It’s a timely question. There’s a startling amount of evidence that the US (and global) economy faces a rough couple of years ahead. Fact is, even if the economy manages to avoid plummeting to what officials deem as ‘recession levels’, few will deny the upcoming years will see very slow economic growth overall. There is also a ton of macroeconomic evidence that the problem of high unemployment will remain unresolved regardless of GDP growth. From simply trying to remain afloat in tough times to seeking fundraising or some other exit strategy, there’s no shortage of available advice on how ones business might deal with rough economic tides.

But what I wanted to cover here is different. Rather than focusing on Basic Survival 101, I’d like to discuss how to minimize the impact of, or even thrive in, periods of slow economic growth. Among the myriad responsibilities any startup founder or CEO faces is the pivotal responsibility of how to economically position his/her business and product for longevity — which entails more than choosing the right markets to enter and the best products to offer, but includes ensuring that his/her business has a smart distribution strategy, a monetization strategy, internal team-building strategy, etc. And these decisions impact the business’s exposure (and response) to economic fluctuations.

Since I am most familiar with consumer businesses, I’ll limit the ensuing discussion to my area of expertise (certainly, similar parallels can also be made about B2B businesses — but I’ll leave that to experts ).

Anatomy of a recession

At the risk of my macroeconomics professor taking huge issue with simplifications I am prepared to make here, let’s enumerate some of the things that happen when economy doesn’t do too well.

• GDP growth slows down
• Companies generally stop investing and start saving money
• Companies are (usually) forced cut overall costs and at times reduce the number of employees or lower salaries, cut benefits, etc.
• Unemployment and lower salaries (or lack of increase in salaries) lowers consumers’ expendable income
• Consumers lower their spending
• Lower consumer spending results in even lower GDP growth
• And the cycle continues

Byproducts of a recession

A few major patterns emerge in this situation. The most important one is that consumers have less money to spend. Consumers stop purchasing items they deem to be overall unnecessary, and for products/purchases that are necessary, consumers will seek less expensive alternatives, like using Kayak and other travel search sites to lower ones travel expenditures. If your company offers a product that is clearly discretionary (say, video games) you’ll see the negative impact when consumers play their old games instead of buying the latest versions or find cheaper alternative entertainment. On the other hand, if selling coupons — deals for food in particular — is your business, then you’ll see a positive uptick in demand, like Groupon did during the 2008-2009 recession.

And if your company provides a less expensive alternative to a basic human need, you’re also in luck. Take dating. If you compare the cost of going out to bars or clubs to meet new people with using online dating sites like Zoosk, the savings consumers can realize by choosing the latter is obvious.

Recession-era customer acquisition

As businesses cut costs overall, marketing budgets are significantly reduced. Both online advertising and offline advertising face budgetary restrictions, but more so in the latter because branding budgets get cut before performance budgets on the web. And the cost of offline advertising remains significantly larger in absolute terms. So, if your monetization strategy is based on selling ads (specially brand ads) your business will take a massive hit, whether you’re an international behemoth like Google or a tiny social gaming venture. In 2008-2009 we saw a huge shift from ad monetization to direct consumer monetization in variety of industries, particularly games. Unfortunately, while bigger companies can afford to weather a downturn (provided it’s short-lived), startups cannot.

In contrast, if advertising is a cost item for your business, then you might benefit from the phenomenon illustrated above, because the cost of acquiring free users falls during economic downturns. When the demand for ad space drops, so does its price — both online and offline –  when decreased competition between bidders sets decreased prices. Insofar as potential customers are interested in paying you (see first part above), they can be acquired for cheaper.

Who wins then?

To summarize, if your business can provide a cheaper alternative for something people will need regardless of economic performance (basic human needs such as food and shelter, including spiritual needs like love and companionship) and if your company has a large customer acquisition budget (like Kayak and Zoosk), then your business remains well-positioned to be recession-proof.

