I believe that each of our companies needs to undertake a critical review of its cash flow requirements. Business plans with defined strategies need to operate in this difficult period. Failure to manage this crisis could result in irretrievable positions.
— Ratan Tata's letter to MDs and CEOs of the Tata Group
Clearly, even veterans are fearful. The biggest companies are cutting costs, laying off employees, cosying up to regular clients and doing whatever else is required to maintain their elitist status. Some are even fighting for survival. If the big fish are so threatened, imagine the condition of start-ups, especially those founded by the relatively inexperienced younger generation.
Start-up SOS |
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| Don't be the last to know that your start-up is in danger of folding up. Watch out for these signs: |
| Low operating cash: If the company account has expenses only for about 15 days, you are headed for a fund crisis. |
| Dependence on one client: Revenues will suddenly dry up if the company withdraws its contract. |
| Expenses that don't generate revenues: Factor in the cost of revenues. If it is too high, you may be wasting money. |
| Dipping into personal reserves: This is the last straw. A company should be capable of surviving on its own income, not your personal savings. |
Take three guesses, and you may still lose the bet. For, these young entrepreneurs are not preparing to close shop, they are raising the bar. A distinct advantage the start-ups have over large companies is their small scale. They can effect a greater change in their businesses to adapt to a market plagued by restricted resources. With less at stake, they are more experimental. Here's how some of them have reinvented their businesses to gain from the slowdown. You can learn from their experiences and make your businesses viable.
Have Flexible Business Models
Krishna Mehra, 25, Aneesh Reddy, 24, and Ajay Modani, 25, set up Capillary Technologies in August 2008. Originally, the company aimed to provide retail information to consumers through mobile applications. But within weeks the trio realised that the plan would require a longer gestation period, something they wouldn't be able to sustain.
So the youngsters did an about turn. "Instead of letting retail consumers choose the vendors through the mobile platform, we decided to help enterprises reach out to their customers through applications such as mobile loyalty programmes," says Mehra. The change paid off. Capillary Technologies is now in advanced stages of discussions with firms in apparel, footwear, car rentals, etc. "Our product increases efficiency and reduces costs for our clients, the two top parameters for giving the green signal to a project," he adds.
A benefit of launching in a downturn is that your product is closely scrutinised. Therefore, a start-up must rejig its existing business model if the market so demands. As Mehra says, clients want a "higher degree of validation" before handing over the cheque. "It is for our longterm benefit. When the good times return, our fine-tuned product will be among the best," he adds.
Cash, Not Client, is King
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| Vineeta Singh, 25 | Bhushan Tapar, 26 |
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| Vishal Prabhu Khanolkar, 27 | Devashish Charkavarty, 37 |
| Company: Quetzal Online and Quetzal Verify Started in: April 2007 | |
| Allocated resources freed up by lost contracts to search for new clients. Expanded product line. Quetzal Verify added campus and bulk recruitment to training and background verification. Quetzal Online has added an English-speaking course to its bouquet. | |
Money is definitely a scarce commodity now. This is why Mohit Goyal, co-founder of the Indian Angel Network, says that you must calculate the cost of the revenues earned. Give up the projects or clients for whom you run up heavy expenses, but which do not generate proportionately large revenues.
However, do not be overly dependent on one client, because if he backs out, you will be cornered. Samresh Kumar and Manuraj Jain, both 31, were caught napping when a business house that contributed a huge proportion to the revenues of their Delhi-based investment banking firm, Vinculum, cancelled the contract. "We were victims of being in a space that has been at the epicenter of the economic crisis," explains Samresh.
One way of pre-empting such shocks is to keep an eye on operating expenses. If you draw a blank after accounting for 15 days' expenses, ring the alarm bell. Goyal suggests that you give discounts to vendors and clients for making payments faster. "They are aware of the situation and will appreciate such creativity," he says.
Woo New Clients
The other way to reduce dependence on a few clients is to get new ones. This is easier said than done. In fact, with companies scaling down work and hesistant to experiment, start-ups are more vulnerable to losing the customer base they have built. Quetzal Online and Quetzal Verify, two Mumbai-based companies started in April 2007 by a group of four friends, fell victim to runaway clients in 2008. "Initially, we focused on servicing the existing clients, partly because we did not have enough resources. But when business from these companies dried up, we aggressively hunted for new clients. This strategy ultimately worked," says Devashish Chakravarty, one of the founders. Thanks to this quick adaptability, the revenues of the company are poised to grow by 40% this year.
When the aim is to stay afloat, you can't, and shouldn't, be choosy about either the work or the clientele. No one knows this better than Arun Balakrishnan and Kaushik Mukherjee, founders of Akventure Web Businesses. The company builds offline support for Net businesses and has successfully completed projects like lootstreet.com and bolcitybol.com. When cash flow became sluggish last year, the duo did not hesitate to take up short-term projects, such as building databases for chit funds and providing tech support to timber factories. Read between the lines and you realise that it wouldn't have been easy to get these assignments. "We networked aggressively to lay hands on them. And yes, it helps to keep an open mind in tough times," says Mukherjee.
Offer Customised, Innovative Products
You may need to redesign your products and services, or add value to the existing ones. One option is to widen the offerings. Quetzal Verify, which dealt with recruitment, background verification and training of new employees, added bulk campus recruitments to the package. It expanded the product line to include English-speaking courses to the existing offering for schools and colleges.
What if, despite all tactics, the start-up fails to get back on track? Is this an indictment of the incompetence of the entrepreneur? "Not necessarily. A product may not be designed for companies struggling in a downturn. For instance, Webadvertising start-ups may find it difficult to look for clients as it is one of the first expenses to be cut," says Goyal. So if you are dipping into your personal reserves to keep your startup afloat, stop right now. Don't be stubborn or continue to be in love with a business idea. A good entrepreneur also realises when it is time to pack up. And when it is best to come back — better prepared.
Case Studies
Venkat Subramanian
Age: 34
Company: Symbiometrics
Started in: September 2008
Combat strategy:
Kaushik Mukherjee, 26, and Arun Balakrishnan, 25 (left to right)
Company: Akventure Web Businesses
Started in: 2008
Combat strategy:
