Startup Reality: Survive or Die Quickly

The simple and painful reality for startups in this economy goes like this: Survive until things pick up, or die quickly and start over.

Mark Peter Davis at DFJ Gotham makes this point in his recent post, The State of Venture: The Ugly, The Bad And The Good.

In this new economic environment, access to capital will become an increasingly important differentiator. If venture investing contracts substantially, a strong balance sheet will no longer simply be a means of staying with the pack, it will increasingly become a substantial advantage, enabling some companies to get way out in front of their competition.

Mark points out that companies with solid funding should be thinking big, albeit cautiously. As competition falters – either showing signs of weakness or dying completely – the companies with solid balance sheets and good funding can execute more aggressively. That means hiring top talent (because more of it will be available), executing more quickly and playing a louder, more dominant market role.

Ultimately, there aren’t many companies with huge amounts of funding and great balance sheets – especially amongst early startups. So what are the alternatives?

Startups can die quickly

In many cases, as Mark points out, this is a blessing in disguise. The economic downturn forces us to re-examine everything about our businesses and we might not like what we see. At some point, you have to say, “Enough is enough.”

In a recent presentation by Howard Lindzon he pointed out that now is the time to shelve ideas or early stage startups that simply won’t work in these economic situations, and revisit them later.

Dying quickly isn’t the worst thing in the world. Failure isn’t the end of your opportunity as a startup entrepreneur. And oftentimes it’s better to die a quick death versus a slow and much more painful one. Out of the death of one startup, others will be born.

Making the decision to kill your startup is hard. I don’t have an easy answer for when and how to do this, although I do think it should be discussed more openly and frequently within the blogosphere, amongst startups, etc.

Startups can survive

The other option is to survive. It certainly sounds more appealing than dying quickly, and in most cases it is. Although survival with no chance of success isn’t really survival…

Mark makes an important point in his post:

While I believe the frontrunners will come out of this downturn positioned to win big, the story isn’t entirely bleak for the second and third tier players. Once the end of the downturn is in sight, corporations will likely exploit the financial woes of startups to make low cost acquisitions. The hunters will be coming. For some entrepreneurs this could yield decent (if not life altering) returns.

This is absolutely true, and you can see this coming when the economy does pick up. Of course, we’re not quite sure when that will be, so banking on surviving as a second or third tier player is a tough bet. Nevertheless, survival of the “second or third fittest” is an option; especially if you haven’t raised huge amounts of money and can take smaller exits. I believe this is the route for many startups at this point – especially those that are early stage and not very well capitalized. You can grow a low cost business, focus in stability, build out some worthwhile and interesting technology, create a small but vocal fan base and survive until the economy picks up. When it does, the big players will emerge as huge victors, but there will be other companies looking to acquire the second and third tier players to compete with the big winners.

Incidentally, Mark’s follow-up post is also worth reading, DFJ Gotham Is Actively Investing, Others Should Too. There are numerous reasons for venture firms to keep investing aggressively:

  • lower valuations means they’ll get a bigger piece of the pie
  • exits aren’t really expected until 2011-2012 when (we assume and hope!) the economy is recovering very strongly
  • opportunities still exist to radically shift and innovate in a number of markets; the crappy economy doesn’t change that fact

Go Big. Die. Or Survive.

In many respects now is the time where you have to make the decision – do we go big, die quickly or try and survive (without it being a bullshit survival)? The amount of money you have, the current status of your company and many other factors all play a role in making that assessment.

December 2, 2008 Posted in Startups by

  • http://www.alaintheriault.com Alain Theriault

    Part of being a strong entrepreneur is having a healthy Ego. But the Ego gets in the way of many decision (often the bad ones). I this case, it will certainly play in the decision to “hang on”. Recognizing this and threading the fine line between pride and ego will dictate the best decision and put the entrepreneur in a better state of mind for the second round.

  • http://www.alaintheriault.com Alain Theriault

    Part of being a strong entrepreneur is having a healthy Ego. But the Ego gets in the way of many decision (often the bad ones). I this case, it will certainly play in the decision to “hang on”. Recognizing this and threading the fine line between pride and ego will dictate the best decision and put the entrepreneur in a better state of mind for the second round.

  • http://www.thewayoftheweb.net Dan Thornton

    While I agree with almost everything that’s mentioned, is there not an argument for concentrating on revenue etc, rather than going ‘big’?
    What I mean is the tendency to focus on total numbers of users, rather than looking at the amount of revenue generated by a smaller number who actually care, and increasing that just as proactively?

  • http://www.thewayoftheweb.net Dan Thornton

    While I agree with almost everything that’s mentioned, is there not an argument for concentrating on revenue etc, rather than going ‘big’?
    What I mean is the tendency to focus on total numbers of users, rather than looking at the amount of revenue generated by a smaller number who actually care, and increasing that just as proactively?

  • http://www.instigatorblog.com Ben Yoskovitz

    @Dan: Going “big” can still mean generating revenue. I’ve argued in the past (as have others) that focusing on revenue is becoming more and more important in these difficult economic times. So I agree with you.

