Using the economy as an excuse for failure doesn’t stack up

“If we don’t get three inches, man, Or four to break this drought, We’ll all be rooned,” said Hanrahan, “Before the year is out.” (Said Hanrahan, John O’Brien)

You’d had to have been living in a cave to have not noticed the economic turmoil sweeping the world. Banks have failed, markets have crashed, and Governments world wide a spending like drunken sailors trying to avoid a slide into a repeat of the Great Depression.

Calling this bad news doesn’t describe half of it. This is the largest economic upheaval in our life time, and where we’ll all be standing a year from now is at best anyones guess. Within the web sector, predictions of doom and gloom are bountiful. One of my favorites was from Jason Calacanis, who in his regular emails said that the economic conditions will kill 50-85% of all startups. It’s a great line, but it’s complete rubbish, because that’s how many startups would have failed anyway (and I’d suggest the figure is probably 90%). The only affect the economy will have is that it may cause failure to come earlier than might otherwise have been the case.

The economy isn’t going to kill startups. Startups will kill startups.

The economy makes no difference if your product sucks, or your business plan is flawed. You’re still going to fail, and using the economy as an excuse is a cop out.

Advertising

The doom merchants are telling us that advertising supported services will be the first to fall, because a contracting economy will result in lower ad spends, and less money to go around. Again, it’s a nice line, but it’s not necessarily true either. Economic contraction does not equal advertising contraction, at least uniformly.

We will see less spending in some areas, and financial services are the obvious candidate, simply on the basis that there are now less competitors in the market. It’s why I didn’t get the $15 million sale of Bankaholic, because this market is the most heavily affected at the commercial level. And yet in other areas, we may see increased spending, as consumers spend less, and companies seek to drive demand. There’s proof here as well: Svetlana Gladkova at Profy did some research on advertising during the Great Depression and found that some brands actually spent more money, using the downturn to gain advantage over their competitors. As Svetlana also points out: people don’t stop consuming during economic hard times, they may just spend in different ways. A contracting economy may actually increase advertising as companies spend up big on keeping existing customers spending, and to minimize the effects of the broader economic climate.

Execution: Spokeo

Spokeo founder Harrison Tang argues (via Louis Gray) that Web 2.0 is dead on the basis that advertising can’t be used by 2.0 companies as a revenue base. It’s a line we’ve heard time and time again, that advertising doesn’t pay, and that the whole 2.0 industry is screwed, and we’re hearing it more now with the economic crisis. Nice line, but it’s not universally true.

Advertising works for some sites and services, and it doesn’t for others. Bankaholic, a not-exciting blog traffic or content wise sold for $15 million; as much as I don’t fully get the price, the one assumption everyone has is that its advertising was delivering.

Blogs have an advantage over other 2.0 companies in that they can get away with big ads, frequently, compared to say a widget or app provider who is constrained by both size, and what users will put up with. Spokeo is a form of RSS reader (you track your friends on social networks) and RSS Readers have never had a proven advertising model, primarily due to the legal issues surrounding standard services such as Google Reader. Users also have a lower tolerance to advertising in this context, particularly when it infringes on the usability of a service.

The key is execution: where the ads are, how they are accepted by users, and how to get people clicking on those ads. Spokeo was a failure of execution: they couldn’t make the ads work, and they didn’t have enough users to make them work financially in the future.

Conclusion

The economic crisis is actually a huge opportunity for those in the 2.0 space. As people spend less money, they’ll be going out less, and when they’re at home, they’ll be turning to the internet more regularly. This is an opportunity to attract new visitors or users.

Advertising may face challenges in some spaces, but as we’ve reported before, evidence shows that where ad spends decrease, advertisers look at more efficient forms of advertising. While search is top of the list to gain, there are benefits for programs like Adsense as well. Other advertisers will be increasing their spends, looking at ways to maintain profits by keeping existing customers spending, and by attracting new ones, and efficient targeted advertising online vs inefficient heritage media channels looks even more attractive.

If you’ve got a startup or even a blog, hunker down, reduce your risks, puts some money aside (because you won’t be able to borrow more, and VC is about to get harder) and use these conditions as an opportunity to thrive, not an opportunity to fail.