GigaOm has a guest post on how start-ups can survive the financial crisis. We have some experience at AdventNet on this, which I want to share. First a bit of history: AdventNet was born as a bootstrapped company in 1996. Our initial business was selling software to network equipment vendors. By 1999-2000, there was a raging bubble in networking and telecom; while the media focused on the flashy dotcoms, it was really telecom service providers and their equipment suppliers that had by far the bigger financial bubble, amounting to over a trillion dollars of capital eventually written off, split between debt taken on by service providers to finance new network construction and the venture capital raised by their equipment suppliers. For every dotcom that raised $5-10 million rounds, there probably was a SONET or WDM start-up that was raising $50-100 million. There must have been a hundred of them just in the San Fransico bay area, but Boston, New Jersey, RTP in North Carolina, Dallas and Toronto all had their fair share of bubble companies, and I must have visited each of these places at least 5 times during 1999-2000.
I had a really good vantage point on the bubble because I personally must have visited 80% of those equipment companies, as a software supplier. Fortunately for me, I was aware of the Japanese bubble of the late 80's (when Japan was going to take over the world) and its painful aftermath in the 90's. So even in the middle of the telecom bubble as a supplier, I could not help feeling it was going to end badly. There was a point when I realized that the same exact pitch was made by dozens of companies, yet most of them didn't know so many others existed, pursuing the same exact business plan.
Having said that, I have to admit even I wasn't mentally prepared for the extent of the carnage to follow. In 2000, I would have thought may be 20% of the start-up companies would survive. It turned out may be 3 out of 200+ survived. By 2003, over 90% of the companies we had supplied to in in 1999-2000 had gone out of business. That is something to keep in mind on the extent of wreckage bubbles cause - for those keeping score in the bay area or in Chennai for that matter, it is worth considering that real estate prices in Japan eventually fell 80% from the peak they reached in 1990.
So how did we overcome that shock? Here are the things that helped us. In 2000, there was a venture capitalist who was offering us $10 million for a 5% stake, in order to enable us to grow faster. After careful thinking, we turned that money down, because we felt the industry was going to shrink, not grow, and we didn't want to commit to a growth projection when our instinct told us to get ready for contraction. We felt if we were to be honest to ourselves, we had to tell the VC we expected to shrink, yet the money was coming in at such a high valuation that it needed growth as far as the eye could see to justify it. One of my friends in venture capital did tell me I was a fool - but that folly saved us.
We didn't expand our headcount in line with revenue in 2000. We simly banked the cash - which came in really handy in the subsequent nuclear winter. Indeed, it was that cash that enabled us to diversify in 2004, and that was ultimately what led to Zoho.
It seems clear that we are heading into another nuclear winter, this time led by housing and financials. It is going to impact the tech industry, but this time as suppliers not as direct bubble-blowers. Companies that have a strong balance sheet (we prefer zero debt), and the ability to adapt and flex will survive the wreckage. Customers are hurting, so attractive pricing is a must - there is going to be price deflation in tech. These are the rules we live by at AdventNet & Zoho.