I might be calling this a little early, but in times such as these, its better to be early than dead. Now that the Sensex is 30% (Nasdaq 25%) off recent peaks, and US economy heading downwards, here are some lessons from the last time we went through this:
- Cash is king – raise money if you can; dont vacillate on valuations
- Put your blinkers on, and build the business – avoid distractions
- Focus on the customer – build what you can sell in near term
- Building brands can get cheaper – but will still take cash
- Enterprise sales (software or services)? Count on longer sales cycles
- Beware of old receivables – a lot will evaporate
If we do get to a full bust, I will come back with some more. Remember, the great companies of today were built on surviving the last bust. Here’s your chance.
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I have a different Opinion,
A low pricing just for one customer (specially for enterprises) is very tricky, often the word spreads and your product market values goes down in that segment/region.
I try and use “March discounts”, “distributer discounts” and other catchy phrases to get the ball rolling if the customer is important.
Also, not letting a customer go is an oversimplified statement in enterprise. In any startup you have to focus on right customer and right pocket size. If you try and service customer-by-customer you may end up being a service company with a over-featured product.
A bust in the stock market will be a good reason for funds to look at investing options beyond the PE deals leading to an IPO. Funding startups which will go for their IPOs when the stock markets are doing better, should be an attractive option for them. Now is probably the time for startups to raise enough cash while funds look at diverting more money towards startups and before the funds tighten their purse strings for all investing options.
The US economy not performing well, will still be a matter of concern.
Alok’s suggestions on focusing on building the business and on customer’s immediate and near term needs (and for that you need to really understand the customer) are probably the two paramount objectives for the startup in what looks like a potential bust looming ahead!
What if the incremental cost is zero ?
For product based companies, more imaginative pricing strategies may help deal with costs like support and pre-sales. You can try to push a one-time discount and/or offer separate maintenance pricing. If your product has hardware appliance costs, you can negotiate with the hardware manufacturer to see if they can offer a discount. In my opinion, product companies should not ever walk away from a sale (unless the sale involves extensive customization work). For startups, revenue and user base are both important – because in most cases the software needs to be filled out or polished by the virtue of many different users.
The Infy-GE example is relevant to “high touch” product companies and for services companies. In the former case, the product is a loss leader anyway for a more lucrative subsequent services or customization deal. So, you can adjust your model to make the initial product an even bigger loss leader.
Finding people to work for startups will get a lot tougher in India. Here in Silicon Valley the trend is that many folks are moving from startups to work in large corporation since the perception is that their jobs will be secure in bigger companies.
If the economy does go on a downward spiral (it is already in the US…everyday now the headline is just that and what the Fed is doing) then money will become tigher to get from VCs.
Historically anytime there is a downward trend i the economy in the US sports and entertaiment have done very well. I wonder if that will be the case in India?
Kamla
If customer brings down price drastically: The short answer is – “depends”. The long answer is:
If it costs you more on raw materials (I have no idea what your product costs) than the customer will pay, ditch. A customer who won’t pay your raw material cost is not quite looking to stay in business.
If the cash flow is absolutely necessary even if it “seems” like a loss, take it. Meaning, this is the price the customer is willing to pay after you have sunk in salaries, rentals etc. so any amount you recover is good. Take it but please grovel and scream and shout or get people who will do that for you.
If you think you will do customer a favour that he will make up for later, and not just because he’s saying it but because he’s got that kind of integrity, do it. But convince yourself that if you’re wrong you can take the moral and financial hit.
If your customer is going to talk to other potential customers and tell them your “new” price, drop him.
If you acquisce meekly you will never be able to get a decent price again. Do hajaar good-cop bad-cop fundas and bring in the accountant-from-hell if necessary, but ensure image is that you are giving in with a huge-ass fight. If customer says take it or leave it, leave it.
All this is bull if you are way beyond the desperation start point. And if it seems like this is the one thing that will turn you around, do it. If it doesn’t quite seem like that, you gotta ask yourself why you would continue with them.
When GE asked Infy to cut prices a lot, sometime in the past, they chose to lose the customer rather than drop margins. ANd that when GE was a significant source of revenue. Best thing they ever did, IMHO, because they reduced dependance on single entities hugely after that, and as we have seen, have done fairly well.