Entrepreneurs and Credit Crunch

Lately, the world has been hit by global financial crisis that led to the collapse of an investment bank Lehman Brothers, the acquisition of Merrill Lynch by Bank of America and many bailouts including AIG and Northern Rock by the US and UK governments. The triggering of this crisis began from the subprime mortgage problem that surfaced during early 2007. What's the impact for entrepreneurs or small medium enterprises business owners given that there is a lack of trust among banks to lend to each other and upcoming recessions hitting most countries? It may be good to take a step back and put some thoughts on what the entrepreneur will navigate through this difficult period:

• Bootstrapping and not Fundraising as growth strategy during the Credit Crunch: In essence, the global financial crisis has left a deep impact to the markets. The stock prices of many companies have dropped so much and there is contracted liquidity in the markets now. For the next 12 to 15 months, any new enterprises in any industry will face a lot of challenges in fundraising. In recent seminars that I have given to students from NTU and INSEAD, I have advocated the contrarian approach to what every textbook in entrepreneurship will tell you: raise funds to expand your business. In such bad times, the entrepreneurs need to adopt the bootstrapping approach for their enterprises. The bootstrapping approach is simple: control cashflows, ensure that profit is greater than loss, and reinvest the profit into growing the business in an organic manner. Micro-financing funds from the government might be helpful to those who want to be in the technology industry.
• Entrepreneurs benefit from bad times and harvest during good times: I won't advocate to anyone to buy any stocks or acquire assets now until the current crisis situation is stabilized by the governments. In the short term, the interest rates will be cut to encourage borrowing from the businesses to energize the economy but inflation will creep in as things go along. Of course, this is the best time to research on companies to invest because you will never get a price less than the current price. In simple words, buy low now and sell high later.
• Realignment of the wages and expectations in the marketplace: With many job cuts from the banking industry, there will be a major re-alignment of the wages and expectations of talent in the market place. This is also a good time for entrepreneurs to scout and hire talent because there are lots of talent hired by Wall Street losing jobs. Banking jobs used to be the envy for many but now many young undergraduates who are thinking of joining investment banks in Singapore can kiss their dream goodbye.

It is an interesting time for investors and entrepreneurs because it present not just problems, but also opportunities. You find opportunity in the midst of adversity.

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Comments

[Parka]

Companies should take some time to analyse the situation. Find out how the crisis is going to affect them.

Maintaining positive cashflow in any business is always the priority. That's regardless of any situation, even in a crisis.

[Walter]

Thanks for blogging about this and providing a more optimistic and buoyant outlook. I totally agree with you about seizing opportunities which come during a downturn rather than moping about it. The other thing which entrepreneurs need to do is to change their product packaging and pricing policies to reflect more value consciousness as opposed to premium positioning. Relationship management also takes a far greater importance in a downturn, as customers are less likely to tolerate stand-offish behaviour in a crisis.

[Trade Meme]

If one's time horizon is long, that is, 10 years or more, now is the right time to dollar cost average into the market.