    It’s a question of defining “going big”.

    @Alain: I agree, the EGO has a big part to play in making decisions. And CEOs are not known for having small egos!

  • http://www.instigatorblog.com Ben Yoskovitz

    @Dan: Going “big” can still mean generating revenue. I’ve argued in the past (as have others) that focusing on revenue is becoming more and more important in these difficult economic times. So I agree with you.

    It’s a question of defining “going big”.

    @Alain: I agree, the EGO has a big part to play in making decisions. And CEOs are not known for having small egos!

  • http://legal.realdealdocs.com Michael

    Awesome stuff I’m soaking all this up. I’m relatively new so thanks for the info I’ve been checking around and you have awesome content.

  • http://legal.realdealdocs.com Michael

    Awesome stuff I’m soaking all this up. I’m relatively new so thanks for the info I’ve been checking around and you have awesome content.

  • http://www.varologic.com/blog/post/2008/11/30-hottest-and-latest-Christmas-gadgets.aspx Nichole

    In the times of recession the proverb “survival of the fittest” applies. This is where the real test begins.

  • http://www.varologic.com/blog/post/2008/11/30-hottest-and-latest-Christmas-gadgets.aspx Nichole

    In the times of recession the proverb “survival of the fittest” applies. This is where the real test begins.

  • http://www.adnagam.etsy.com Tracy K

    Gosh… I couldn’t imagine waiting this recession out in order to get out of the hole! Yikes!

  • http://www.adnagam.etsy.com Tracy K

    Gosh… I couldn’t imagine waiting this recession out in order to get out of the hole! Yikes!

  • http://www.eastcoastairsoft.com/index.php?cPath=25_52 Rick

    As long as you don’t have a lot of recurring expenses, there is no reason why a small company should die. Even if you are not making money, if you are not spending any either, you can just wait until things pick up and in the mean time use free marketing techniques. That’s what I do, even when I am making money.

  • http://www.eastcoastairsoft.com/index.php?cPath=25_52 Rick

    As long as you don’t have a lot of recurring expenses, there is no reason why a small company should die. Even if you are not making money, if you are not spending any either, you can just wait until things pick up and in the mean time use free marketing techniques. That’s what I do, even when I am making money.

  • http://www.BellaDeaDesigns.com Christina

    I think one should also consider the size and type of the business intended. These 2 factors would greatly influence a businesses’ success during rough economic times. Some business plans have higher start up costs than others, some businesses’ have a higher profit to expense ratio. There are so many different factors that one needs to consider, it would be hard to make a blanket statement about ALL start up businesses.

  • http://www.BellaDeaDesigns.com Christina

    I think one should also consider the size and type of the business intended. These 2 factors would greatly influence a businesses’ success during rough economic times. Some business plans have higher start up costs than others, some businesses’ have a higher profit to expense ratio. There are so many different factors that one needs to consider, it would be hard to make a blanket statement about ALL start up businesses.

  • http://20yearbillionaire.com Brandon Schlichter

    I totally agree, the economy of everything has changed.

    I am in real estate, and we’ve been experiencing a very large dropout of real estate agents in the industry. Many people try to build a business with shallow roots, and when things get dry , they die.

  • http://20yearbillionaire.com Brandon Schlichter

    I totally agree, the economy of everything has changed.

    I am in real estate, and we’ve been experiencing a very large dropout of real estate agents in the industry. Many people try to build a business with shallow roots, and when things get dry , they die.

  • http://www.markgillespie.net Mark

    The reality is that the day of high-overhead businesses with high rents will face a very tough time. This is when your business model is really put to the test, and I think many of the “little people” will survive ok. It is the big companies who have borrowed heavily in anticipation of expansion who will be fretting over servicing their loans who must fall. Unfortunately, they are the big “wealth creators” so it has a knock-on effect.

    Think we should all invest in space programs and start anew on Mars.

  • http://www.markgillespie.net Mark

    The reality is that the day of high-overhead businesses with high rents will face a very tough time. This is when your business model is really put to the test, and I think many of the “little people” will survive ok. It is the big companies who have borrowed heavily in anticipation of expansion who will be fretting over servicing their loans who must fall. Unfortunately, they are the big “wealth creators” so it has a knock-on effect.

    Think we should all invest in space programs and start anew on Mars.

  • http://eskiltech.wordpress.com Eskil

    Even though the business oportunities are declining I think that there also will be a decline in competition, at least as long as you can survive for a while.

    Another good point is that small businesses often have an advantage of less overhead costs and can compete through lower prices. In a declining ecomony that may get customers to turn to smaller suppliers.

  • http://eskiltech.wordpress.com Eskil

    Even though the business oportunities are declining I think that there also will be a decline in competition, at least as long as you can survive for a while.

    Another good point is that small businesses often have an advantage of less overhead costs and can compete through lower prices. In a declining ecomony that may get customers to turn to smaller suppliers.

  • http://www.internationalyachtchartergroup.com Mike

    I think the Darwin Theory somewhat applies here. But the “fit but not the fittest” can survive too, with a bit of adjustment, or rather evolution, in context to the conditions. Very informative post. Thanks a lot!

