Last year’s irrational exuberance in the tech sector turned into this year’s market pricing slump. So far, our portfolio companies report they haven’t seen a downturn in business. In fact, revenues in most of our companies continue to rise month over month and sales pipelines are growing. Nonetheless, financial markets typically anticipate business cycles, so a slowdown may be ahead. In any case, it seems clear that valuations got ahead of reality and investors have since turned wary so startups now face a different and more difficult, financing environment.
Here at Blumberg Capital, we encourage our portfolio companies to adopt a variety of strategies and tactics to survive and thrive through any slowdown. The best companies aren’t afraid to question assumptions, try new strategies and change behaviors.
1. Here are a few examples of techniques employed to successfully survive a business slowdown or funding drought.In the early startup phase of Check Point Software Technologies, the future looked bright. They could have raised traditional venture capital; yet they wanted to avoid dilution. Instead, they made a lucrative “take or pay” reseller agreement with Sun Microsystems to grow its operation. That cash and the profitability of the business allowed CheckPoint to not raise additional capital until its IPO.
2. CaseStack raised traditional venture funding just prior to the 2001 dot-com crash. The technology platform was originally designed to provide outsourced logistics services to the emerging B2B marketplaces. As the crash lengthened into a recession, management made the bold and strategic pivot towards a completely different set of customers – manufacturers and importers needing to ship consumer packaged goods (CPG) to major retail chains. Within a few years, CaseStack gained scores of new customers and saw revenue rise rapidly. However, the financial meltdown in 2008/2009 sent the national economy into a tailspin and the company once again faced a cash flow crisis. This time, they took a calculated risk and moved the company’s HQ from Los Angeles to Arkansas to reduce operating costs and to launch a strategic partnership with Walmart. Today, CaseStack captures a major share in the CPG segment with partners like Whole Foods, Kroger and other leading retailers.
3. A former CEO of TEVA, now the worlds’ largest manufacturer of generic pharmaceuticals, once called the senior management and told them a major customer had been lost and they must recommend 10% budget cuts across the company within the next 24 hours. After the consensus recommendations were delivered, the CEO announced the account had not been lost, but to the astonishment and applause of the management team, he said the recommended cuts would be implemented anyway.
These successful strategies may not work for you but it shows unorthodox tactics CAN work, depending on market conditions and the company’s circumstances. The point is to consider everything: from generating more cash, saving on spending, or evaluating options that others might quickly dismiss as foolhardy. Surviving the storm may require actions beyond what you had thought of previously, or even thought possible. Time waits for no one; the time is now.
David J. Blumberg is the founder and managing partner of Blumberg Capital. Follow him on Twitter at @davidblumberg