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Transcript of How to Survive Economic Downturn Booklet
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How to survivean economic downturn
Foreword by David HunterMD, NESTA Investments
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NESTA is the National Endowment or 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, inorm policy, and deliver practical
programmes that inspire others to solve the big challenges o the uture.
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3
Contents
Foreword 4by David Hunter, MD, NESTA Investments
Its about survival, not prosperity 6
by Jon Moulton
Take rapid action and be realistic 10by Tim Cooke
Go the extra mile or your customers 14
by Martha Lane Fox
There are still opportunities to thrive 18by David Rogers
Learn rom others whove been there beore 22by Permjot Valia
Collaboration and creativity will get you through 26by Sh Wasmund
Contents
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ForewordBy David Hunter
4 How to survive an economic downturn
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5
The recession is now upon us and as you will read
in this collection o insights rom experienced
entrepreneurs, it is unlike anything we haveseen beore. It is urgent that our portolio
companies and other early-stage high-growth
businesses recognise the signifcance o this
recession and adapt accordingly.
NESTAs research shows that there is a crisis in venture capital
unding. A total o 39 unds have been actively investing in the
early-stage space in the past ve years and we now estimate that
there are only 13 unds that have more than 5 million remaining.
The number o early-stage unds 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-prot companies this outlook requires
immediate attention to consider what changes need to be
made now in order to prepare or a undamentally new unding
environment. For many this new environment will require a
rapid response with signicant alterations to business plans and
company strategy.
I hope that this timely insight rom a range o experienced
entrepreneurs will provide a useul overview in considering how
your company will survive and thrive during these extraordinary
times.
David Hunter
MD, NESTA Investments
David Hunter Foreword
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Its about survival,not prosperityBy Jon Moulton
6 How to survive an economic downturn
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Ive worked through a ew recessions, in the
UK and the US, but this time around its much
nastier. In a very short space o time weve seena housing market meltdown and the collapse o
fnancial systems. Businesses need to adopt a
survival strategy and orget 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 defation. Every company will
require exceptionally tight cash control and excellent orecastingsystems. Its absolutely essential that those orecasting systems
are realistic. Managing the balance sheet rather than the prot
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 zero-
based 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.
7Jon Moulton Its about survival, not prosperity
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I redundancies are required, its better to re too many people
than too ew. This might sound harsh but repeated rounds
o redundancies erode morale and can eventually destroy a
company. Businesses also need to take what they can rom thegovernment, whether thats PAYE or VAT payment delays, any
uture reductions in corporation tax or grants or businesses in
certain parts o the country.
Opportunities or 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 i you grasp
opportunities to come up with dramatically new ways to run the
business, such as outsourcing parts o it or even closing divisions.
O course its always the case that recession will lead to
opportunities or brand new ventures. The general lowering o
costs can make some businesses viable when they wouldnt have
been beore.
Small, growing ventures are going to nd it especially dicult
to make progress in this market, with people less likely to beadopting new products or services. In particular, nding second
or third round unding 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 or lawyers and accountants
8 How to survive an economic downturn
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specialising in restructuring, but at least 95 per cent o 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.
9Jon Moulton Its about survival, not prosperity
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Take rapid actionand be realisticBy Tim Cooke
10 How to survive an economic downturn
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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 early1990s I was chie executive o a large part o
Logica and when the dot-com bubble burst in
2001 I was chairing a range o start-ups. The
recession were now in is completely dierent
rom those that have gone beore.
Since everything ell o a cli 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 ast and must take the view
that things may stay like this or a couple o years. There is no
room or hoping or the best and you cant place trust in anyoneorecasting recovery.
Choosing a course o action
As I see it, there are three types o companies and each needs to
take a dierent course o action to weather the downturn. Therst type o company is the cash-rich business. These businesses
will have been well managed and already recognise the value o
cash. Cost control is undamental and even cash-rich companies
need to keep costs to an absolute minimum. Cash-rich businesses
should be looking to make dierent kinds o investments, such
as improving their business model by ocusing on high-margin
11Tim Cooke Take rapid action and be realistic
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business or improving systems. I you can aord 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 o 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 signicant sales reductions. I
the business is experiencing problems, its important to talk to
your bank or venture capitalist sooner rather than later and try tonegotiate new arrangements. Companies in this position should
also look around to see i there are business angels who can oer
support, even i the terms are tough.
The third group o businesses are those or whom the economic
climate provides massive opportunities, such as rms that can
buy distressed assets. One o the companies that I chair acquiresdistressed sotware companies, and being able to buy and
resource more cheaply means that 2009 will be a good year or
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 prot margins, customer relationships and
joint ventures. Investing in people and inrastructure now will
enable the business to move quickly when the economy picks up.
