The economy's slowed to a crawl, and whether it's a prelude to recession or a temporary blip, there's already a body count. A good portion of the formerly high-flying dot-com world has either rolled over and died or is wandering the streets with sandwich boards reading: "Will Do Whatever You Want for Financing." Even established companies like General Motors and Lucent have announced they'll lay off thousands of people in the coming months. All in all, it looks like a wonderful time to launch a business.
Seriously.
Call it opportunistic entrepreneurship. Call it picking the low-hanging fruit. Call it vulture time. Whatever. For the shrewd entrepreneur, times of economic duress are rife with possibility.
Of course, the days of us-against-the-world business plans, sky-high valuations for companies with no products or customers, and $100,000 launch parties are long gone-and anyone with a modicum of business sense will happily bid them adieu. They've been replaced by abundant capital, a pool of experienced and ambitious labor, more affordable commercial real estate, and an office equipment aftermarket that makes Monty Hall seem like a stickler for negotiations. The competition has thinned out as well: 12 months ago the chances of getting a business plan through the door of a venture capitalist's office were on par with Ralph Nader taking a board seat at Chevron. As most would-be entrepreneurs scurry back to the safety of corporate America, anyone with a solid plan, more than a little determination, and good old-fashioned chutzpah is way ahead of the game. As a bonus, businesses launched now won't have to contend with premature pressure to go public, a slew of me-too companies looking to tap their market niche, or being profiled in an e-business mag exposé titled "What Went Wrong This Time."
So start polishing those rose-colored lenses, and get ready to look for opportunity where others see failure. After all, it might take another 10-year bull market run for an opening as good as this one to come along again. -Robert Dunn
An Embarrassment of Riches
VCs ARE STILL GIVING AWAY TRUCKLOADS OF MONEY
As a bevy of VC-backed companies have scorched their investors in recent months-whether it's Pets.com's demise leaving Hummer Winblad Venture Partners in the doghouse, or the knee to the groin Idealab! has taken from investments in eToys and Goto.com-the conventional wisdom is that it's a bad time to seek financing. Don't believe the hype. Venture capitalists still have money-a lot more than they did a year ago, in fact-and they're all in desperate need of fledgling companies to invest it in. "There's easily about $35 billion to $40 billion out there to invest," says Jesse Reyes, a vice president at Newark, New Jersey-based Venture Economics, a venture capital research company. "It's actually a good time to seek financing. VCs are just digesting a large dinner. Is there some indigestion? Certainly. But that doesn't mean their appetite has been permanently affected."
There's a good reason VCs are still hungry. The last two years set fund-raising records for venture capital, netting $70 billion last year and $37 billion in 1999, according to the Wellesley, Massachusetts-based publication Private Equity Analyst. Of that total, a little over $46 billion is earmarked for early-stage venture investments. Because most VC funds are structured as 10-year illiquid partnerships-that is, capital is returned to investors within 10 years of their commitments-a VC firm must invest the money within five years of the fund's formation, or risk feeling the ire of its backers. Seen in this light, the lag in capital placement over the last few months is actually a boon for any company sporting a well-thought-out, realistic strategy.
So, what flies this time around? Revenue-or, at the very least, the potential for some within a year. "You need to have really solid revenue information to prove that you can monetize the business," says Robbie Hardy, founder of Atlantis Group, a Research Triangle Park, North Carolina-based angel investor. This wave of entrepreneurs should also avoid the me-too syndrome. "You have to have a business plan that really highlights what the barriers to entry are," Reyes says. "VCs don't want a business plan that has a lot of speculation in it." That means sketchy ideas for Internet-based community plays, Web telephony, or online retailing are out. "There were a lot of concept deals that crashed and burned last year, so that type of plan is effectively dead right now," Reyes says. Ones that actually make money, however, are set to explode out of the blocks. -Robert Dunn
Throw 'Em a Life Vest
THE TALENT POOL'S DEEPER THAN IT'S BEEN IN YEARS
The numbers tell the story: Since December 1999, there have been more than 56,000 dot-com layoffs, including 15,000 this past January alone, according to The Industry Standard's Layoff Tracker. The companies hit read like a Super Bowl XXXIV commercial break: eToys, Petopia.com, Buy.com, CDNow, Amazon.com, and AOL. And it's not just the so-called New Economy industries that are hurting: Old-line companies like DaimlerChrysler and General Electric both announced substantial labor cuts this year. The Bureau of Labor Statistics recorded more than 326,000 layoffs in December-the most for that month since 1995-and as the economy slows, it will only continue. An entrepreneur can now pick and choose from what may be the most diverse talent pool in years-and many have valuable experience pre-dating the dot-com era.
Look especially for the grown-ups that ditched out of, say, a 15-year career at Arthur Andersen to join NewNewIdea.com. They may be skeptical about working at another start-up, but if an entrepreneur can lure these mature castoffs, he'll find a seasoned employee with extraordinary business perspective that can come up big whether marketing a new product or negotiating with suppliers.
These vets are also demanding less compensation. "The people who have more years under their belts and have experienced a recession are being much more realistic," says Sal Castillo of San Francisco-based recruitment firm Castillo Associates. "They are willing take pay cuts of $10,000, or even more." Also, now that reality's boot has kicked some perspective into the job market, workers no longer have the luxury of choosing their employers based on the quantity of foosball tables.
