VCs Speak On The Economic Downturn: Batten Down the Hatches

http://www.techcrunch.com/2008/10/29/vcs-speak-on-the-economic-downturn-batten-down-the-hatches/

by Jason Kincaid on October 29, 2008

This is part one of our coverage on today’s Downturn RoundTable hosted by VentureBeat. For Part Two, which details the Entrepreneur panel, click here.

Today at VentureBeat’s Downturn RoundTable, two panels of Silicon Valley’s elite - one made up of Venture Capitalists, the other of experienced entrepreneurs - offered a roomful of startup CEOs their advice for weathering the economic crisis. And while the two panels differed in some respects (with the VCs saying that they’re open for business and the startup veterans calling this a falsehood) the general consensus was at least in part optimistic: Money will be tight and many companies will endure painful cost cutting, but it’s cheaper than ever to run a startup and innovation will continue to thrive.

The VCs

In a panel moderated by VentureBeat’s Matt Marshall, John Doerr of Kleiner Perkins Caufield & Byers led off by agreeing with the themes in Sequoia Capital’s 56 Slide Presentation of Doom, expressing his concern that we are just entering an economic crisis of confidence, and that startups must enact swift and effective cost cutting - a sentiment that was echoed throughout the panel. Kittu Kolluri of New Enterprise Associates emphasized the need to cut burn rates, and to figure out how to generate revenues as quickly as possible. Early Google investor Ram Shriram said that we would likely be seeing company valuations shrink and expressed that it would become very difficult to get money. Benchmark Capital’s Matt Cohler (formerly at LinkedIn and Facebook) agreed that it is essential to be conservative with spending, but emphasized that an important part of being conservative is to refrain from panicking.

Of all of the investors the most optimistic was prolific angel investor Ron Conway, who said that we are in much better shape than we were during the last bubble. He recalled that during the dot com bubble 70% of the startups his angel funds had invested in during 1998/1999 went out of business within a year. In contrast, only 13% of Conway’s current portfolio is facing shutdown. He attributed this in part to the burn rates for companies, which have gone from an average monthly rate of $750k in the first bubble to around $200k now. He went on to say that if a company does need to raise money, it should turn to its original investors, who are the most likely to support them.

Kolluri showed some optimism as well, saying that some of his firm’s best investments came during the last downturn, and that it continues to invest at a regular pace. It may be more selective, but he believes there will certainly be innovation to be found.

After broadly expressing their thoughts, the panel gave some more practical advice. Before the roundtable John Doerr polled executives from Kleiner Perkins’ portfolio companies for some tips, and compiled the following list:

1. Act now. Act with speed, and raise more money if possible.
2. Protect the vital core of the business. Use a scalpel instead of an axe.
3. Get 18 months or more of cash in the businesses, against conservative revenue forecasts.
4. Defer Facilities expansions. Instead of buying more PCs or more software, use webbased stuff.
5. Negotiate. Negotiate with all your supplies and vendors, get more favorable payment terms.
6. Everybody in your organization should be selling. You need everyone to be selling the ideas and the organization. This is about increasing revenues.
7. For people with bonuses, offer equity instead of cash. Doerr noted that he once had a voluntary salary deduction program for people who remained during the downturn - Investors will be on board with this idea.
8. Pay attention to where your cash is, and keep it secure, in a place fully backed by the government. Doerr said that he’s been putting money into treasuries.
9. Make sure that for the revenues you plan, you have leading indicators that tell you 90 days in advance whether you’ll be getting revenues or not.
10. Overcommunicate with your employees, investors, and customers. Let them know your resolve. Don’t sugarcoat it.

The other panelists chimed in with their own tips:
Ron Conway - Stay open minded to M&A and move fast on M&A. Also, your biggest non variable cost is your rent. But your lease isn’t set.. In 2000 I spent many hours in front of landlords, negotiating, saying we’d give them more equity and that we’d leave afterward. About half the time it worked.

Ram Shriram- At this point, money may be worth more than equity. Use your equity rather than cash to pay if you have to.

