Surviving - and thriving

Entrepreneurs offer prescriptions for tough times

By Scott Kirsner
November 9, 2008
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There are two predictions that no businessperson in Boston is ready to make: how bad this recession is going to get, and how long it will last.

"I'm afraid it's gonna be longer than six or 12 months," says Michael Bonney, chief executive of Cubist Pharmaceuticals Inc., a Lexington drug developer. "This is the biggest economic disruption since my parents' youth in the 1930s."

"This will not be easy to fix," says Robert Shillman, chief executive of Natick-based Cognex Corp. "People are in a gloomy mood, and if enough people feel like they shouldn't be spending money, you get into a downward spiral."

We've already started to see casualties of the downturn: Axcelis Technologies Inc. of Beverly, which makes factory equipment for microchip manufacturing, has cut one-third of its workforce this year and is scrambling to refinance its debt. Fidelity Investments and Avid Technology Inc., the state's biggest financial services company and one of its biggest tech companies, are shedding employees, and MatchMine, an Internet start-up funded solely by the Kraft Group, was shut down last month as part of "aggressive cost reduction measures to conserve cash across the Kraft Group companies," says former CEO Mike Troiano.

So what do we know about how the economic climate of the coming year will affect our region's innovation economy? In talking last week with a dozen CEOs, chief financial officers, and venture capitalists, some common themes surfaced.

Cash is king. Companies with money in the bank are effectively spectators, watching the credit freeze from the sidelines. (Though they will undoubtedly be affected if some of their customers go out of business.) EMC Corp., the storage giant in Hopkinton, has more than $8 billion in cash and short-term investments. As a result, says CFO David Goulden, "our day-in and day-out liquidity is not dependent on the market for commercial paper." Companies looking to get loans to cover receivables, or for working capital, are finding it "basically impossible to get a loan, or usurious," says entrepreneur Don Bulens. Carl Stjernfeldt of Castile Ventures in Waltham advises companies that can get loans to "line up debt now, even if you may not need it. It's like any other credit line, where it's good to have it ready to go, even if you don't need it."

Venture capitalists will have the upper hand. Companies that need to raise funding from venture capitalists over the coming year are going to be giving away bigger chunks of equity for smaller amounts of cash. "VC firms have just put too much money into a lot of companies in the past few years," says Venetia Kontogouris, managing director of Trident Capital in Connecticut. "If you put $50 million into a company, and the average acquisition price is about $50 million, what's your profit?"

Kontogouris believes that a company's valuation - what investors believe it is worth - should rise when the company hits significant milestones, like finishing its product, attracting the first 10 customers, or reaching profitability. But in the coming year, Kontogouris says, "you're going to see a lot of down rounds," where companies experience a decline in valuation because they're not making enough headway, or their markets have simply stagnated.

Get profitable, now. "If you're losing a lot of money right now, that's the worst position to be in," says Mike Fitzgerald of Commonwealth Capital Ventures, a Waltham venture capital firm. "But if you're making steady progress to break-even, venture capitalists can be a lot more patient, and we can be very patient once you reach that point."

Think small. As the last recession began, VistaPrint of Lexington had offices in Europe and the United States and offered all sorts of printing services, from brochures to stationery to business cards, using the Internet as its storefront. In 2001, chief executive Robert Keane sold off the European operations, cut the Massachusetts headcount from 70 people to 30, and decided to focus only on producing business cards.

"I remember multiple meetings where we said, 'We've got to get to be a profitable, $20 million-a-year, business-card-printing company first,' " he recalls. "Then, we can get back to our dreams of being a multinational company." The extreme makeover helped get the company to profitability; it's now publicly traded, and growing, with more than $100 million of cash in the bank. Revenues are expected to hit about $500 million this fiscal year, and though hiring has slowed, Keane says the Lexington company will add about 100 people to the 1,600 it currently employs.

Be opportunistic. Bonney says his phone has been ringing in the past month with other biotech and pharmaceutical companies looking to sell him products - both drugs that are still in development and drugs that have already been approved. "There's an opportunity for companies like Cubist, which are generating cash, to acquire assets that will allow us to build our business," Bonney says. The company is profitable, and third-quarter net income was up 39 percent.

Go global if possible. Obviously, not every company has the resources to start building a global presence just now. But Kontogouris says that operating in several geographies "diversifies your risk. You want to be in countries like India, which is still growing at 7 percent." At Cognex, Shillman says, "we still see economies in the Far East and Eastern Europe as an opportunity for us, because we have low market share there today."

Be the low-price leader. It's a tough slog to sell big-ticket items when customers are scrutinizing every budget item. Companies like VistaPrint are emphasizing that they can provide services to their customers cheaper than the competition; Scot Junkin, founder of a new voicemail service called MessageSling, plans to emphasize that the service, which ranges from free to $19.99 a month, is "less expensive but higher-quality than the competitors," he says.

Trim costs assiduously. At MessageSling, they've built the service using five contractors who have worked alongside the two founders, and they resisted the temptation to relocate from Worcester to Boston to save on rent. Cognex has been cutting back on planned hiring. EMC has been analyzing the money it spends on real estate, travel, and third-party consultants. VistaPrint has been putting some projects on the back burner. "We've been saying, 'Let's find the 20 percent of projects that we think will most move the needle, and redeploy our resources to make sure we knock them out of the park.' " The last resort, say all the executives, is cutting the payroll.

While everyone expects a rough 2009, most innovation-oriented companies take a long-term view. Keane says that he tells his troops that "great companies are built over decades, not years," and that recessions are unavoidable. "In tough times," he says, "great businesses show their mettle."

Scott Kirsner can be reached at

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