Recession Prep: Scott Rafer’s Survival Tips from 2000, or the ‘Summer of Angst’

Last October, Found|READ lunched with serial entrepreneur and Lookery cofounder Scott Rafer, who gloomily predicted the technology industry was “no more than five months away from the next bust.”

Pessimistic, even for the opinionated Rafer, but then he knows a thing or two about successes (MyBlogLog), struggles (Feedster), and recessions. Rafer then generously loaded our plate with great tips for less experienced founders who might need help preparing for the market’s “hard knocks.”

Seven months on, times are tougher, but plenty of companies are still getting funded. So this week we checked in with Rafer again. First words out of his mouth: “There has only been a flight to quality. Frankly I’m struggling to understand it.”

While still expecting “the collapse,” Rafer does admit more optimism for founders’ prospects in the near term. Why? “Investors are spending into this recession,” he says. “People are neither writing stupid checks, nor are they running for the hills. Crude oil at $200 a barrel would change that. But if crude drops to $80, this will last forever.”

The $64,000 question, then, is when will the day of reckoning come? The summer of 2000, Rafer recalls, was similarly angst-filled for Valley types – the Nasdaq had cratered in April, and everyone was waiting for the other shoe to drop. Only it didn’t, until more than a year later, on that fateful day in September 2001.

“People — including me, apparently — forget that things weren’t that bad, or not as bad as we remember them now, before the attack. I closed a $23 million round for Fresher in May 2000, and then launched WiFinder on Sept. 5, 2001.” Then everything changed. “Most tech downturns are a lot shorter than that last one, which at 36 months was very unusual; 9/11 stretched it out.” By Rafer’s timeline, we’re a good two months past the top of the tech cycle on the downward slope – and it still isn’t that bad.

Rafer’s lesson: Make hay while even a little bit of sun shines. Then hunker down, and you stand a good chance of surviving the “bottoming out” ahead. Here is Scott Rafer’s Recession Prep:

Rule #1: Raise a reasonable amount of money now, and use talent to do it.
“If you have a good team, it barely even matters right now what you do.” Rafer says he knows of several startups that have recently closed angel rounds, some without a single customer reference. VCs have committed capital that they need to spend, and in recessions it’s easier to rationalize investing it in good people than it is in ideas. But whatever you do, he warns, don’t raise as much as you can. Taking on more money than you need will come back to haunt you. (See Rule #5.)

Rule #2: Just get through another “Summer of Angst.”

“If you can last through Labor Day, you ought to be able to come charging out of the summer with at least another few months of runway.” August is a notoriously low-ebbing month in the financial markets, and VCs coming off vacation are often slow to make tough calls. They’re more likely to give it another quarter.

Rule #3: Do one thing only. Think “un-sexy.”
“Be smaller. Be focused. It’s time to do what you do really well, and hire eight people to do just that one thing.” After a year in business at Lookery (which has eight employees), Rafer says the company is on its way to doing “one-and-a-quarter things. It’s enough.” Also, “un-sexy” is still good business, so make your “one thing” a service that plenty of people need, but few entrepreneurs want to do. You’ll have a reliable customer base, and less competition. Consider Lookery, the Internet ad network Rafer launched last July, which he says now serves over 3 billion ads a month into Facebook applications.

Rule #4: Don’t spend to gain 5 percent of your market.
In fact, don’t spend, period. “The days of writing a business plan where you’ll fund your way to being the biggest, baddest thing in an entirely new market segment –- this is no longer the time for that.”

Rule #5: Set business goals you know you can achieve.

If you’re meeting your goals, however small, then when the VCs’ “flight to quality” becomes tangible, as Rafer warns it will, your metrics will be in the right column. One more reason why Rafer urges you to raise money now, just not too much. Every extra digit equals higher expectations. Your job is to keep expectations manageable.

Rule #6 Resemble your customer.

Pare down your own operations. Be ready to run lean and long, because this is what your customers are doing. “If they aren’t, question whether you are selling to the right people.“

Photo credit: Arjen Schat.