Financial Armageddon: Fasten the seatbelts

With the economic crisis sending shockwaves around the world and no-one yet knowing where the bottom is, it is difficult to know what the final impact will be on the mobile industry and start-ups like ourselves.

Below we explore some of the themes that we are likely to experience and what this means (Note: if you leave this post before the end it will seem unbelievably depressing but there is a significant ray of hope at the end):

Industry Impacts
- Operators focus in on churn management. Margins get squeezed. Enabling mobile data takes a back seat.

In such a tough economic environment, the end consumers are going to look to make savings wherever they can and one of the most regular bills are those from the operators. Accordingly, there is going to be a huge effort from the operators to retain customers. This will take the strategic focus off development of the right conditions for the mobile web (e.g. all you can eat data plans) and introduce a slow down ramp to its development.

Financing Impacts
- VCs have trouble exiting. Have more difficulty raising funds than usually the case. Keep cash in house rather than invest in uncertain times.

That the number of VC exits this year is already significantly down on last year is no surprise given that 2007 was a record year for some firms, but even so it is abundantly clear now that selling into a freefalling NASDAQ is not on. Without that measurable return on funds, VCs become a little more cautious. Given that the industry works in a kind of "if you're interested, I'm interested" fashion, the nervousness will be infectious. The implication for start-ups is to tighten the belts and make money last longer.

Revenue Impacts
- The advertising industry begins to slow. Mobile advertising money reigned back. Less cash coming in for those relying on advertising.

You need only look at the front of Premier Football League shirts to see that the advertising industry will be taking a hit - high profile spenders such as Northern Rock, AIG, XL are in financial trouble. In addition, consumer spending is down so there is less value to be marketing into. A higher proportion of spending will be in sustaining/creating brand value and a lower overall sum will be invested in trying to grow the overall market (why spend money now trying to persuade someone to buy a new car when you know it is the last thing on their mind?).

Though 2008 could arguably be the year we look back on as the year that mobile came of age and become part of integrated campaigns within advertisers - or at least a firm part of the agenda in planning - its hold on that spending budget is just too new. As spending overall is reigned back, mobile will be viewed as a discretionary piece that can be easily sacraficed. There will still be some spending and experimentation but it will be less than before.

- Consumers look again at their discretionary spending. Ringtone subscriptions the first to fall.

So, if those with a mobile advertising models are going to find it tough, then those with subscription models are really going to struggle. Consumers are going to look to cut meaningful discretionary spending and subscriptions or payments which are large enough to register on the radar are likely to be cut. Mobile subscription providers beware.

Behavioural Impacts
- Start-ups renowned innovation is tested. New models and cash preservation key. Those with positive cashflow breathe sigh of relief.

It is in such an environment that the ability of a start up to innovate is put to the test, not so much in being able to drive new technologies but in how brilliantly they can shape themselves to the environment and survive. Expect to see new models, subtle changes of direction, more conservative growth plans and some innovative guerrilla marketing. Very few new faces will emerge and some will join the deadpool.

- Start-up resolve is tested. Has what is important changed?
It is important to stay true to the things that you believe give you an edge in the first place. In the last cycle similar to this (2001-2002) I saw a number of companies fly to the apparent safety of mobile subscriptions or sacrafice staff to save costs and in doing so compromising their quality. Staying true to your beliefs in the long term. If you begin to compromise that by focusing on other areas you'll lose part of yourselves, our focus and from there, a large number of your customers along the way.

Through all of this, there is great opportunity.

For those that survive:
there will be less competition around;
your brand will have been in the market with less competition for a significant period;
you'll have reduced dependence on VCs;
you'll have more learnings about the user and the market to act upon;
you'll be well placed for any larger players that wish to play catch-up;
you'll be even more convicted on what it is that you bring to the market
and so on

The key through this difficult times is to stay involved. Good luck!

UPDATE: Good post from TheEquityKicker.

Tighten the belts

Techcrunch published a story yesterday which Techcrunch UK followed up on today about the financial fallout and which start-ups might be best placed to weather the storm. The current situation is arguably more serious than the bursting of the bubble during 2000 and 2001. At that time we were in a period of resetting of valuation expectations. This time we are faced with a situation where venture capitalists will find an exit far more challenging (particularly tough after a record 2007). In addition, those at a point in the cycle where raising money for new funds is required will also find themselves working harder than normal.

I am taken back to the 3GSM World Congress (as it was called then) in 2002 seeing fewer of the same companies again rather than any new start-ups.

The key for any start-up at this stage becomes survival. If you can capture viral growth and/or have the ability to generate cashflow in excess of your burn (even in the economic downturn) then you are very well placed. If you are in a position where cash breakeven is not immediate then you need to show nimbleness and determination.

I was Chairman of a company called UCP in 2002. It is to the immense credit of the management team (Christian Lutz and Marwan Saba) that they survived this period through a mixture of tight cost control, tough strategic calls and dogged sales conversion. When the gloom lifted a couple of things happened: UCP looked around and saw that it had fewer competitors than before the storm (some had gone bust and had not been replaced with new money) and that larger players were suddenly eager to break into the market.

Their tenacity enabled them to stay in the game and without that the subsequent purchase by QPass and then Amdocs would never have happened.

The message for start-ups is clear: get your planning right and do it right now for how you will balance the books over the next 18 months. It will pay dividends in the long run.

Good luck!


Here is another article from Techcrunch including a memo from a VC called Benchmark highlighting what I said above about survival being everything.