and is a non-executive director
of Marks & Spencer, Channel 4 Television and mydeco.com.
She is best known as the creator of Lastminute.com, which she
co-founded with Brent Hoberman in 1998. She is also founder
and Chairman of Antigone, her own grant giving foundation.




                Martha Lane Fox Go the extra mile for your customers    17
     There are still
     opportunities to thrive
     By David Rogers




18    How to survive an economic downturn
I’ve worked through a number of economic
downturns but I haven’t seen anything like this
before. This recession wasn’t widely predicted
and it moved from the financial markets to
the real markets at great speed. It looks like
being as bad a recession as we’ve ever had.
Businesses have had little time to prepare for
these challenging conditions, but I know from
experience that there are things you can do to
mitigate the circumstances and come through
stronger.


Three factors to address
To steer a business through a recession you need to tackle
financial management, sales and marketing and innovation. The
way in which you put these three factors together will decide
whether your company just survives or whether it uses the
economic conditions as a springboard and actually thrives. Now
is a good time to reinvent your basic business strategy in light of
where you want to be on the other side of the recession.
In relation to financial management, you need to understand
what the worst case situation could be. Only by planning how you
will cope with a drastic downturn in sales and sharp reductions
in prices will you be able to protect the fundamentals of your



                  David Rogers There are still opportunities to thrive   19
     business. You should be analysing your cash flow position and
     sales scenario on a weekly or even daily basis. This information
     should always be at your fingertips and it should be understood
     by the whole organisation.


     Making efficiencies
     You will inevitably need to make operational efficiencies.
     Lowering your break-even position shouldn’t just be a ‘slash and
     burn’ cost-cutting exercise. It may involve more fundamental
     decisions about the markets and products that your business is in
     and the innovations that you focus on.
     You’ll need to introduce greater flexibility in your expenditure,
     with the ability to move costs up and down as needed, and you’ll
     need to negotiate suitable payment structures with suppliers and
     customers. Issues around managing payments and receipts can
     no longer be confined to the accounts department – it needs to
     be everyone’s business. The same goes for budget commitments
     – all budget holders need to understand what commitments are
     coming up and proactively manage them.


     Be bold and innovate
     During a downturn your market won’t be growing and it may
     well be shrinking. The only way you’ll survive is by adopting a
     strategy of taking market share from your competitors. Your
     ‘kill the competition’ mentality has to be very different from the
     mentality that will have seen you through the good times.




20   How to survive an economic downturn
You’ll need intimate knowledge of what your competitors are
doing and what they’re offering. The whole organisation, from
the chief executive down, will need to re-engage with your
key customers. You’ll need to be prepared to make bold, quick
decisions on how to reshape your proposition in response to your
customers’ changing needs.
Innovation is a vital part of rethinking your business and it’s not
just about coming up with new products. Innovation could mean
changing a weekly process to a daily one, moving parts of your
business online or taking a new approach to sharing risk. It could
also mean stopping doing something.
Taking market share, readjusting your costs to a different break-
even position and introducing much better financial controls will
enable your business to thrive when the blue skies come. There’ll
be a huge amount of work involved but if you can do these
things, you should get a positive outcome.
.   .   .   .   .

David Rogers is Chairman of NESTA’s portfolio company ProVision
Communications. He has held senior positions in the broadcast
and consumer electronics industry, including those of CEO of
Amstrad, Vice President at Philips Consumer Communications
and President and CEO EMEA of Lucent Technologies.




                    David Rogers There are still opportunities to thrive   21
     Learn from others who’ve
     been there before
     By Permjot Valia




22    How to survive an economic downturn
This downturn has been sharper and more
severe than anyone anticipated and no-one can
say what’s going to happen over the coming
months. We’re all in uncharted waters.


The benefit of experience
Anyone under the age of around 40 is unlikely to have first-
hand experience of managing a company through an economic
downturn. But there are plenty of people out there who do
have this experience. Businesses should be looking to recruit
non-executive directors who can offer practical experience and
knowledge of how to run a business during a recession.
Innovative, fresh ideas have a role to play in getting through
the downturn, but it’s also important not to be blind to what
experience can teach you about the context and environment
we’re now operating in.
A strong relationship with the bank manager will also serve any
business well. You should be asking your bank manager for their
advice and sharing your plans with them. You need to make the
bank feel completely comfortable with lending to your business.


Focus on core activities
For those running businesses, cash has always been king – but it’s
now become emperor. Businesses must cut back on non-essential
spending and do everything they can to hold on to cash. When


           Permjot Valia Learn from others who’ve been there before   23
     funding for dot.coms came to a halt in 2001, smart companies
     went into a period of hibernation, keeping the business ticking
     over but no more than that.
     Businesses shouldn’t be too quick to sacrifice their sales and
     marketing budgets though. Sales and marketing is a vital activity
     – your customers still need to know that you’re there. This is
     especially true for small businesses. Advertising also sends out a
     strong message about the confidence you have for the future of
     your business. Businesses should continue with their marketing,
     but be absolutely certain that they are achieving the best possible
     return on their investment.


