JSooooooooo, with all the talk of recession, economic crisis and the global meltdown of markets I thought it would be good to see what the world looks like from our side of the fence. And along the way share some of the things we at Huddle have been thinking about with many of the other early stage companies we know both here in the UK and further afield. So what are the recession effects on startups?

What is 2009 going to look like for us all? Well it’s going sure as hell going to be different from the last 3-4 years, that’s for sure. But is it all doom and gloom or actually are we looking at a massive opportunity? Hmm….

Funding & Investment:

Regardless of whether you are a startup, early stage company or more established outfit – funding is going to be more difficult. The recession effects on startups will be more than that of more established companies often due to the lack of cash flow. Startup capital is much thinner on the ground now that the Hedge Funds like Tudor (who previously threw ridiculous amounts cash at early stage companies) are out of the market and many of the professional Angel investors are looking to consolidate their cash rather than make more speculative investments. However if you talk to the independent, focussed early-stage investors like Eden Ventures and Pentech they maintain that now is a fantastic time to be investing. There is less competition, the best companies rise to the top and they are not looking to exit for 3-5 years anyway. Meanwhile the scrapping of the fantastic G2i program (where we got our first introductions to our A-round investors and where we now present to other startups on our experiences in raising money) by the LDA, is a desperate loss for the UK startup scene. It’s a classic piece of short-termism by the London Mayoral organisation who is led by their political masters rather than by a wider outlook onto what adds real value to the economy. It definitely doesn’t help in today’s climate.

Similarly B-rounds are going to be harder to close as later stage investors can afford to be more picky and not invest in border-line companies. We’re also seeing direct evidence of some pretty well known funds in the UK simply not having the money to invest (it’s not just us lot that go to the wall in these situations, funds can as well, go on, shed a tear). In addition, there is no doubt that exits are going to be hard to achieve over the next 2-3 years so investments in more risky companies are going to be less likely. But a lot of what we hear are simply excuses by the investors to offer lower valuations. If you’ve got good traction, the market is responding well, you are executing on your business mode, doing deals and have a clear route to profitability then you will be able to raise money at a good valuation. If anything, it might get a little easier for good companies as all the rubbish is cleared out! And we will see more opportunities to acquire users and great technology from other companies as they go to the wall. To paraphrase Warren Buffet’s words; ‘Be bold when others are being too cautious, but be cautious when others are being too bold’ Personally, I can’t wait….

Business Models & Operations:

A lot’s been said about the issues that consumer ad-funded businesses are going to face over the next year. For sure ad revenues always drop off a cliff during a recession – the fact they haven’t yet is simply due to the fact that budgets are frantically being spent before year end in the knowledge that they won’t be available next year. So subscription businesses are more likely to fare better. True, but people will also spend less on these unless they (a) are business critical or (b) an immediate cost saving measure (eg recruiting through LinkedIn vs traditional recruitment). When looking at recession effects on startups, ensuring a sound business model is critical. This is tough in the best of times and a recession only amplifies any weakness.

What’s for sure is that the excesses of the last couple of years are thankfully a thing of the past (well until the next cycle anyway). We’ve seen plenty of companies that were simply unbelievably stupid in the way they used their cash. I heard of one UK startup yesterday that burnt £5m of seed money in 1 year. Nice. Equally you’ll see several Sequoia portfolio companies like Jive have been chopping staff left and right following their now infamous GoodTimes RIP deck However this is more an indication of ‘We’ve just taken a pot of VC money and so are going to hire lots of expensive people with MBA’s but no real role’ than a true crisis in these companies. It should be simple. Be clever with your money. Lease don’t buy. Get other people to share your office space to help pay for it. Buy your test boxes off eBay if you have to (we did!). And in terms of hiring, if someone is not adding more sales $, users or product features than it costs to employ them – you get rid of them. If you ever see us doing similar stupid stuff, you personally have my permission to come up and give me a slap!

2009: A Break-Through year for Saas, the Cloud & Social Software?

The short answer in our opinion is yes. 2009 will see SaaS companies come of age as security concerns are resolved, cloud services become more and more widespread and lagging buyers are won over by the massive cost benefits in a time of reduced budgets. It will also see IT departments having to work much harder with the money they have got and pushing as much administration, support and ownership back onto the business as possible – ideal for SaaS companies.

And in an age where every marketing $ will be closely scrutinised, ‘social’ as a user acquisition model for business software will truly prove itself as the way to build profitable SaaS businesses. Although I love Salesforce, having to spend 75% of revenue on sales and marketing is just not the way to build a scalable business fast. Larry Ellison is right to laugh at us, until we can acquire users as cheaply as we sell the software to them, we won’t build massively profitable web software businesses. But the Social model of acquiring users, which we use in Huddle and which is demonstrated by our LinkedIn App, is exactly that…Bring on 2009

BTW – if you haven’t installed Huddle in Linkedin yet – do it!!

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