Entrepreneurship in A Bear Market
"In the midst of crisis, lies great opportunity." - Albert Einstein
As the spread of COVID-19 continues to impact us all, entrepreneurs are faced with new challenges - different work routines, reduced access to customers, tightening of consumer spending, and reduced buyer confidence have all contributed to a tough and uncertain environment. Therefore, it is only natural that founders and business owners have found themselves feeling overwhelmed by the increased pressure of dealing with the unknown.
A recent report from the United States Study Centre confirms, crisis tends to result in necessity entrepreneurship - where people start businesses because they need some kind of income. Some such businesses can disrupt a market or create value where none existed previously and become highly successful. This phenomenon is evidenced by the emergence of iconic startups such as Uber, Airbnb, Instagram, Whatsapp, and Dropbox, all borne out of the Global Financial Crisis (GFC) period.
So how can founders take advantage of the opportunities presented by the current climate while at the same time navigate pressing existential threats? A University of Sydney Business School webinar hosted by Professor Clinton Free (Academic Director of Executive Education), John Keith (Managing Director of BNP Paribas) and Audrey Khaing-Jones (Co-Founder and CEO of GlamCorner) raises four key insights and advice on the topic of Entrepreneurship in a Bear Market:
1. Speed To Market Matters
As John points out, speed is crucial in combating unforeseen changes to the market. The environment we're in at the moment means it is hard to scale. But, an advantage that smaller and younger businesses have over larger and more established companies is that they can quickly adapt and pivot in ways that bigger companies cannot. We have seen large companies move much slower in response to the pandemic, and they are struggling to adapt because of extensive layers of internal resources, operations, and responsibilities. On the contrary, smaller and nimble companies can move extremely quickly.
An example of this is Afterpay for whom sales are up over 100% in the 2019-2020 financial year as consumers prefer a "buy-now-pay-later" model over the incumbent credit card model for which usage has been steadily falling since its peak in 2016-2017. Afterpay is well-positioned to take advantage of changing consumer trends, and investors are looking for similarly positioned founders who can show them that the problem they were trying to solve pre-COVID is still the problem that exists today and perhaps to an even greater extent looking into the future.
2. Attain Customer Validation as a Priority
It is important to recognize that the current environment means that spikes in revenue are going to be difficult to come by, and this is why customer validation is more important than ever. John explains this by imagining a business's revenue climbing from 0 to 1 over this quarter. He points out that this small increase doesn't matter as long as your offerings are receiving quality customer validation because eventually when things improve, and consumer confidence comes back, you are in a position to grow that 1 to 100 rather quickly and that 1 to 100 jump is going to be even more meaningful than it would have been prior to the pandemic.
Having famously founded Airbnb in 2008 during the GFC, Brian Chesky has been outspoken about his belief in the importance of handcrafting your user experience before you start to scale. Nobody starts with 100 million users; you start with a few. In the beginning, you need to stop thinking big and start thinking small. Hand-serve customers and prospects and do anything and everything you can to win them over, one by one. The ability to seek out and listen to user feedback, and to attain customer validation was the secret to Airbnb's foundational success.
3. Bootstrap For As Long As You Can
Having co-founded a business with nothing but money from her pocket, Audrey understands the temptations of venture capital. However, she stresses that it is important to achieve revenue, traction, and good unit economics on your own before seeking further capital. Now more than ever, you must put net growth on the back burner and instead focus on maintaining profitable growth because of the uncertain state of the capital market. If you need further convincing, here are four simple reasons to avoid outside investment until you have bootstrapped to reliable profitability:
· No pain, no gain: Without a false security cushion of investor's money to rely on, you are forced to prioritize making money yourself. Bootstrapping gives you no option but to perform, and it doesn't matter how many times you tell an entrepreneur to spend investor's money as if it were their own, rarely is it actually done.
· Control and freedom: You are in control of all finances because it's your money, and this allows you to allocate funds to areas of the business that you believe are most important. You also have the creative freedom to take risks you may not be willing to take with somebody else’s money.
· True indicators of success: Funding yourself will have you focused on real-life metrics and milestones rather than lucrative valuations. John notes that despite appearing "sexy", high valuations can cause serious harm to your company if it is followed by a negative round of funding as a result of poor spending choices with the initial investment.
· Increased leverage for future funding: Not all money is the same money. With this in mind, perhaps the most obvious advantage of bootstrapping is an increased ability to say no to outside investment once your company does reach a tipping point where it makes sense to approach investors for a financial push. If your business is generating value at a manageable pace to become profitable, you have proven that the market need is there and that the business model works. Thus, you are obviously more attractive to investors than if you had been propped up by venture capital at an earlier stage and you are in a better position to pick the right group of investors on terms that works best for you and your intentions.
4. The Highs and Lows of Entrepreneurship
The entrepreneurship journey is a constant cycle of highs and lows. Audrey says that it can be difficult to understand the sheer euphoria that comes with the highs and the utter misery that comes with the lows until you actually experience them for yourself as a founder. However, what you can do to prepare is recognize that failure and hardship are inevitable when running your own business, especially in the initial stages. By accepting that entrepreneurship is an emotional rollercoaster, from the various stages of trying to find your perfect product-market fit, to scaling and growing your customer base, fighting operational fires and trying to raise capital, you can respond to the ups and downs with a more zoomed out perspective.
No two days are going to be the same, you're not going to get enough sleep, you're going to feel like giving up. But, in return you will achieve great freedom and flexibility and you'll live life as your own boss whilst offering high quality solutions to your customer’s problems.
The Time is Now for Great Entrepreneurs
I strongly believe that great entrepreneurs thrive in crises and uncertainty. They revel in the depths of the most complex global challenges. Creativity is in their DNA, it's how they're wired. Great entrepreneurs also have the unique capacity for silent clarity and unwavering determination. It is in times like these that I believe entrepreneurs do their best work as they have been trained to expect the unexpected, ride any wave, possess a resilient mindset and quickly adapt to any changes with creative solutions. To repeat the wise words of Albert Einstein, "in the midst of crisis, lies great opportunity"; the time is now for great entrepreneurs to continue building as the ones who survive this COVID crisis will be equipped to survive anything and will be the driving force for positive change in the new post Coronavirus world.
About the Author:
Lucy Lin is the President of the University of Sydney Business Alumni Network. She is also a board advisor and the Founder of Forestlyn.com, a growth consultancy for high tech entrepreneurs and companies focused on driving innovation. She is passionate about marketing, entrepreneurship, innovation, diversity, emerging technologies and writes and speaks regularly about these topics. For more information: www.lucy-lin.com