Matt Cohler - Avoid long term spending commitments. None of us know how long this will last. Given that, operate under the mentality of uncertainty, and be careful. For example, be careful about facilities commitments. Unlike lots of types of spending, these are really contracts. Another example is IT spending in general. One of the things different in this downturn is that there are lots of tools and services and marketplaces that are free/low cost and flexible. You can turn them off, dialing up and down spending.

To close, Cohler also affirmed that despite some belt tightening, Benchmark and other VCs are still open for business.

Silicon Valley Entrepreneurs: Make Cuts, Stay Stingy, But Never Forget The Dream

http://www.techcrunch.com/2008/10/29/silicon-valley-entrepreneurs-make-cuts-stay-stingy-but-never-forget-the-dream/

by Jason Kincaid on October 29, 2008

This is part two of our coverage on today’s Downturn RoundTable hosted by VentureBeat. For Part One, which details the Venture Capitalist panel, click here.

The Entrepreneurs

In a panel moderated by Kara Swisher, Toni Schneider, CEO of Automattic (the company behind WordPress), led off by saying that he wished this kind of “panicky” advice had been around for the last bubble, explaining that his startup at the time didn’t react quickly enough to stay afloat. Nirav Tolia, co-founder of epinions, added that his company had fallen prey to similar mistakes in the last bubble by investing in growth (in terms of employees and office space) before it was necessary.

Mahalo’s Jason Calacanis detailed his experience with laying off employees, saying that it should be done in one fell swoop rather than in incremental steps, which only serve to increase fear and uncertainty. He expressed how difficult it is lay people off, and urged executives to do all they can for their past employees (vesting stock whenever possible, writing letters of recommendation, etc.). He said that while CEOs may not be able to predict economic shifts, they are ultimately the ones at fault if a company has to lay off workers.

Tolia also related the cost cutting measures epinions had to undertake in the first bubble, emphasizing the importance of having someone who had “been through this sort of thing before” for advice and calling Bill Campbell (who had weathered past downturns) “a godsend”. He likened cutting costs to dieting, explaining that companies should be making “lifestyle changes” so that these problems don’t arise again instead of making cuts and then falling back into the same costly habits, only to have to downsize again in the future.

Slide CEO Max Levchin said that he has never been forced to lay off his workers, but emphasized the importance of being stingy. He attributed his frugality to his “immigrant ethic”, which he says is a great trait to have in a startup co-founder.

Paul Sieben of O’Melveny and Myers agreed with Ron Conway’s statements earlier that companies should more readily consider M&As. He also said that startups should be nimble, able to change underlying goals and start the M&A process early by forming business relationships.

When asked how helpful venture capitalists are when their portfolio companies face economic hardships, the panel had some varied (and not always positive) comments. Levchin related his experience with BlueRun Ventures (which has invested in both PayPal and Slide), saying that the VCs there have been very supportive, even when he has had to change business plans.

Toni Schnier said that Levchin has been dealing with ideal VCs, but that there are unhelpful investors who will constantly give advice (often about ideas you’ve already thought of), and that thsese are the ones who will get on your case as soon as things start looking shaky. Calacanis said that entrepreneurs tend to ask VCs for too much advice, which is a mistake, going on to say “VCs are VCs for a reason” and likening them to bankers. Calacanis also said that while the VC panel claimed it would stay open for business, they will instead form a “circle of wagons”, focusing on their winners and shutting down losers.

And while they spent a great deal of time talking about the hardships many entrepreneurs will be facing, the panel emphasized the importance of remembering why they had come to Silicon Valley in the first place: to build their dream.

Each panelist also offered some specific tips for success:

Max Levchin - Don’t listen to anyone, nobody really knows what’s going to happen next. It’s better to be contrarian in times like this than not. Just hunker down and build a company. Silicon Valley is about leveraging crazy hopes and occasionally winning.

Paul Sieben - Have backup plans.

Toni Schneider - Consider open source. It’s a great way in slow times to keep your project going - people who have time on their hands to keep your dream going.

Nirav Tolia - Over communicate.

Jason Calacanis - Focus on the product. If you’re in a plane and it’s going into a death spiral, look at your instruments (page views, members, etc.). Don’t look out the window.