How tech entrepreneurs plan to stay afloat this time

Many venture capitalists and technology entrepreneurs are acting quickly this time around to try to avoid the carnage that came amid the dotcom bust of 2001. I had a boss who very wisely reminded me often that the only things a business owner can truly control are expenses. It's no surprise then that cost cutting heads the list of measures companies are taking to weather the financial crisis.

Chief among them are the importance of swift and deep cost-cutting; of focusing scarce resources on core activities; and of convincing investors that your business strategy is a winner.

As the article points out, these are not easy measure for entrepreneurs in particular who, by nature, tend to be tireless optimists. I've been part of the dotcom world for most of my professional career and I definitely learned that lesson myself. The hard lesson that rings very true to me now:

Sequoia went on to urge the executives to cut costs fast so that their firms would not run out of money before becoming profitable. Other venture capitalists are echoing its message. “Rule number one is to take immediate measures so you can stay in the game,” says Mike Speiser of Sutter Hill Ventures, another VC firm.

Based on the headlines just this past week, companies seem to be getting the message. TechCrunch chronicles recent industry carnage in a post with a title that doesn't mince words: 19,683 Tech Layoffs And Counting The article goes on to list the numbers of layoffs at companies including Xerox, Yahoo, Dell and Wikia. The Economist article highlights the importance of these seemingly deep cuts:

All this explains why the bosses of several start-ups have started to wield a big axe... Deep cuts like these may be painful in the short-term, but they are better both for profits and morale than repeated rounds of small lay-offs. In 2001 many firms trimmed too little, too late.

There is definitely truth to that. It is far better for morale and collective organizational focus to err on the side of cutting more staff at once than to impose the distraction and cultural poison of a string of cuts of one or two staff at a time. It's best to take decisive action and allow the healing to begin as work continues.

Of course, I've also worked for firms that cut jobs needlessly and recklessly. To use a gruesome metaphor, they cut far beyond the fat and into the critical meat of the organization, inflicting mortal wounds to both operations and culture. Once a company has made that mistake, it can be almost impossible to recover. When quality inevitably suffers as a result, the organization will quickly buckle under the vote of no confidence from remaining employees, clients, business partners and investors.

So rather than focus on cost cutting alone, firms should also look for ways to grow revenue—or at least aim to maintain pre-crisis levels. One way to do this is to focus on clients in industries such as gaming and health care, which may be less vulnerable to a recession.

Equally important is to turn a critical eye toward unprofitable activities of all kinds. Surprisingly, the worst offenders aren't likely to be employee time wasters such as personal e-mail and surfing the Web at work. In fact, going on a witch hunt to find ways to enforce greater productivity can often prove counterproductive and make sagging morale much worse. Instead, companies would do better to streamline operations, eliminating unnecessary projects, meetings and bureaucracy. Jive Software, a Portland company that has recently shed staff, is doing just that:

Executives at Jive Software, which produces online collaboration tools for corporate clients, say it is now far better at scrapping initiatives that do not seem to be paying off. Once these have been placed on a “kill list”, there is no further discussion about them. In the past the lack of a formal process for canning ideas meant that many lived on, absorbing time and resources better spent elsewhere.

One important cost-cutting measure not directly mentioned in the article is to be extremely picky in selecting and keeping clients. That may sound counter intuitive—even preposterous—to companies trying make it through a downturn. The fact is, a client that is a bad fit for the organization can be costly in more ways than just to each project's bottom line. A bad client often distracts from more profitable and valuable clients and, in some cases, will inspire the staff working with them to dust off their résumés.

Finally, work harder than ever to keep valuable clients by winning more and longer-term projects from them. The sales cycle stretches painfully during a downturn and companies labor over every dollar they spend. The less time you have to spend pounding the pavement, the better off you'll be.

...Mr Kwatinetz is bullish about the prospects for those start-ups that manage to survive the crisis. They will face a much less crowded field and their managers will have honed their moneymaking skills in the harshest of all environments.

Technology start-ups face the downturn  |  The Economist
Fright night in the valley
Oct 23rd 2008 | San Francisco