Posted 13 October 2008
The financial meltdown of the past two weeks has been scary to watch. The New York Times has a nicely done interactive graphic of the stock market decline that puts it in the perspective of previous market collapses.
This came just as my startup company, Webvanta, has been pitching angel investor groups and putting together a Series A financing. The financial crisis has obviously made this process more difficult. It will take us longer to close the financing, and we’ll probably do it in a couple of stages. But we will make it through. We don’t have a high overhead to support, and we’re deeply committed to doing whatever it takes to succeed.
In terms of the market for our service (vs. the market for investment dollars), tough financial times don’t trouble us much; in such times, our service will be even more attractive to our customers because it slashes the up-front costs of having an effective web site.
Clearly the situation is bad. The fear is building on itself and making things even worse. The folks who are tasked with trying to stop the downward spiral have an unenviable job. As an entrepreneur, my job is relatively simple: keep pushing forward, and ensure that, above all, the company survives, so we can prosper in the good times that will eventually follow.
As our investor, board member, and staunch supporter David Hehman is fond of saying, Perseverance Through Adversity Leads to Success.
Warnings Galore from Investors
You can read all the gloom and doom predictions you can take by picking up your daily newspaper. Of more interest to entrepreneurs than the mainstream press are the writings of various folks in the startup community. The first was a lengthy piece by Jason Calacanis, The Startup Depression, which first went to his “private” email list but was later posted to his site. It seemed pretty severe at the time, but a few days later it started to seem almost reasonable.
In the past two weeks, there’s been a series of warnings coming from leading investors, giving advice to their companies. These were meant to be private communications, but with plenty of well connected bloggers eager to publish, anything that goes out to a sizable list doesn’t stay private for long.
Ron Conway’s email to the companies in which he has invested, titled IMPORTANT PLEASE READ ASAP â¦..REGARDING CURRENT MARKET CONDITIONSâ¦, was the first such memo to be leaked. The core of Conway’s message is this:
“The message is simple. Raising capital will be much more difficult now.
You should lower your âburn rateâ to raise at least 3-6 months or more of funding via cost reductions, even if it means staff reductions and reduced marketing and G&A expenses. This is the equivalent to âraising an internal roundâ through cost reductions to buy you more time until you need to raise money again; hopefully when fund raising is more feasible. Letting go of staff is hard and often gut wrenching. A re-evaluation of timelines and re-focus on milestones with the eye of doing more with less will allow you to live many more days, and the name of the game in this environment in somerespects is survivalâsurvival until conditions change.”
Even more dire in tone was Sequoia Capital’s Doomsday Meeting. This was an in-person, emergency meeting that the CEOs of all of Sequoia’s portfolio companies were required to attend. It was supposed to be private, but notes from the meeting, as well as the slides themselves, soon made it on to the web.
Prudent, or Self-Serving?
These missives have provoked a variety of reactions. From my perspective, you can’t blame investors for wanting to do what they can to help their portfolio companies survive, and it is clear that there’s hard times ahead. Valuations are going to fall, with some of the drop attributable to the genuine change in exit opportunities and prices, and some of it due to investors taking advantage of the crisis to get better deals. That’s just how the system works.
Venture investor Fred Wilson’s Don’t Shoot the Messenger responds to some of the criticism, and the comments to his post are well worth reading for an assortment of opinions.
The best way to manage a company is indeed different in boom times than in downturns, and investors are appropriately concerned that entrepreneurs won’t adjust quickly enough. After all, being an optimist is a necessary characteristic for creating a new business. We’ve come to a point, however, where we need to be a little pessimistic about the near term to ensure our survival, so we can continue to be optimistic for the long term.