12 How to survive an economic downturn
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For start-ups, now is a good time or 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 or the upturn
when it happens.
Anyone running a business needs to stay grounded and realistic,
especially when it comes to sales orecasts. Having been through
various downturns beore, I do think its important to keep a
sense o perspective though. This isnt the end o the world and
things will get better hopeully in around 18 months. We can
aord 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.
13Tim Cooke Take rapid action and be realistic
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Go the extra mile
or your customersBy Martha Lane Fox
14 How to survive an economic downturn
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I eel ortunate as I have not had to work
through a climate as tough as this beore, but
steering Lastminute.com through the 2001stockmarket crash and beyond certainly taught
me how to cope when your company is being
battered. This downturn is very dierent rom
2001 though. When the dot-com bubble burst,
the fnancial crash was much less severe and
the eects werent elt on the High Street.
There has been an absolute explosion o media since the last
downturn and with this multitude o coverage come some scary
headlines. There is no arguing that its going to be horrible but
despite what the headlines suggest, society is still unctioning
people are still going about their daily lives, going to the
supermarket, buying the odd treat, going out or occasional un.
It is important not to become carried away with what the papers,
TV or web is telling you. Instead, you need to ocus on what
youre doing and what your organisation is doing.
Lean thinking or 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.
15Martha Lane Fox Go the extra mile or your customers
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Some businesses will nd that the downturn creates opportunities
or growth, but or most its a case o nding a way through by
changing, disrupting and continuing to innovate. You need to
keep things interesting or your customers and make changeswith condence. Remember that innovation can come in lots o
orms it could relate to your product, a clever marketing idea or
a new pricing strategy or example and it doesnt have to cost
a lot o money.
Deliver greater value
I was once lucky enough to hear Bill Gates speak. One o the
things he said that has stayed with me was that i 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 satisy customers, aim to delight them.
Businesses that can go the extra mile and deliver greater value
or their customers and perhaps some light relie should come
through this downturn well. At Lucky Voice, we recognise that
this January might not be as busy as last year, so were oering
ree room hire to low-paid public sector workers. Running this
oer wont cost us anything and itll help to generate customers
or the uture, but more importantly were doing a good thing.
Online opportunities
Online usage continues to go up. In November 2008 the buoyant
nancial results rom ASOS showed us that there are still
enormous opportunities or taking a share o the online market.
16 How to survive an economic downturn
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Ive also seen the potential or online growth through my role as
a non-executive director o mydeco. The rate o growth may be
slower than it was, but its still ast.
I your business is just starting out, its going to be an especially
tough time. Like any business, you need to look at your cash fow
and conserve cash as much as possible. I youve just managed
to raise money, resist the temptation to splurge and instead
consider lying low or 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 unding.
. . . . .
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.
17Martha Lane Fox Go the extra mile or your customers
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There are still
opportunities to thriveBy David Rogers
18 How to survive an economic downturn
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Ive worked through a number o economic
downturns but I havent seen anything like this
beore. This recession wasnt widely predictedand it moved rom the fnancial 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 or
these challenging conditions, but I know rom
experience that there are things you can do tomitigate the circumstances and come through
stronger.
Three actors to address
To steer a business through a recession you need to tackle
nancial management, sales and marketing and innovation. The
way in which you put these three actors 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 owhere you want to be on the other side o the recession.
In relation to nancial 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 undamentals o your
19David Rogers There are still opportunities to thrive
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business. You should be analysing your cash fow position and
sales scenario on a weekly or even daily basis. This inormation
should always be at your ngertips and it should be understood
by the whole organisation.
Making efciencies
You will inevitably need to make operational eciencies.
Lowering your break-even position shouldnt just be a slash and
burn cost-cutting exercise. It may involve more undamental
decisions about the markets and products that your business is in
and the innovations that you ocus on.
Youll need to introduce greater fexibility 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 conned to the accounts department it needs to
be everyones business. The same goes or 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 o taking market share rom your competitors. Your
kill the competition mentality has to be very dierent rom the
mentality that will have seen you through the good times.
20 How to survive an economic downturn
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Youll need intimate knowledge o what your competitors are
doing and what theyre oering. The whole organisation, rom
the chie executive down, will need to re-engage with your
key customers. Youll need to be prepared to make bold, quickdecisions on how to reshape your proposition in response to your
customers changing needs.
Innovation is a vital part o 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 o your
business online or taking a new approach to sharing risk. It couldalso mean stopping doing something.
Taking market share, readjusting your costs to a dierent break-
even position and introducing much better nancial controls will
enable your business to thrive when the blue skies come. Therell
be a huge amount o work involved but i 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.
