How to survive a credit crunch

Entrepreneurs, as a rule, are so focused on their companies that they simply don’t have enough time to worry about what is happening in the world around them. Usually this is the most correct position. But now - an exception. The credit crunch has hit the financial markets. This will lead to serious consequences for any startup.

Why did this happen?

The roots of the current situation should be sought in 2001. In an attempt to overcome the economic effect of the dot-com collapse and the September 11 terrorist attacks, the US Federal Reserve began to lower lending rates, reducing the cost of raising money to 1.75% from 6.5%. It was great - entrepreneurs could attract cheap money to build new businesses, buyers could very easily borrow to buy products sold by these businesses.


However, this led to an unexpected result. People began to use cheap loan rates to get a mortgage to buy real estate. A lot of real estate. Investment banks made various derivatives from mortgage-backed securities in order to balance old secured loans along with new and risky ones. The pursuit of a borrower soon led to a tremendous increase in risk on the once super reliable mortgage bonds. (Translator's note - old secured papers on mortgage loans with a down payment and new papers secured only by the real estate itself. Creative exaggeration: in recent years you could get a loan to buy an apartment at a rate of 1% without a down payment) .
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The result turned out to be catastrophic: the supply of new homes rose sharply, real estate prices collapsed - and suddenly financial institutions ended up with trillions of dollars in their hands in unsecured securities. Unable to raise money, some of these investment banks no longer exist. Loans are no longer available to anyone, including entrepreneurs.

If you are lucky enough and your startup already has customers, it’s also difficult for them now and they are less willing to spend money right now. If you do not have such buyers yet, then you have bad things - business angels and venture capitalists, who last year fought for your brilliant idea, will now prefer to overstate the situation in real money.

What should an entrepreneur do now?

Three steps for surviving a credit crunch.

Step 1.

Talk to your team and investors. Explain to people that you are now “in the trenches” - no new employees, bonuses, development. It also means no new servers or software purchases. Agree now with vendors, do not wait. Prepare your investors for slower growth. Speak in their language - show examples of customers who will buy less, but still will. Show investors that you know how to cut regular expenses. For example, Angelsoft has reduced its monthly expenses by 30% since June. On Monday, when the market collapsed, investors sent more money - “Yes, this is a loan, but this is the money that we now need, and this shows the investor faith that everything will turn out.”

Step 2.

Focus on revenue. Many startups focus on attracting as many users as possible, postponing monetization until later. Nowadays there is no place for such a strategy. You run out of money much before. Switch your product, marketing and sales to generate revenue here and now. You will not grow so fast, but a live cache is required, without it you will not survive.
Angelsoft has always been free for IT entrepreneurs, but three months ago a product was created for the premium segment, which allows an entrepreneur to directly withdraw their business plans for investors for $ 250. In the long term, this may reduce the number of new users, but it gives some income that will allow it to exist a little longer.

Step 3.

Do less. For most entrepreneurs, this will sound strange, however ... You were called to make business more, to reach some new frontier. When everything is good - this is significant, but now - all businesses will experience difficulties with development. If you continue to consider growth as your main goal, you will fall out of reality. Then you will not have another chance to prove that you are capable of something when the economy starts to grow again.

Ryan Janssen - Director of Operations (COO) Angelsoft.net , a web platform for IT entrepreneurs and investors.