Last week there was an article in the Wall Street Journal titled "In Silicon Valley, Start-ups Begin Hitting the Brakes". The article struck a very negative tone that as the economy slips into a recession that VC-backed start-ups are very worried about slowing sales and hence are rushing out to raise wads of cash in case of a downturn. The article's tone made it seem like a new bloodbath is on the way for VC-backed companies. As usual, the press looks to paint the entire picture with the same brush. I can hear the editor at the WSJ saying - hey, let's go talk to some start-ups and VCs to get feedback on why the recession will hurt them and what they're doing to make sure they survive a downturn in the economy.
In any recession a number of industry sectors suffer from a poor economic environment and start-ups are no different. I'm sure we'll see our share of failures if the economy continues to falter. However, I expect we'll also see quite a number of companies thrive in a bad economic environment and I've always felt that the greatest tech-related companies are usually born during the worst economic times. In a bad economy a young company becomes battle tested, has more time to get their business model right with less competition nipping at their heels, are forced to focus on only what matters to be successful and are able to recruit higher quality talent more easily.
This brings me to the story of KnowledgeStorm, an online lead generation company I invested in back in 2001 only a few weeks after September 11th. If you recall that period, the tech industry was being written off, online marketing was being written off and the internet was considered dead. Very few venture deals were getting done at all. The entire KnowledgeStorm management team had to rent a van and drive almost 20 hours to our offices for a final presentation to our entire partnership for investment approval. There were no planes flying yet at the time and the country was still in fear. The truth is I knew I would fund the company before they even walked into our conference room. Having the whole team leave their families during that time to travel and drive 20 hours in a cramped, rented van showed me they would have the guts to persevere during the toughest times. They could have rescheduled for a later date but the team wanted the financing now and they couldn't know for sure when the airlines would be flying again. For me the investment was a no-brainer and Kelly Gay and her entire team proved my instincts to be right. KnowledgeStorm built a good business which was sold successfully last year earning us a solid return on our investment.
At the time we invested, KnowledgeStorm only had $300k-$500k of revenues. Despite the economic environment and the fact that I couldn't find another venture firm to co-lead the deal with me I was convinced it was the ideal time to make the investment. KnowledgeStorm essentially offered technology marketers the highest quality leads and a compelling ROI during a time that tech marketing budgets were being cut dramatically. A registered user would search tech solutions and opt-in to have the vendor contact them to provide more information. They were offering hot, buyer initiated leads during a time when tech companies felt like they were wandering the desert for months in search of water. Essentially, KnowledgeStorm had a countercyclical product and was able to provide the perfect offering at the perfect time. Tech companies pulled back on B2B magazine ads and trade shows and subscribed to the KnowledgeStorm directory to acquire leads.
KnowledgeStorm experienced tremendous growth from 2001-2004 and continued to scale once the economy turned positive again. This brings me back to today. In 2007 we invested in 3 new lead generation companies: BDMetrics, BestContractors and ReachForce. All three companies are focused on a different area of lead gen but have one common thread - they provide a compelling, measurable ROI to the marketer that can't be easily achieved through alternative marketing channels. We didn't make these investments knowing that the economy might move into a recession during 2008, however, if that happens I expect all 3 companies to see even stronger top line growth. We'll be more likely to step on the gas, not hit the brakes.
Lead gen isn't the only sector that does well during an economic downturn. I'm not going to name them all here but there are a number of sectors that are either countercyclical or have absolutely no correlation to the economic environment (health care).
And for those companies that are operating in more vulnerable sectors. My advice is to use poor economic times to focus on what's most important so that you'll come out the other side even stronger. Remember the old saying - what doesn't kill you makes you stronger. For evidence see Google, Microsoft and countless other tech companies that built their commanding market share and tremendous value during a weak economy.