21David Rogers There are still opportunities to thrive
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Learn rom others whovebeen there beoreBy Permjot Valia
22 How to survive an economic downturn
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This downturn has been sharper and more
severe than anyone anticipated and no-one can
say whats going to happen over the comingmonths. Were all in uncharted waters.
The beneft o experience
Anyone under the age o around 40 is unlikely to have rst-
hand experience o managing a company through an economic
downturn. But there are plenty o people out there who do
have this experience. Businesses should be looking to recruit
non-executive directors who can oer practical experience and
knowledge o how to run a business during a recession.
Innovative, resh 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 or their
advice and sharing your plans with them. You need to make the
bank eel completely comortable 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
23Permjot Valia Learn rom others whove been there beore
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unding or dot.coms came to a halt in 2001, smart companies
went into a period o hibernation, keeping the business ticking
over but no more than that.
Businesses shouldnt be too quick to sacrice 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 or small businesses. Advertising also sends out a
strong message about the condence you have or the uture o
your business. Businesses should continue with their marketing,
but be absolutely certain that they are achieving the best possiblereturn on their investment.
Be indispensable
Businesses should do everything possible to make their service
indispensable to their customers. I the customer can do without
the service i its a discretionary purchase rather than a mandatory
one youll need to have a really strong value proposition.
Sales o DVDs are going up because the product delivers good
value or the customer. Buying a DVD is a treat, but when
people want to spend less on nights out, DVDs oer a very cheap
orm o entertainment.
Opportunities or start-ups
I believe that 2009 is still a good year to start up i 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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ocusing on their core business activities, its a particularly good
time or entrepreneurial individuals and small companies who can
oer outsourced services.
Investments may have dropped dramatically but there will always
be money out there or 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 ront will nd it increasingly dicult to nd support.
Make your money work harder
I oten ask the companies that I work with what they would do
with an investment o 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 useul exercise
or any business. What youll nd is that although the steps you
take to reach your goals will be dierent, you will still nd a way
to achieve them.
. . . . .
Permjot Valia is the co-founder of Flight & Partners, a fund
manager authorised and regulated by the Financial ServicesAuthority. 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
25Permjot Valia Learn rom others whove been there beore
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Collaboration and creativitywill get you throughBy Sh Wasmund
26 How to survive an economic downturn
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I set up my frst business, a PR company, in
the mid-1990s at the tail-end o an economic
downturn. It didnt even occur to me that Ishouldnt go ahead because o the fnancial
conditions. Maybe it was the naivety o youth
but I knew what I wanted to do and just did it.
The dot.com crash came a ew 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 or the worst
This is going to be an extremely dicult year and businesses need
to expect and prepare or the worst. Every single penny counts,
so businesses need to look at expenses and travel budgets and
nd ways o reducing costs. Cutting sta 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 i people are prepared to take salary cuts.
Its important to involve your teams in trying to nd solutions.
The people who work at the rontline o your business have a
dierent perspective and may be able to oer resh ideas on
cutting costs and nding a way through the downturn.
27Sh Wasmund Collaboration and creativity will get you through
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Businesses that have borrowed responsibly and been good
customers to their banks may still nd that their banking acilities
are withdrawn. I this happens to you, you need to ght your
corner by taking your case up with senior executives at thebank and getting your MP involved. You also need to hold your
suppliers and customers to strict terms. I your payment terms are
30 days, then you should be chasing at 25 days.
Adapt to the changing market
Its crucial or businesses to understand how their customers
needs have changed and what this means or them. Innovative
and quick-thinking companies will come through the recession
well. It can be harder or big businesses to change course but
smaller companies should be able to take the initiative and act
switly. The dicult economic conditions require businesses to
be fexible, adaptable and chameleon-like.
Businesses that carry on spending on marketing during a
downturn are oten able to grab a larger share o the market. I
you can aord to continue marketing, you should. I you have to
cut back on marketing, then you need to get creative and nd
ways o making your budget work smarter and harder.
Dont sit on the ence
New ideas and approaches will drive your business orward 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
28 How to survive an economic downturn
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money. The recession wont last orever and businesses need
to continue innovating so that theyre in good shape when the
upturn comes. Theres no room or ear or or sitting on the ence
and postponing big decisions.
Business owners also need to be proactive in networking and
learning rom others sta, suppliers and especially other
businesses. Ive set up Smarta to enable businesses to do this.
When youre running a business, being able to learn rom
someone whos six or 12 months urther down the line than
you are is invaluable. My advice is to take every opportunity toconnect, 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.
29Sh Wasmund Collaboration and creativity will get you through
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NESTA
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London EC4A 1DE
www.nesta.org.uk