     Be indispensable
     Businesses should do everything possible to make their service
     indispensable to their customers. If the customer can do without
     the service – if it’s a discretionary purchase rather than a mandatory
     one – you’ll need to have a really strong value proposition.
     Sales of DVDs are going up because the product delivers good
     value for the customer. Buying a DVD is a ‘treat’, but when
     people want to spend less on nights out, DVDs offer a very cheap
     form of entertainment.


     Opportunities for start-ups
     I believe that 2009 is still a good year to start up if you’re brave,
     have a great idea, really understand your market and can prove
     customer demand by generating pre-orders. With large companies



24   How to survive an economic downturn
focusing on their core business activities, it’s a particularly good
time for entrepreneurial individuals and small companies who can
offer outsourced services.
Investments may have dropped dramatically but there will always
be money out there for the right business and the right team.
Pre-orders will enable you to close the gap between when you
start trading and when the revenue starts coming in. Investors
want to see early revenue and businesses that can’t deliver on
this front will find it increasingly difficult to find support.


Make your money work harder
I often ask the companies that I work with what they would do
with an investment of £100,000. Once they’ve written down
what they’d achieve with the money, I ask them how they would
achieve the same goals with just £5,000. This is a useful exercise
for any business. What you’ll find is that although the steps you
take to reach your goals will be different, you will still find a way
to achieve them.
.   .   .   .   .

Permjot Valia is the co-founder of Flight & Partners, a fund
manager authorised and regulated by the Financial Services
Authority. Previously, Permjot worked as sales and marketing
director at Ernst & Young, looking after the Entrepreneurial
Services division in London. He is also on the board of the
Enterprise Investment Scheme Association. He is an early-stage
investor and blogs at www.businessangelblog.com




            Permjot Valia Learn from others who’ve been there before    25
     Collaboration and creativity
     will get you through
     By Sháá Wasmund




26    How to survive an economic downturn
I set up my first business, a PR company, in
the mid-1990s at the tail-end of an economic
downturn. It didn’t even occur to me that I
shouldn’t go ahead because of the financial
conditions. Maybe it was the naivety of youth
but I knew what I wanted to do and just did it.

The dot.com crash came a few years later but that was a minnow
in comparison to what we’re experiencing now. We knew there’d
need to be a simmering down at some point but no-one expected
anything like this. The challenge is that we don’t know whether
we’ve hit rock bottom yet. When we reach rock bottom, people
will start to see a real way out and will make decisions again.


Prepare for the worst
This is going to be an extremely difficult year and businesses need
to expect and prepare for the worst. Every single penny counts,
so businesses need to look at expenses and travel budgets and
find ways of reducing costs. Cutting staff should be a last resort
and I’d urge anyone that’s reaching this point to explore every
possible alternative. In small teams it might be possible to avoid
redundancies if people are prepared to take salary cuts.
It’s important to involve your teams in trying to find solutions.
The people who work at the frontline of your business have a
different perspective and may be able to offer fresh ideas on
cutting costs and finding a way through the downturn.



      Sháá Wasmund Collaboration and creativity will get you through   27
     Businesses that have borrowed responsibly and been good
     customers to their banks may still find that their banking facilities
     are withdrawn. If this happens to you, you need to fight your
     corner by taking your case up with senior executives at the
     bank and getting your MP involved. You also need to hold your
     suppliers and customers to strict terms. If your payment terms are
     30 days, then you should be chasing at 25 days.


     Adapt to the changing market
     It’s crucial for businesses to understand how their customers’
     needs have changed and what this means for them. Innovative
     and quick-thinking companies will come through the recession
     well. It can be harder for big businesses to change course but
     smaller companies should be able to take the initiative and act
     swiftly. The difficult economic conditions require businesses to
     be flexible, adaptable and chameleon-like.
     Businesses that carry on spending on marketing during a
     downturn are often able to grab a larger share of the market. If
     you can afford to continue marketing, you should. If you have to
     cut back on marketing, then you need to get creative and find
     ways of making your budget work smarter and harder.


     Don’t sit on the fence
     New ideas and approaches will drive your business forward during
     the recession, so sidelining innovation is absolutely the wrong
     thing to do. Whether it involves product development or clever
     marketing, innovation can save you money and it can make you



28   How to survive an economic downturn
money. The recession won’t last forever and businesses need
to continue innovating so that they’re in good shape when the
upturn comes. There’s no room for fear or for sitting on the fence
and postponing big decisions.
Business owners also need to be proactive in networking and
learning from others – staff, suppliers and especially other
businesses. I’ve set up Smarta to enable businesses to do this.
When you’re running a business, being able to learn from
someone who’s six or 12 months further down the line than
you are is invaluable. My advice is to take every opportunity to
connect, collaborate and help each other through.
.   .    .   .   .

Sháá Wasmund is the founder and CEO of Smarta, a social
enterprise that provides online information, business networking,
tools and services to make it easier for people to build a successful
business. Sháá is CEO of investment company, Bright Station
Ventures and is a founding director of travel company, deckchair.
com. She also set up her own successful PR and marketing
company in 1994, establishing major brands, such as Dyson.




        Sháá Wasmund Collaboration and creativity will get you through   29
NESTA
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London EC4A 1DE
investments@nesta.org.uk
www.nesta.org.uk

Published: March 2009

								
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