Standing on the Precipice: Why it’s Good News to Start and Scale Businesses in a Downturn
“If you are going through hell, keep going.” Winston Churchill
As 2016 unfolds there is a sense that a fundamental shift is underway in the global economy. Valuations are being reset down, venture capital is becoming highly selective and there are concerns about global growth. Sounds like a bad time to start or scale a company, right? Not exactly, depending on the type of business. In fact, history shows that a downturn is often the best time to scale or start a marketplace business. Companies that demonstrate resilience, perseverance, speed, and creative approaches to the new environment will be best positioned. Exploiting market dislocations caused by a downturn enables you to build incredible companies, as long as you are focused.
I learned this firsthand while building two different billion dollar marketplace businesses during the last two economic downturns. Given the realities of today, as valuations reset, the question you need to ask yourself is not when or if, but how to best prepare for the inevitable. I’ve stood twice on this precipice: both in 2001 and 2008, thinking that my professional career was on the rocks, but in retrospect it was about to take off. I will introduce these lessons in this post today and follow up with more learnings in future posts.
I’ve found there are typically three major catalysts that create opportunities for new marketplace businesses to succeed. Specifically, these catalysts create the opportunity for businesses to build transformative user experiences that enable them to beat out incumbents. The catalysts that drive change are: economic, societal, and technological. These catalysts created dislocations both in 2001 and again in 2008 which created opportunities. We’re in a similar environment today.
Lessons Learned Building lastminute.com and Trulia through Economic Downturns
The early 2000’s were a tough time for business people in the technology industry and beyond. The economy crumbled following the ‘irrational exuberance’ of technology driven stocks, which crushed the stock market and the ensuing chill that fell over society following the tragic events of September 11th.
A few years earlier I was part of the founding team at lastminute.com, the pan-european online travel company connecting prospective travelers with travel deals. As you might imagine, to many it felt like the worst time to be in the travel industry. Although things were tough, we built a proposition that met the new needs of the market. lastminute.com satisfied bargain hunting consumers with the deals they craved. Meanwhile, suppliers needed our low cost distribution channel more than ever before, to sell extra inventory. Many travel companies struggled and went out of business during this time, however, billion dollar businesses like Expedia in the U.S. and lastminute.com in Europe thrived. We exploited new opportunities in the market, while keeping our long term vision and focus on the customer.
Several years later, in 2008, the Great Recession began to take hold following the global financial collapse. Millions of homeowners entered foreclosure, as home prices plummeted and they were unable to pay their mortgages, in the worst housing crisis in a generation. Consumers became extremely cautious about home buying and selling.
A few years earlier, I had just started Trulia, an online consumer real estate marketplace. Again, it felt to some like the worst time ever to be in the real estate industry. We realized that there were new opportunities despite the fear that was prevalent in the industry. Consumers were desperate to understand a volatile market and find bargains, while sellers and agents were focused on efficiently hunting for business. Our competitors pulled back to focus on fewer markets and products, but we were adding new services and products relevant to the dynamics of the downturn, and realigning budgets to support them. Some advisors said scale back and cut deeply to survive. Instead, we pursued our long-term vision because we believed we could get through the downturn successfully if we made the most of the current situation and built the business sustainably.
Despite the unprecedented economic challenges, it was during this time that a number of billion dollar marketplace business were built. In housing, AirBnB thrived by offering homeowners the ability to make money from empty rooms and houses and Trulia succeeded by connecting nervous prospective home buyers with information on properties, communities, and agents.
In retrospect, we had the conviction and stamina to ride it out. We used the downturn to galvanize the team and build a great company and culture. The industry change created opportunity, and the organizational struggle and necessary focus didn’t just enable us to survive, it helped to shape the foundation of the company and position it for success.
Catalysts are Creating New Opportunities To Start and Scale Marketplace Businesses
As we look to today, catalysts are creating a whole new set of industry transforming businesses and opportunities that are unseating incumbents. The catalysts are a cooling economy, evidenced by a slowdown in China, falling oil prices, and an overall tightening of credit. The emergence of the sharing economy is bringing people together with technology to exchange goods and services in new ways that older generations just cannot comprehend. Meanwhile, access to advanced computing, data, intelligence and software is becoming pervasive, not just on our desks or phones, but also on our wrists, ears, cars and homes.
The economic growth of the last 7 years cannot continue forever. Markets are beginning to turn and while we are not fully there yet, the reality is that a downturn is inevitable. These can be scary times for young companies, but they can also be times of tremendous opportunity.
So don’t fear a downturn; embrace it. It’s a very unique time to build a defensible business . . . a young company can take advantage of a challenging economic environment and thrive.
