Surviving the Downturn

I went to a talk a couple of weeks ago by Mike Clauser about surviving the downturn. Essentially he was discussing different strategies for small businesses and entrepreneurs to survive and – better – profit from the recession.

If you run a business which doesn’t need debt to survive – either because it is a low capital business or because it has lots of free cashflow – a recession can be pretty profitable, especially one in which deflation takes hold: your inputs become cheaper (commercial rent, advisers, commodities…), staff become cheaper and more available, and staff turnover (a big cost for businesses) can be greatly reduced.

The difficulties include a lack of available capital, a lack of exit opportunities (relevant if you are a tech start-up or serial entrepreneur) – and, most pressing, customers who may be cash-strapped and would rather keep their money than pay it to you.

Governments’ reactions to the economic crisis can also provide opportunities: both the USA and UK are spending billions to try to prime their economies. Much of it seems to be earmarked for infrastructure, and it should be a good time to be in that market.

The secret of course is to identify opportunities, and build your strategy around them. This means research and building a picture of what the world is really like to inform the strategy.

Mike reckoned there were four basic models, depending on your view of the outlook:

  • ”mow the valley” – if you think it is a moderate downturn, you can profit near the bottom
  • ”ski the slope” – if you take a more pessimistic view, find a way from profiting from the rapid fall
  • ”rise with the tide” – for the more optimistic: start a business now with cheap talent, and reap the benefits when the bust turns to boom
  • ”climb the mountains” – for the really optimistic (are there any very optimistic people left out there?)

None of this is complicated, of course – it just depends on forming a view and following it through.

It did make me wonder about the morality and ethics of some possible business strategies, though. Mike mentioned several internet-based solutions such as TakeMyStuff, which profits from people who have to sell their property quickly, for instance to pay off debts or because they have been evicted. A business model profiting from their predicament is providing a service, and helping them when they need it; but it also feels rather uncomfortable.

ThinkCash aims to provide short term loans to cover funding gaps – replacing loan sharks in the process – and profiting from being able to borrow at a cheaper rate than the hard-pressed individuals who need their services. (Zopa is another financial disintermediator – although closer to a UK credit union than a loan shark!)

Similarly, if there is to be a fire sale of bad debts by the banks, one can easily see how the prices might sink too low, providing trading opportunities for the brave.

The flip side to this is that there must also be opportunities for social enterprises to develop and work within their communities – like the credit unions and co-operative societies.

I guess it all depends on one’s world view.


2 thoughts on “Surviving the Downturn

  1. smithowls

    ZOPA is not like a credit union at all. Credit unions are entirely run not for profit basis and credit unions are owned entirely by its members and the profits shared amongst them! So how is ZOPA like that ( in any sense?).

  2. patrickhadfield Post author

    From my understanding of it, I think Zopa is like a credit union because it is providing a mechanism to match lenders and borrowers – with more integrity than a bank (and let’s face it, we kind of need that at the moment). For me, the main difference is that credit unions are, as far as I am aware, always based within a local community – indeed, it is their grounding in that community that provides the security: they know their debtors better than banks do, and they can profit (ie pay interest to their depositors) from that knowledge. By utilising the disintermediation allowed by the internet, Zopa lacks that understanding – but is able to profit instead by cheaper costs connecting borrowers and lenders.


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