" 'When can I get my stock options and cash out?' I haven't heard that in a long time," says Brett Walker, VP of marketing at job board FlipDog.com. "Now, it's 'How long are people staying? Are the employees satisfied?' It's almost back to calling the Better Business Bureau and seeing if the company is legit."
In a recent job-satisfaction survey commissioned by Reston, Virginia-based CareerBuilder, Inc., salaries and career opportunities were the top factors people considered when evaluating a job. At the bottom: perks, titles, and stock options. And remember signing bonuses? Forget 'em. In fact, they may actually be a bane for a new company by tying it to the empty promises of employers past.
To woo dot-com refugees, entrepreneurs shouldn't promise the moon, but rather a sensible salary and a business plan that's clear, has realistic financial goals, conservative expenditures, an intelligent timetable for profitability, and, perhaps most important, a reasonable burn rate. It should also include a structured management and job hierarchy, since the days of coaxing 80-hour weeks out of employees are long gone. FlipDog.com's Walker says a successful pitch to new employees today should resemble Denzel Washington's playbook in the film Remember the Titans. "He played a coach who said, 'I run six basic plays and not a lot of tricks.' People realize that trick plays don't count anymore." -John Scalzi
As Companies Drop, So Do Rents
DOT-COM EXCESS HAS CREATED A TON OF AVAILABLE SPACE
You know what happened when Boo.com and Icebox.com went out of business? They moved out of their offices, and they did it in a hurry. Know what that means for someone starting a business? Greater availability of office space and, more important, cheaper office space. A February report from national real estate broker Insignia/ESG found availability in downtown Manhattan jumped more than 18 percent in January, while south of midtown, average asking rents dropped by $1 per square foot. On 10,000 square feet, the money saved pays for a VP of marketing.
Dot-com woes have created space in other parts of the country as well. David Ege, a co-founder of San Francisco-based communications company Mobido, recently found loft space in SOMA, one of the city's most-sought-after neighborhoods. Ege credits his company's windfall to overbuilding (fueled by the market demand of 18 months ago) and to landlords' becoming more realistic about the long-term prospects of dot-com companies and the economy as a whole. "Landlords were demanding a high rent and stock in your company, which is crazy," says Ege.
Failed businesses are also freeing up prime space in the forms of subleases, shared space, and just plain defaults. "Companies, especially dot-coms, are closing their New York offices and don't know what to do with all their space," says Ruth Colp-Haber, a partner at New York-based commercial real estate firm Wharton Property Advisors. The shrewd move? She recommends subleasing or sharing space. That way, the entrepreneur won't have to design and pay for an office's infrastructure. "It's all already built out," Colp-Haber says. "And that can save a huge amount of time, hassle, and money." Insignia/ESG managing director Jeffrey Bernstein agrees. In cases where dot-coms have been forced to cut labor but not fold entirely, he says, space can often be picked up for a few dollars cheaper per square foot than the going market rate. Would-be entrepreneurs get a break on rent, while the somehow-still-alive dot-com gets to slash its rental costs.
To find these deals, you have to be willing to chase the hearse. Knowing which businesses are laying off employees is the first step to locating subleased space at a great price. (Hint: If you haven't already, bookmark fuckedcompany.com on your browser.) By talking to the business directly, an entrepreneur can save the struggling company the time and expense of employing a broker, and potentially negotiate a better price. In the case of a company that's folding, there's also the possibility of picking up the business's lease as a discounted asset, Bernstein says. This means a renter could be paying a market rate from a couple of years back-which could translate into a significant saving. -Jude Stewart
Casting for Castoffs
FAILED BUSINESSES HAVE A LOT TO OFFER ENTREPRENEURS
When companies fold, it's not just people that are tossed; every tangible asset hits the pavement as well. It's a huge opportunity for the entrepreneur to outfit the office with top-quality stuff. If the taint of failure seems a little overpowering, take note: The stuff is dirt cheap, and at these prices, the stench wears off fast.
What's available? Whatever you want: workstations, Aeron chairs, monitors, conference tables, couches, Lava lamps, filing cabinets, Rolodexes, kitchen equipment, Post-it notes-even lobby art, arcade games, and Ping-Pong tables (though at the moment start-ups should probably avoid having games in their lobbies, at least if they're looking for investors). Anything that can be used again is put into play and is abundantly available through local resellers or online auction houses.
There can also be a hidden benefit to bargain shopping: If mentioned strategically in a business plan, it's an artful way of letting investors know the management understands the opportunities an economic downturn presents. Another plus: Much of what's currently out there has been barely used or, in some cases, not used at all. David Marchick, a vice president at Bid4Assets, which specializes in redistributing the remnants of failed companies, recounts itemizing the assets of one company and finding 30 Cisco servers-enough to power a huge business-still in their boxes.
In addition to Bid4Assets.com, OfficeExchange.com and Auction-Warehouse.com offer similar services. And don't think contacting failed businesses directly is uncouth. They need to liquidate, and it's better to have suitors calling than to spend even more money advertising castoffs. Like Rome, the foundations of new businesses will be built on the ruins of their predecessors. —John Scalzi
