Prospering in a downturn

I always remember a West Coast venture capitalist telling me one of his favourite internet stories about a guy who was trying to raise money for an online venture called funerals.com.

‘We’re going to put the fun back into funerals,’ he said.

‘Ugh,’ my colleague replied.

‘Absolutely, we’re going to make it easy to make choices when someone dies: caskets, liners, flowers, music, you know, all that stuff.’

My mate didn’t back this wacko but many did. Then there was the Swedish fashion retailer, boo.com, which lost $185 million (£93 million) in 18 months, and online grocery delivery service Webvan, which raised $275 million in an IPO despite losses of $35 million on just $375,000 of sales.

Fast forward to the Sunday Telegraph article on 20 March this year and you have a different picture. ‘The dot-com bubbles again’ ran the headline. That’s not surprising considering the money that has been pumped into two social networking sites recently. Bebo was acquired by AOL for $850 million and Microsoft bought a stake in Facebook, valuing it at around $15 billion dollars even though it is yet to make a profit.

So, you may say: ‘What has all this got to do with me? This dot-com stuff never did make sense and the same thing is happening again.’ My point is that taking a contrarian view in business is not only fun (take Jon Moulton for example!) but it’s also the best way to make real money.

Venture capitalists who were brave enough to take a view that internet companies were still a great place to invest in have often made millions (Google and Skype were founded during the dot-com crash).

Beacon of light
The meltdown during the past six months in the financial markets has been as traumatic for most of us as for those caught up in the boom and bust of the 2000 internet bubble. We’re being told that this recession is going to hurt us where it really hurts – our houses.

The press is screaming that house prices are collapsing and the UK negative equity gap of the early 1990s is upon us. Doom and gloom prevails.

But are we really on the brink of a full-blown recession? Whether or not the harbingers of armageddon are correct, there are key questions entrepreneurs need to ask themselves all the time, the answers to which will depend in large part on the economic outlook.

Do we hire extra people here? Buy new equipment to expand into a new market there? Commit to new salespeople in the UK or abroad? It even comes down to buying a new car and our own pay and allowances.

So here are my views on how to make the downturn work for you:

1 Watch interest rates like a hawk. Whatever one says about it today, it is not the same as the early 1990s when the base rate was consistently about 7.5 per cent. Today it is five per cent and if it trends down (and not up) then it is my view we will have a slowdown, not a recession

2 Do not be tempted to pay money down (if you can) to reduce borrowings. Liquidity is key at the moment as there will come a time when you can use your cash to maximum effect – acquiring a struggling company and the like. The same applies to shares

3 Always remember my maxim: ‘Manage the existing business better.’ You can always reduce costs if you are prepared to take the time. Also, be brave and do not be bullied. If you have contracts that appear like they can’t be broken, don’t be put off. Be belligerent – refuse to pay. The worst-case scenario is that they can threaten to sue you and that’s a lose/lose situation for both parties. The other side knows it is too

4 Be opportunistic. If that top salesman from the competition you have always wanted becomes available, take him. Difficult times create as many opportunities as problems

5 Remember that you are only small and that means whatever the market, there is still tons of business out there. Stay optimistic and make sure you and your team just work harder and smarter

6 Bear in mind there will be a defining moment when the swing is positive again. In the 1990s it was the UK coming out of the ERM (European Exchange Rate Mechanism). The same will happen again so be ready to go for it when it comes

Michael Jackson is chairman of Elderstreet Investments, the leading technology venture capitalist which he founded in 1990. He was formerly chairman of Sage, the FTSE-100 accounting software group with which he was closely involved for over 20 years, since its unquoted days. He is also chairman of PartyGaming, one of the largest online poker businesses in the world.