For Startups: Lessons from the Great Depression--focus on customer needs

In his recent newsletter (which was briefly available on TechCrunch), Jason Calacanis of Mahalo shares honest and moving insights into the impact of the current economic downturn on entrepreneurs and startups.

Jason frames his message both as a warning and as forward-looking suggestions during what could become the entrepreneurial depression during the current (economic) depression. I applaud Jason for sharing his personal experience during the ups and downs of the recent DotCom roller coaster and for providing grounded advice to entrepreneurs, focusing on how to assess and respond to external and internal factors. It's not always easy to be forthcoming in what can often be a startup shark-pool.

The economic downturn is likely to get worse before it gets better. Many more jobs will be lost. Over 90% of stratups will come and go. The housing market will stand still or go lower. The rich may become super rich--but most likely, many will lose a lifetime of savings and investments.

Going back to the post-WWI Great Depression, the US (and parts of the world) were being turned upside down; beaten inside out. These were terrible times. Hunger, poverty, violence were as real as the arid ground during nature's added bonus--a drought.

But as we look back, the Great Depression was also a time of opportunity. And while large (mostly manufacturing) businesses were shutting down, other, smaller businesses, were springing up. These businesses understood what people truly wanted and needed at a time of crisis--an internal war--and not only won significant financial gains, but also, in many ways, left a lasting impression on the world.

Consider how people spent their leisure time. They filled movie theaters, seeking comic relief and a sense of community and inspiration. Gone with the Wind and Of Mice and Men are just two of the era's masterpieces. It was a time when people gathered in groups to discuss current affairs and to commiserate. While the men hashed solutions and criticized the government at hand, women sat together and interacted, sharing information beyond the Betty Crocker facade. These, I propose, were early seeds that later led to the possibility of such things as the women liberation movement, spiritualism, and higher education for women.

What did the companies who succeeded do right? They were able to tap basic human needs relevant to the times. They were able to understand the ecosystem within which businesses could operate at the time and to provide solutions that made sense to people. This, I propose, is exactly what startups should focus on as they plan to wade their way through the turbulent waters of the coming years. This is how they will survive.

Let's also put things in order: operational efficiency and cost cutting are baseline for every company today. Unless it has a trust-fund founder behind it who doesn't mind throwing millions of dollars down the drain, no company will survive without hitting these hard. Lean, mean, relevance and focus are key to survival.

But to go beyond, startups will need to demonstrate that they understand what customers today want and need--and deliver to these needs. At the core, people always seek to overcome helplessness, powerlessness, and hopelessness. They seek control over their lives. At times of affluence, people may be more flexible and have a range. But at times of crisis, all three are play and the need for control speaks louder than anything else. How can your company address these in your category? How can you empower your customers? How can you help them feel in control of their lives--lives that are likely to change even more in the coming 2-3 years?

To draw on lessons from the Great Depression, here are a few customer experience trends that startups and investors alike should consider as they strategize for the coming months:

Focus on Reduced Spending: People will become much more selective in their spending. They will look for clear cost/benefit value. What can you offer to customers that demonstrate a no-brainer solution all should have for a low price? How will it be used to enforce the sense of security and control?

Enable People to Demonstrate Power through Luxuries: For a small niche, self-medicating with unreasonable spending on luxury goods will become a pastime activity. Forget alcohol or stockings--what can you provide that will make this niche feel invincible and unaffected by the change around them? What can you provide to a larger niche--one that may not have as great of a spending power, but that can help people in it feel powerful at a lesser cost?

Capitalize on the Home: People will spend even more time at home. To cut costs, people are likely to eat more at home, invite people over, use the great home entertainment solutions that pop up every day, turn to inexpensive projects they've always wanted to do but didn't have the time. What can you offer to strengthen the sense of safety and security, of a welcoming space? Is it around home media? Connection to others around the world? What can you offer that cuts costs and delivers a great value for staying home?

Leverage the Quest for Good Old Entertainment: People seek distractions from the daily grind. In normal DotCom days, it was in the form of lavish parties on private rooftops and happy hours with signature drinks at up and coming clubs. But during times of depression, people look for simple, inexpensive entertainment that makes them feel good. Watch out for upcoming comedies, romance, and hero movies to come back on screen. People will go back to dancing. They will spend less on transportation and look for locally provided entertainment. How can you tap into this need? How can you evoke a sense of joyful distraction with your offering?

Help People Find Meaning: People will seek meaning and meaningful interactions. They will reassess their lives, take stock of their accomplishments, and reprioritize. They will engage in conversation about the situation, they will look for inspiration and explanations--for points of views. What can you provide to help fill this need? How can you bring news, trusted analyses, larger and more relevant view of the world around them? How can you help provide the content and the interaction that will will help people feel a palpitatable sense of meaning?

Realize the Simple Life: Life has become much too complex in the recent 2 decades: people are overwhelmed with information, content, tools. As the reality of the economic downturn hits, people will look to simplify. They will look for clear solutions that make sense. They will seek hard evidence for the value they get. They will go back to those very things they've known before, perhaps as kids. To the Macaroni and Cheese. They will seek comfort and certainty. What can you provide that helps people feel they understand what they get? How can you simplify people's experiences in a transparent way?

Capitalize on Down-Trading: This one comes from a reader: "People trade down to less expensive yet enjoyable treats in bad economic times. The early late 70s-earlly 80s were bad economic times, but Baskin-Robbins flourished. People traded down from more expensive "treats" to something more affordable yet still luxurious. A smart company will ramp up its affordable options." How can you provide a WalMart experience in the coming years?

The economic downturn does not mean the end of all things entrepreneurial. It means a reassessment; it means startups and VCs will have to be highly selective; it means technologies should be made into products that fit customer needs now--in this time.

Understanding the power of meeting customers' core needs is likely to change the conversation in your company and with your investors. Demonstrating that you have already thought about the value offering of your product in light of the current state and that you understand why and how your product is going to speak directly to customers' needs now will help to ensure that not only you stay in business, but that you have a chance at becoming the next big thing to come out of these uncertain times.

Comments

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What a great article, I believe that this economic downturn is exactly what our country needs, now I am not excited about it nor do I believe it will be easy by any means, but it will force us all to re-evaluate our priorities, and do what is right by us and our families

Posted by: Jimmie McThomas | November 21, 2008 at 10:38 AM

Thanks, Jimmie! The downturn will definitely slough off the excess of everything. And if people go back to what's truly important to them--like (as you mention) family values, then that's really not too bad.

Posted by: Ravit Lichtenberg | November 21, 2008 at 03:16 PM