I’ve debated chiming in on the economic climate. It’s obvious that folks who’ve devoted their entire academic and professional careers are unable to rationalize what’s going on. What more can I add to the discussion?

There are a few thoughts I can add and those have to do with how bad economic conditions impact startups and how startups might want to navigate these difficult times.

The first reality that people need to come to terms with is that bad economic circumstances impact different companies differently, based on the stage of where the company is. For example, startups that had planned to raise an A round in late 2008 or early 2009 will likely fail at capitalizing their businesses in this climate. Second funding rounds will be equally hard, especially for companies that don’t show strong traction. Companies that recently closed rounds, however, might be in good shape to ride out the downturn.

My advice to startups is to be smart about turning a bad economy into a positive for your company. Here’s what I recommend:

1. Focus on making your best existing customers even more ecstatic. In politics they call this your base constituency, but in business these are your core customers. Keep them happy. They are making tough decisions too.
2. Reduce expenses to extend your runway. The quickest way to reduce expenses is by reducing payroll. Re-evaluate every individual in every role. Are they vital for your existence over the next 6 to 12 months? Are these individuals the ones you’d start the next company with? If the answer is “no” decide whether it makes sense to shrink the team a little.
3. Take advantage of the opportunity to catch up to the competition. Startups already know how to be productive even when resources aren’t abundant. Use your efficiency as a competitive advantage.
4. Accelerate your plans to generate revenue.
5. Nurture and develop strategic, long term business relationships. During boom times it’s easy to be distracted by all that’s going on, often at the expense of business development relationships that amplify distribution and reach. In slow periods, potential partners have time and you have time, so make the best of it.
6. Opportunistically upgrade the caliber of the team. If you have an underperformer or two, there may now be much stronger candidates in the market now. The goal is to come out of tough times even stronger than before.
7. Focus the team on core, top priorities. Now’s not the time to work around the margins.
8. Defer your external capitalization plans. If you have not already received a term sheet, assume angel or venture funding will not happen in the next 12 months.
9. Defer thoughts about your exit strategy.

I do believe there can be a silver lining in bad economic times. I founded MessageRite, an email archiving service, in late 2002. We felt we were able to catch up to our much bigger competition quickly in part because they were all stopped in their tracks, dealing with shrinking revenues and rounds of layoffs. Additionally we failed at raising capital during that economic climate, which forced us to figure out how to succeed with very modest resources. That meant that when we were ultimately acquired, the founding employees of the company owned all the equity which resulted in a much bigger payday for everyone involved. It was also interesting to note that our acquirer was one of the business partners we started working with during the tough times.