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
by David Hunter, MD, NESTA Investments

Its about survival, not prosperity

by Jon Moulton

Take rapid action and be realistic

by Tim Cooke

10

Go the extra mile for your customers

by Martha Lane Fox

14

There are still opportunities to thrive

by David Rogers

18

Learn from others whove been there before

by Permjot Valia

22

Collaboration and creativity will get you through

by Sh Wasmund

26

Contents

Foreword
By David Hunter

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.
NESTAs 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

Its about survival, not prosperity

By Jon Moulton

How to survive an economic downturn

Ive worked through a few recessions, in the UK and the US, but this time around its much nastier. In a very short space of time weve 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 youve got a solid banking situation. Businesses need to cut capital expenditure, avoid taking credit risks and make sure theyre not holding inventory, which could be susceptible to deflation. Every company will require exceptionally tight cash control and excellent forecasting systems. Its 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 zerobased budgeting approach, where every cost is questioned. Its all about having a highly liquid, strong balance sheet and to achieve this, businesses cant assume that a budget needs to be 10 per cent higher than the previous year.

Jon Moulton Its about survival, not prosperity

If redundancies are required, its 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 thats 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 doesnt 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 its 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 wouldnt 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. Well see some businesses do well during this recession, but not many. Itll certainly be a good year for lawyers and accountants

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 Its about survival, not prosperity

Take rapid action and be realistic

By Tim Cooke

10

How to survive an economic downturn

Ive 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 were now in is completely different from those that have gone before.
Since everything fell off a cliff with the credit crunch in September 2008, weve 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 cant 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 its a great time to do so. Its 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, its 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 Its 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 its important to keep a sense of perspective though. This isnt 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 NESTAs 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 werent 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 its 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 youre doing and what your organisation is doing. Lean thinking for lean times All businesses need to look closely at their cost base. Ive always operated a lean organisation in my businesses, but its an essential practice at the moment. Cash is crucial in this climate and its 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 its 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 doesnt 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 youre not worrying about your customers, someone else will be. When Brent Hoberman and I were setting up Lastminute.com, our mantra was dont 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 were offering free room hire to low-paid public sector workers. Running this offer wont cost us anything and itll help to generate customers for the future, but more importantly were 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.

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How to survive an economic downturn

Ive 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 its still fast. If your business is just starting out, its 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 youve 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

Ive worked through a number of economic downturns but I havent seen anything like this before. This recession wasnt 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 weve 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 shouldnt 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. Youll need to introduce greater flexibility in your expenditure, with the ability to move costs up and down as needed, and youll 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 everyones 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 wont be growing and it may well be shrinking. The only way youll 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.

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How to survive an economic downturn

Youll need intimate knowledge of what your competitors are doing and what theyre offering. The whole organisation, from the chief executive down, will need to re-engage with your key customers. Youll 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 its 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 breakeven position and introducing much better financial controls will enable your business to thrive when the blue skies come. Therell 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 NESTAs 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 whove 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 whats going to happen over the coming months. Were all in uncharted waters.

The benefit of experience Anyone under the age of around 40 is unlikely to have firsthand 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 its also important not to be blind to what experience can teach you about the context and environment were 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 its 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 whove 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 shouldnt 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 youre 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 its a discretionary purchase rather than a mandatory one youll 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 youre brave, have a great idea, really understand your market and can prove customer demand by generating pre-orders. With large companies

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How to survive an economic downturn

focusing on their core business activities, its 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 cant 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 theyve written down what theyd 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 youll 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 whove been there before

25

Collaboration and creativity will get you through

By Sh 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 didnt even occur to me that I shouldnt 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 were experiencing now. We knew thered need to be a simmering down at some point but no-one expected anything like this. The challenge is that we dont know whether weve 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 Id urge anyone thats 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. Its 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.

Sh 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 Its 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. Dont 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

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How to survive an economic downturn

money. The recession wont last forever and businesses need to continue innovating so that theyre in good shape when the upturn comes. Theres 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. Ive set up Smarta to enable businesses to do this. When youre running a business, being able to learn from someone whos 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. . . . . .

Sh 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. Sh 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.

Sh Wasmund Collaboration and creativity will get you through

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NESTA
1 Plough Place London EC4A 1DE investments@nesta.org.uk www.nesta.org.uk
Published: March 2009