Being smart in a down economy

By now, probably everyone has seen the slide deck from Sequoia Capital to its portfolio companies. If you haven’t, check it out. There’s some interesting information about how the U.S. economy has gotten into this predicament, but more importantly, there are good recommendations for startups to consider as they determine how to operate in this environment. There have been similar messages from firms such as Benchmark Capital, Foundation Capital, angel investor Ron Conway, and others.

The bottom line is that almost no sector will be immune to a downtown in spending. Not advertising. Not e-commerce. Not mobile. And not enterprise software. Maybe open source will be a bright spot, since it’s one way companies can save money. But if you think business was rough in 2002 and 2003, this could be worse. Gartner is reducing its IT outlook for 2009, cutting growth in half. Personally, I think that could be optimistic.

Just think back to how many companies went out of business in the dot-com bust. They may have had great ideas that were eventually proven right. But if you’re burning cash and you can’t turn it around in short order –and I mean 90 days max –you may not have the chance. If you can get more investment — which is unlikely in a credit crunch — the terms are gonna suck. IPOs? Doubtful. M&A opportunities will be few and far between for money-losing companies and valuations are going to be lower. After all, an acquiring company has every reason to wait until prices get lower. And who wants to acquire a troubled company anyway?

So you better take action now to figure out how you will survive during this period and get your house in order.

• Cash is king, so cut operating costs to the bone
• Get cash flow positive as soon as possible
• Focus your marketing on building demand and helping sales
• If it’s not revenue focused, forget it
• Figure out what product features are essential and cut the rest
• If your product doesn’t help companies generate revenues or reduce expenses, it’s going to end up in the “nice to have” pile
• Assume all deals will take longer to close
• Decrease non-essential headcount and overhead functions

Admittedly, some of this is Startup 101. But it’s back to basics right now for everyone — not just startups. I’m not saying these things are easy to do. They aren’t. It takes bold leadership to make these changes. And that’s often in short supply.

What’s happening in your organization? Are you cutting headcount? Are projects on hold? Are you using more open source? Share your comments below.