Better yet, if we avoid recession and the economy makes a recovery, everybody wins . Entrepreneurs should however seek to build healthy businesses well-hedged to thrive in both scenarios. I hope the entrepreneurs out there take this opportunity to examine the fundamentals of their business and locate any areas that will be impacted by boom/bust economic cycles. There are always ways to tweak your model such that you are better positioned in both situations.

I grant that video chatting with “people you know” can be useful in certain instances. The two most salient examples I can think of are (1) using video chat to keep in touch with family members, or (2) for work collaboration (e.g. video conferencing with colleagues remotely). But engaging in video chat with your social graph at large will not have a strong uptake.

At the bottom of this bias is a very basic human fear. Most of the time, people do not feel fully presentable to their extended friend list in video format. In instances where we communicate with casual acquaintances, social anxiety becomes even more of an issue. People attend to their physical appearance before engaging with friends in real world, and for many the process of ‘getting ready to go out’ is a necessary prerequisite before ‘going out’ is even a possibility. We can apply the same social psychology principles to video chat. And people, by and large, have zero interest in ‘getting ready’ to video chat. Text messaging and online chatting, on the other hand, can be performed at any and all levels of hygiene and physical disarray, hence the huge interest and uptake.

When MySpace integration with Skype failed, self-consciousness of users contributed to the failure. I predict that Facebook integration with Skype will similarly be limited by users’ self-consciousness. No chance will it usher in the era of video communication.

Zoosk has offered video chat functionality on Socialbox, providing video chat between Facebook friends, for a while, and consumer interest in this feature has been relatively low (compared to non-video engagement, which has been great). I’m sure the same is happening on Facebook+Skype right now. I’d venture the same will be true for Google+ hangouts, once the initial cool factor goes away.

Nonetheless, like I said, video chat can be (and already is) hugely relevant in a few categories:

• Keeping in touch with family (Skype & Facetime): Higher social mobility has made it possible (and often necessary) to live where opportunity permits. Many of us live at relatively inconvenient distances from members of our families. Video chat is a convenient and powerful tool that many of us use to stay connected to our family members despite the distance. And it goes almost without saying that we have a much lower “presentability” threshold for Mom & Dad .
• Professional collaboration (Skype for conference calls): Complex economic factors require that people in different locations work collaboratively with each other. In such cases video conferencing boosts productivity while slashing costs (in terms of both time and capital). Plus we are (usually) presentable at work already, making additional grooming redundant  .

There might be other categories that I am missing, but those cases must provide a compelling argument against some very basic human biases. And it would require us to overcome a deeply ingrained existential fear: confronting the eternal question of “No, really, how do I look?”

Not knowing what to expect, we rolled out Socialbox and threw some traffic at it. Boy, did it stick. Unsurprisingly, consumers really wanted easier ways to chat with their Facebook friends. In only 6 weeks, Socialbox grew to approximately 2M MAU (see chat below courtesy of AppData).

Seeing this burst of interest, we took it one step further and added video chat to the product. We beat Facebook to video chat functionality on it’s own chat platform by a couple of weeks, which was really cool to achieve. It pays to be agile!

Video Chat for Facebook on Socialbox

In short, Socialbox is still a side project at Zoosk — but as long as consumers show love for the product we will continue to do awesome things with it. Socialbox is an example of how we encourage our team to approach their jobs at Zoosk. We reward creative thinking and we give our people the resources and support to turn their ideas into reality. We need more people who embody this commitment to innovation.

Reductionism can either mean (a) an approach to understanding the nature of complex things by reducing them to the interactions of their parts, or to simpler or more fundamental things or (b) a philosophical position that a complex system is nothing but the sum of its parts, and that an account of it can be reduced to accounts of individual constituents.

