Two types of businesses for the downturn

Morning CommuteImage by Jeroen Krah via FlickrAs austerity takes over from ostentation, sensible investors are telling their companies to knuckle down and reduce burn. Hat, tip Nic.

As I have argued, this is still a time to be looking at building new ventures but what kind of businesses make sense in this environment?

I think the first type are austerity businesses.

Austerity businesses are businesses which help people make their way through declining consumer spending and declining income. Businesses that build on shareability, like Streetcar and CityCar, which allow us to free up tied capital, spend on what we use and track our expenditure become more valuable. Price comparison, discounting and couponing will grow in importance.
Pay by the house, like Amazon Web services, will make sense for businesses as finding capital to build infrastructure will become nigh on impossible.

The second are hibernation businesses.

During a down turn, people will stop going out. At a BLN dinner last night, Alain Courtine from Intel Capital suggested peopled were about to hibernate. That is they were going to cut going out and cut vacations, think twice about travelling, and hunker down at home. Alain cited anecdote that there has been an upsurge in purchases of games consoles and games over the summer, perhaps as people prepare for an autumn/winter without foreign holidays.

Stuck at home, a broadband connection is so versatile-in fact the lifeline to a world of intellectual, emotional and social pursuits–it is hard not to imagine people turning online increasingly over the coming months.

Hibernation businesses will include online media and gaming for consumers. They aren’t going out so they need something to do. This is a great opportunity to build an audience and customer relationships that will be valuable for incumbent companies when they stop cost-cutting and think about expanding (which will happen in 2-3 years)

At the same time, business models need to reflect the new realities. Online advertisers will become more demanding. If you can’t support your business today through advertising, you probably won’t do it over the next year or so.

The freeconomic model will start to come under-pressure. Subscription and micropayments will work. We know they work on music services and online games. We also know that during a downturn, people continue to spend albeit more parsimoniously. Online businesses, run towards break even, have generally more attractive economics than multi-channel businsses, hamstrung as they are with a higher cost base and rapidly declining physical assets. Entrepreneurial businesses have an approach to parsimony that no established business can hope to match. So the economics may yet make sense.

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