Don’t put much stock in predictions saying “It’s just a bull-market correction.” Not because isn’t–it might be–but because the predictors have no idea whether it is or not. The current market action could be a “correction” or it could be the start of the next leg in the Great Bear Market, which began in 2000, and never got anywhere near previous bear market lows. And/or it could also be signaling that our economy is finally headed into a recession (trust me–or read Jeremy Grantham’s latest). The point is that no one knows what will happen in the market or economy, so you need to be prepared for anything.
What might happen to digital media companies if the market and economy go into the tank? Two things:
1) Sources of funding will likely dry up for all but the most successful companies. VCs and angels don’t play the stock market, but they are as affected by its movements as a hedge-fund manager. Why? Because their investors are humans, and when markets crash, humans begin to worry about “throwing good money after bad.” (Similar emotions help loosen VC purse strings in a rip-roaring bull market, such as the one we’ve had the last few years). Also because the VC’s “exit” options close–fewer IPOs and less M&A, as public companies start to worry more about tending the businesses they have instead of buying other ones. With fewer exit options, most VCs are less eager to put money to work (lest they have to explain themselves to their investors).
2) Digital advertising and subscription revenue will get hit. In a good scenario, this would just mean slower growth. In a bad scenario, it would mean a fall-off of 20%-30%, as businesses and consumers tighten their belts. Digital advertising won’t get hammered as badly as it did last time (down 50%), but it won’t go unscathed. In a weakening economy, advertising spending is usually one of the first expense items to get cut.
So how can you be recession-proof? First, raise enough capital to comfortably go at least two to three years without raising any more. That’s how long it took the financing flow to get going again last time, and this cycle will probably have a similar duration. Better yet, start generating your own cash.
Second, run a scenario in which your current revenue–current, not projected–drops by 25%, and see how this changes your cash flow needs. If you don’t have enough to make it two to three years with this model, raise more money now. Or get ready to start whacking costs and firing people.
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