  • http://www.internationalyachtchartergroup.com Mike

    I think the Darwin Theory somewhat applies here. But the “fit but not the fittest” can survive too, with a bit of adjustment, or rather evolution, in context to the conditions. Very informative post. Thanks a lot!

  • http://smallbizbee.com/index/2008/12/19/dont-caught-recession-trap/ Matt | Small Biz Bee

    If you can hang on, and survive for a while you have a good chance for success. You’re right, as a new start up it is usually apparent very soon that your biz is not viable.

    Matt

  • http://smallbizbee.com/index/2008/12/19/dont-caught-recession-trap/ Matt | Small Biz Bee

    If you can hang on, and survive for a while you have a good chance for success. You’re right, as a new start up it is usually apparent very soon that your biz is not viable.

    Matt

  • http://www.torontobusinessbroker.con Omar Kettani

    I am against targeting a survival mode. Startup businesses are risky in any economy even if you try to play it safe. So let’s be agressive. At least there is an upside and after all it might work. Otherwise it’s not worth it. Better stay in your current job.

  • http://www.torontobusinessbroker.con Omar Kettani

    I am against targeting a survival mode. Startup businesses are risky in any economy even if you try to play it safe. So let’s be agressive. At least there is an upside and after all it might work. Otherwise it’s not worth it. Better stay in your current job.

  • http://www.profastbilling.com Jeff

    Sometimes it takes times like these to “shake the tree” a little and weed out the dead leaves. When the real estate market was booming, everyone and their mother, cousin, sister and step-brother was jumping in to become a realtor. The people who didn’t belong got weeded out pretty quick and the ones who survive will be poised to come out strong when things turn around.

    Same goes for a start-up. If your planning is sound and your business model solid, you should be poised for a good run.

  • http://www.profastbilling.com Jeff

    Sometimes it takes times like these to “shake the tree” a little and weed out the dead leaves. When the real estate market was booming, everyone and their mother, cousin, sister and step-brother was jumping in to become a realtor. The people who didn’t belong got weeded out pretty quick and the ones who survive will be poised to come out strong when things turn around.

    Same goes for a start-up. If your planning is sound and your business model solid, you should be poised for a good run.

  • http://www.tycromedia.com Jay Robinson

    yes it is becoming harder for smaller companies to even make a name for themselves

  • http://www.tycromedia.com Jay Robinson

    yes it is becoming harder for smaller companies to even make a name for themselves

  • http://www.instigatorblog.com Ben Yoskovitz

    Thanks for all the comments.

    Jeff – I think the tree is shaking mightily at this point.

  • http://www.instigatorblog.com Ben Yoskovitz

    Thanks for all the comments.

    Jeff – I think the tree is shaking mightily at this point.

  • http://handphone-2010.blogspot.com hand2010

    Great post. Thanks for the help.

  • http://handphone-2010.blogspot.com hand2010

    Great post. Thanks for the help.

  • Pingback: Is the Venture Capital Model Broken?

  • http://www.liveagl.com/events Alex Delarge

    Oh good ol Ego,
    It is a greatest strength and our greatest weakness, strength because it gives us that charisma and drive to be entreupenuers, weakness is that things get too personal and effect our pride..

  • http://www.liveagl.com/events Alex Delarge

    Oh good ol Ego,
    It is a greatest strength and our greatest weakness, strength because it gives us that charisma and drive to be entreupenuers, weakness is that things get too personal and effect our pride..

  • http://www.rss.lt rolandas

    In Lithuania officially recession will start soon, but already now we can feel the slowth of economy.

  • http://www.rss.lt rolandas

    In Lithuania officially recession will start soon, but already now we can feel the slowth of economy.

  • http://www.californiachief.com/ Dave

    If you can hang on, and survive for a while you have a good chance for success. You’re right, as a new start up it is usually apparent very soon that your biz is not viable.

  • http://www.californiachief.com/ Dave

    If you can hang on, and survive for a while you have a good chance for success. You’re right, as a new start up it is usually apparent very soon that your biz is not viable.

  • http://curtingalt.com Curt

    very important topic. i think we should always concentrate about revenue. because revenue is the heart of a business. a targeted customer is always a good source of revenue. so we should think of small rather than a big one.

  • http://curtingalt.com Curt

    very important topic. i think we should always concentrate about revenue. because revenue is the heart of a business. a targeted customer is always a good source of revenue. so we should think of small rather than a big one.

  • http://www.TheBrainchildGroup.com Green Marketing

    Nichole — you’re absolutely correct. Hit the nail on the head. Darwinism at its fullest.

  • http://www.theworkouts.com/workout-routines.html workout plans

    Keep coming with such great articles. really enjoyed reading it. recession has affected everyone and i hope it doesn't stay for long.
    regards

Ben Yoskovitz
I'm VP Product at Codified (makers of VarageSale).

I'm also a Founding Partner at Year One Labs, an early stage accelerator in Montreal. Previously I founded Standout Jobs (and sold it).

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