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What to do if you think things will slow down

I wrote recently about how the money will keep flowing into venture capital, perhaps diluting good returns before they happen.  If you are an entrepreneur, what should you do in this environment, particularly if you believe that an economic slowdown is coming, too?

First, resist the temptation to 'lower the bar' and pursue a sub-par opportunity because capital is available.  Although it is always nice to draw a salary, most entrepreneurs really want to make a difference and start something that has the chance to be big.  A 'me-too' opportunity has less of a chance of that.  So, be honest with yourself during your own diligence on a new opportunity.  Of course, as the entrepreneur, you have to love your new idea.  But, is it defensible against inevitable competition?  Can you be capital efficient?  Can revenues grow faster than expenses?  Does the business model fit well into the market environment?

Second, if the projected glut of capital occurs, raise money even if you don't need it.  It is a very rare CEO who says after a successful exit, "I should have raised less money."  Having financial reserves before a downturn is a fantastic advantage.

Third, don't mix-up raising money with spending money.  If you can convince your investors to invest money without you having to spend it too quickly, you are in good shape.  I think that being tight with spending gets embedded in a company's make-up.  If you start off being cheap, it will be easier to stay that way.  Of course, as a company gets big and profitable, it can and should spend more money.  But, efficiency should always be the watchword.  There is never a company size that makes it OK to waste capital.

Fourth, keep your workforce as variable as possible.  These days you can buy so much as a service.  Only hire the core people you need.  What would your company look like if you had to cut expenses?  Try not to commit to more than that as permanent staff.  Beyond that, you can hire outside services, contractors, etc.  If you have to cut these back in the wake of a downturn, it won't feel anywhere near as bad as a layoff does.  This is a fine line to walk, but worth doing.

Fifth, if things get bad, there will be competitors and complementary companies that will fold.  See if you can use your common stock to pick up some technologies and people that add on to your company.  Although this is a bit dilutive for you and your investors, if you can pick up something valuable at a fraction of what it would cost you to develop it yourself, then you are investing your equity wisely.  Most of the technology from companies that wind down ends up rotting on a shelf somewhere, so use your strong negotiating skills to avoid overpaying.

I'd be interested in other ideas that people have on this.  Please post some comments with additional thoughts.

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