Nobody can pinpoint the timing or impact of a private-tech-sector bubble burst. But preparing for one is not a bad idea, even if you don't think your company would be affected. Remember that the trickle-down effect from such sector downturns is real--especially if your customer base includes privately funded tech startups or companies that sell to them. The hard lessons learned by survivors of previous bursts will help your company weather the next pop.
Diversify Your Client and Supply Base
Paul Baum founded Rumarson Technologies, which refurbishes and resells computer hardware, in 1991. After the economic crisis of 2008, large companies, his primary source of used computers, could no longer afford to replace their systems. Within three months, used supply shrank 75 percent. Surviving required him to expand sources to include major retailers that accept returned computers from consumers.
Baum recommends that you diversify now, especially if your customers or suppliers come from the tech-startup space. "Run your company paranoid," he says. Baum is taking his own advice. His company, now called Plan-IT-ROI, recently hired a team of paid graduate and undergraduate interns to test and prove new business lines. He expects to launch one of them early next year.
Tighten Up Terms
Former venture capitalist Anand Sanwal founded private company investment database CB Insights in 2010. The data-as-a-service company helps its clients understand high-growth private companies, their investors, and their acquirers.
Sanwal advises founders with a high concentration of startup clients (or those dependent on startups for revenue) to closely monitor the financial health of those clients. Once you determine that any of them are struggling, change your payment terms. In addition to checking on things like whether they are actively hiring for new positions, look at how active they are on social media, when they issued their last press release, whether they're in a sector that is out of favor with funders, and how long it's been since they raised money. If you see a break or significant alteration in their fundraising schedule, or if they go longer than 24 months without a fundraising round, that's a red flag.
"If you have payment terms of 30, 60, or 90 days, look at tightening those up," Sanwal says. "You don't want to be left holding the bag."
Get a Credit Line While It's Cheap
Sumeet Goel saw the last bubble up close and personal as a venture capitalist. When the dust settled, he founded strategy consulting firm HighPoint Associates, in 2002. To prepare for a bursting of the current tech bubble, Goel advises entrepreneurs to take advantage of the low cost of capital today.
"Get the biggest line of credit you can get," he says. "Six months from now, if there's a downturn, everything will be shut down, so at least you'll have that line locked in." He also suggests using a small portion of your credit line on a regular basis so you have a history of making timely payments. "I will actually use my line periodically just to ensure that when the downturn happens, they can't say, 'You've never used it and we're going to take it away,'" Goel says. (Lenders can close a credit line for other reasons.)
Be Ready to Switch to Profit Mode (if You're Not Already in It)
In the early days of the dot-com boom, William Hsu, co-founder of venture firm Mucker Capital and startup accelerator MuckerLab, raised more than $50 million in venture capital for BuildPoint, a construction software and marketplace company. When that bubble burst, Hsu's VCs fired him from his own company.
Now Hsu is helping protect startup founders at MuckerLab from another burst by preparing them to switch from growth mode to profitability mode at the drop of a hat. His advice is to know your "unit economics to break even," or the amount of money you can spend on customer acquisition while still reaching profitability within a defined time period.
"If you have that math in your head, you know that, depending on the market, you can dial your acquisition costs up or down and manage your growth," he says. Another general rule is to plan to reach profitability with at least one-third of your most recent funding still in the bank.
"Even if a future round never happens, the business stays sustainable," Hsu says.