What You Should Do To Prepare For The Next Downturn?

 

How To Prepare For a Downturn

With the dot-com bubble burst, a lot of us have the perception that most of the dot-com companies went out of business and got liquidated. The truth is that 48% of dot-com companies survived through 2004, albeit at lower valuations. One notable company that survived the dot-com bubble burst is Amazon.

The question is, why could many companies endure the crash, and why did many not? What have the companies that survived done differently?

Cash Is King But …

Many startup companies' lifespan is measured by their burn rate, the rate at which they spend their existing capital. If we ask people how to prepare for the next high-tech downturn, most people will probably say a strong cash position. But the problem is we don’t know when the downturn is coming and how long it will last? If the recession lasts much longer than the cash you have on hand, it won’t matter anymore.

Ben Horowitz discovered this when one of Loud Cloud’s biggest customers, Atriax, was bankrupt. As a result, they could not raise more cash through private investment. This leaves them with no choice but to sell the company.

The key learning is that having a strong cash position is always a plus, but it might not be as important as having customers with a strong balance sheet. Companies with a pipeline of customers with strong financial health will have a much better chance of surviving the downturn. Read More...