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The Silver Lining (continued)

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THE VALUE OF SWEAT EQUITY

Serial entrepreneur and angel investor Peter Schmidt, SM '92, said that when he and his wife, Hollie Schmidt, LFM '92, embarked on their latest joint venture in 2001, at the point of the dot-com collapse, “we probably picked the worst time in the last 50 years to start a high-tech consulting company. We survived on our savings for over a year before our market began to recover.”

“In a recession, there are more real opportunities, but it is also harder to go after them,” says Schmidt, who has started more than 10 for- and non-profit organizations, including a software venture co-founded with his wife while both were at MIT Sloan that later sold to Teradyne for $20 million.

“As a recession matures, a couple of things happen,” he explains. “Companies have reorganized and are now understaffed for what they would like to achieve. This gives entrepreneurs a chance to bootstrap … which works well in many high-tech companies where you can apply the same skills to your job as well as to your own effort. Hollie and I worked seven days a week at our first startup, so we worked 40 hours a week at our jobs and we could still work 40 hours a week on our company. Even after it became profitable, we kept up the 80 hour pace for three or four years as we grew it.”

Initially, Harthorne and his partners at MassChallenge did exactly that as well. They maintained full-time jobs while working on their new nonprofit venture out of a home office and “using a mirror as a whiteboard.” Others, like Nag, ploughed ahead with their ideas, but without full-time jobs, amid the humble beginnings of a small garage.

“We were a classic Silicon Valley startup, with no money and no Web site. It was all about networking, and we lived hand to mouth, month to month, in a very tiny garage,” Nag says. “But we got incredible press. A two-line story in PC Week led to a mention in InfoWorld, then NPR, the New York Times, and then the cover of Fortune magazine ... . Three months later, Motorola bought the company.”

UNDERSTAND YOUR MARKET

When times are tough, venture ideas based on problem solving and cost savings are key, say entrepreneurs and entrepreneurial mentors, as are the customers needed to buy them.

“A lot of times, people focus on the product development process, but don't think as much about the customer development process,” says Lubynsky. “It's important to do as much as you can to explore customers and validate your product. You have to get out there and talk to them before you build a lot of technology. This way, you learn an enormous amount about your target customer and probably find other target customers as well.”

“You need to understand your market very well,” says Williams. “Where will you find customers? Will they be willing to pay for what you are producing?”

Ideas based on something even simpler may work, too, as is the case with Twitter, the much-buzzed-about online service founded in 2006, which the New York Times has called “one of the fastest-growing phenomena on the Internet.” Still, despite millions of registered users and a plethora of publicity, they have yet to turn a profit.

“Twitter has critical mass, and if a company is big enough yet unprofitable, the belief is that eventually you will find a way to make money,” Schmidt says. “That worked for Amazon, but most investors now would prefer there to be a real business model in place before large amounts of growth capital are needed.”

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