September 22, 2008 at 16:09How to survive the credit crisis
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Entrepreneurs, as a rule, are so focused on their companies that they simply do not have enough time to worry about what is happening in the world around them. Usually this is the most correct position. Now, however, is the exception. The credit crisis hurt financial markets. This will lead to serious consequences for any startup.
The roots of the current situation should be sought in 2001. In an attempt to overcome the economic effect of the collapse of dotcoms and terrorist attacks on September 11, the US Federal Reserve began to lower lending rates, lowering the cost of raising money to 1.75% from 6.5%. It was great - entrepreneurs could attract cheap money to build new businesses, buyers could borrow very easily to buy products sold by these businesses.
However, this led to an unexpected result. People began to use cheap credit rates to obtain mortgages to buy real estate. Lots of real estate. Investment banks made various derivative instruments from mortgage securities in order to balance old secured loans with new and risky ones. The pursuit of the borrower soon led to a tremendous increase in risk on the once super-reliable mortgage bonds. (Note of a translator - old secured mortgage securities with down payment and new securities secured only by real estate itself. Creative exaggeration: in recent years, you could get a loan to buy an apartment at a rate of 1% without down payment) .
The result was catastrophic: the supply of new homes rose sharply, property prices collapsed - and suddenly financial institutions ended up with trillions of dollars in their hands in unsecured securities. It is impossible to raise money; some of these investment banks no longer exist. Loans are no longer available to anyone, including entrepreneurs.
If you are lucky enough and your startup already has buyers, they are also not easy now and they are less likely to spend money right now. If you don’t have such buyers yet, then you have bad business - business angels and venture capitalists who fought for your brilliant idea last year will now prefer to sit out the situation in real money.
What should an entrepreneur do now?
Angelsoft has always been free for IT entrepreneurs, but three months ago a product was created for the premium segment, which allows the entrepreneur to directly display their business plans for investors for $ 250. In the long run, this can reduce the number of new users, but it gives some income that will last a little longer.
Ryan Janssen is Operations Director (COO) of Angelsoft.net , a web platform for IT entrepreneurs and investors.
Why did this happen?
The roots of the current situation should be sought in 2001. In an attempt to overcome the economic effect of the collapse of dotcoms and terrorist attacks on September 11, the US Federal Reserve began to lower lending rates, lowering the cost of raising money to 1.75% from 6.5%. It was great - entrepreneurs could attract cheap money to build new businesses, buyers could borrow very easily to buy products sold by these businesses.
However, this led to an unexpected result. People began to use cheap credit rates to obtain mortgages to buy real estate. Lots of real estate. Investment banks made various derivative instruments from mortgage securities in order to balance old secured loans with new and risky ones. The pursuit of the borrower soon led to a tremendous increase in risk on the once super-reliable mortgage bonds. (Note of a translator - old secured mortgage securities with down payment and new securities secured only by real estate itself. Creative exaggeration: in recent years, you could get a loan to buy an apartment at a rate of 1% without down payment) .
The result was catastrophic: the supply of new homes rose sharply, property prices collapsed - and suddenly financial institutions ended up with trillions of dollars in their hands in unsecured securities. It is impossible to raise money; some of these investment banks no longer exist. Loans are no longer available to anyone, including entrepreneurs.
If you are lucky enough and your startup already has buyers, they are also not easy now and they are less likely to spend money right now. If you don’t have such buyers yet, then you have bad business - business angels and venture capitalists who fought for your brilliant idea last year will now prefer to sit out the situation in real money.
What should an entrepreneur do now?
Three steps to survive in a credit crisis.
Step 1.
Talk with your team and investors. Explain to people that now you are "in the trenches" - no new employees, bonuses, development. It also means no new servers or software purchases. Agree with the vendors now, do not wait. Prepare your investors for slower growth. Speak their language - show examples of buyers who will buy less, but still will. Show investors that you know how to reduce regular expenses. For example, Angelsoft has reduced its monthly expenses by 30% since June. On Monday, when the market collapsed, investors sent more money - "Yes, this is a loan, but this is the money that we need now, and this shows the faith of investors that everything will work out."Step 2
Focus on revenue. Many startups focus on attracting as many users as possible, postponing monetization for later. Nowadays there is no place for such a strategy. You run out of money badly before. Switch your product, marketing and sales to revenue generation here and now. You will not grow so fast, but a live cache is required, without it you will not survive.Angelsoft has always been free for IT entrepreneurs, but three months ago a product was created for the premium segment, which allows the entrepreneur to directly display their business plans for investors for $ 250. In the long run, this can reduce the number of new users, but it gives some income that will last a little longer.
Step 3
Do less. For most entrepreneurs, this will sound strange, however ... You were called upon to make the business bigger, to enter some new frontiers. When everything is good - it is significant, but now - all businesses will experience difficulties with development. If you continue to consider growth as your main goal, you will fall out of reality. Then you will have no other chance to prove that you are capable of something when the economy begins to grow again.Ryan Janssen is Operations Director (COO) of Angelsoft.net , a web platform for IT entrepreneurs and investors.