How to Survive Economic Downturn Booklet

8/2/2019 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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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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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



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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



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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



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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.



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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



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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.



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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



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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.



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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



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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



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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



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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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How to Survive Economic Downturn Booklet