Then, it’s no surprise that when first confronted with the question of ‘Why was product X successful or a failure’, we naturally put our reductionist hat on and and try to reduce the product to its basic parts (usually features or marketing strategy) and assign values to them in their contribution to the success or failure of the product.
This approach works very well for products that are more or less independent of other products’ or peoples’ actions. For example, we can apply this model easily to find out why a Dyson vacuum cleaner dominated the market at a particular time period. Or, why the Motorola RAZR exploded in the the cellphone market back in 2003.
Equipped with this great framework of analysis, we naturally use it to answer the same question about networked web products. Hence questions like ‘What feature(s) of Facebook helped it beat MySpace?‘, ‘Did MySpace lose because of the Google Ad deal?‘, or ‘Which feature of Zoosk makes it so much better than Match.com?’.
The problem with applying Reductionist framework to understanding social web products is that we can not capture complex interactions between different users of the same product in any simplistic way. And that’s where we usually turn to emergence theory. As wikipedia puts it

In philosophy, systems theory, science, and art, emergence is the way complex systems and patterns arise out of a multiplicity of relatively simple interactions. Emergence is central to the theories of integrative levels and of complex systems.

What we need to remember is that not all phenomenons can be explained using a reductionist framework. This is specially true for networked web products which social products are a great example of. So, maybe next time we want to analyze the rise or fall of the next social web product, we should not go straight for breaking it down into individual features. It might save us from drawing simplistic conclusions that can lead to bad decisions.

From my personal experience and talking to others who have started companies, what the paper calls ‘effectual reasoning’ is the only possible way of thinking in early days of a startup (especially if you are a first time entrepreneur with very limited resources). As the business grows though you definitely need to add some ‘causal reasoning’ to the mix otherwise you can’t scale the organization and the business. The bigger the company becomes (both in terms of people and revenue), the more you end up tilting your reasoning to the causal side.

However, you still need to keep the effectual reasoning in your arsenal beyond the very first days of the venture. It is an essential part of being able to expand your product offering, enter new markets, or even add innovative functionality to your products. The trick becomes maintaining a healthy balance of the two if you possess both. My current thinking is that 1 of out every 5 major initiatives at a company between $100M and $1B should be adhering mostly to effectual reasoning. What has been your experience?

Another interesting outcome of this paradigm is that you need to have a team that can execute on both types of projects. Early employees at startups by definition become comfortable with the effectual reasoning of the founders. That’s all they see everyday! However, as the business grows and new people join the team who have not been involved in these types of projects, it can create shocks when switching between the two. I have personally tried to put together mixed teams for these types of projects: bring some people with experience in effectual reasoning projects and have them play along with a few newbies. It has worked well so far in getting projects off the ground as well as making more people comfortable with the project type.

As a founder switching back to effectual reasoning every once in a while might come very naturally (you might even yearn to go back to it because it’s what you enjoy the most). Like anything else, the more you do it, the easier it becomes. But you need to keep in mind that not everybody on your team has had this type of practice. It never hurts to talk about the differences between types of reasoning and projects discussed in this paper. Sometimes I feel I am beating a dead horse when I try to talk about this topic with our team. And every time I do, I am glad I did it. You might not realize it, but you are probably not doing it often enough. And this paper gives you a very good framework to discuss the idea with your team.

USA Inc.: Red, White, and Very Blue

hope you enjoy it.

PS: send me comments/feedback since this is a question i get asked a lot all the time.

This is how the song came about

Flo Rida was in the studio with Pain doing a song called “I’m Dancin’”, which is featured on T-Pain’s next album. One of T-Pain’s boys, Tay Dizm, was talking about how he met some fine girl on Zoosk. He was talking all kind of mess about how good she looked and that she actually had good credit. T-Pain responded from the booth and was like “I need me a Zoosk Girl“. The jokes then turned into a song and it went from there. Since the song was clearly a smash, we decided to work something strategic out with Zoosk to amp the promotions for the song, which is now Flo’s Hype Single off his album The Only One”.

Commented Poe Boy Music Group CEO Elrin “E-Class” Prince

Can’t wait to see how high in billboard rankings this song is going to go!