Ron Conway, one of Silicon Valley’s most prolific angel investors (and he was also an early investor in Google), wrote an email yesterday to the CEOs of his portfolio companies. In no uncertain terms he outlines a bleak immediate future, and gives advice to his startups.
It’s the same advice, actually, that he gave in 2000 during the tech meltdown that was then happening in real time. Lower your burn rates to get at least 3 more months out of your current money, and raise money right now if you can. It’s very similar to what Sequoia (and other VCs, I’m sure) are telling their startups.
One thing Ron made clear in a conversation with me today. He’s not worried about the state of innovation in Silicon Valley, and he isn’t going to stop investing. He’s not pessimistic about the future of technology at all. What he is concerned with is protecting the portion of his portfolio companies who don’t currently have a large cash position to weather a storm, and he’s sharing his experience from the last downturn to help them through this one.
The full text of Ron’s email is below, along with similar emails he sent on April 17th 2000 and May 10th 2000.
——— Forwarded message ———-
From: Ron Conway
Date: Tue, Oct 7, 2008 at 12:12 PM
Subject: IMPORTANT PLEASE READ ASAP …..REGARDING CURRENT MARKET CONDITIONS…Confidential
We have all been absorbed by the turmoil in the financial markets the past few weeks
Unlike the turmoil of 2000 when the “action” was centered right here in Silicon Valley this time is it centered on Wall Street…..but it has rippled to the west coast quickly and we will not be “immune” to its drastic effects.
I was an active investor in 2000 when the “bubble burst” and remember it vividly and want to give you the SAME EXACT advice I gave to my portfolio company CEOs back then.
I have pasted in the emails I sent on April 17th 2000 and May 10th 2000 and every word applies today.
Unfortunately history DOES repeat itself but I hope we can learn from history and prevent the turmoil from occurring again.
The message is simple. Raising capital will be much more difficult now.
You should lower your “burn rate” 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 “raising an internal round” 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 some
respects is survival–survival until conditions change.
If you are in a funding cycle, you should raise your funding as soon as possible and raise as much as possible but face the fact that if you can’t raise money now you must cut costs.
While I do not own a large percentage of your company I hope you will consider this thoughtful advice.
I was here in 2000 and want to share what I learned through many years of experience and historical “pattern recognition”!
Here are the two emails from the year 2000 that I referred to above and all the statements apply in today’s market:
To: Angel Investors, L.P. Portfolio CEOs
Date: 04/17/2000 05:24 PM
From: Ron Conway
RE: Market Conditions Effect on Angel Investors, L.P. Portfolio
Companies
The down draft in the stock market sends us some obvious “signals” and we can’t help but mention them.
1. If you are in a funding cycle, you should raise your funding as soon as possible and raise as much as possible.
2. Many companies are ignoring certain VC leads we’ve provided in order to concentrate on the top tier only. While we have preached that in the past, this is no longer the case. Currently, top-tier VC
bandwidth constraints, coupled with the market down draft, make it very important to take meetings with any VCs where you can get their attention. We have been working hard to open up this new bandwidth.
3. You must aggressively examine and pursue M&A opportunities (unless you have over 12 months of cash reserves!) ro insure you have critical mass (including funding, customers, rolodex power, market
share, cash, synergy, etc.).
4. Be realistic on valuations – they will fall so be ready and willing to co-operate.
5. Look for corporate partners to invest so you can raise more money. You should also consider a sale of your company to your corporate partners.
6. If you are entering a funding cycle start raising money sooner rather than later.
7. While it’s safe to say entrepreneurs have had negotiating leverage with the “down draft” in the market, the VC community will start exercising their leverage.
—————————————————————————-
—————————————-
To: Angel Investors, L.P. Portfolio CEOs
Date: 05/10/2000 05:23 PM
From: Ron Conway
RE: Market Conditions Effect on Angel Investors, L.P. Portfolio
Companies
I want to “touch base” again; given the continued uncertainty in the capital markets.
As the market turmoil continues, we must underscore the advice that we have provided since mid April and it boils down to just a few points:
1) The capital market window is shut, including IPOs and VC Funding (VCs are looking at their existing portfolio funding needs – not new opportunities). Basically the market is now looking for PtoP (Path to Profitability) instead of BtoC, BtoB, etc! PtoE will prevail price to sales ratios! You must lower your “burn rate” to raise at least 3-6 months more of funding via cost reductions, even if it means selective staff reductions and reduced marketing and G&A expenses. This is the equivalent to ‘raising
an internal round” through cost reductions to buy you more time until you need to raise money again; hopefully when fund raising is more feasible.
2) If you have $10M or less in the bank you must do #1 above plus look at M&A options for your company; especially if your company is BtoC, content, advertising model, community, commerce, and even BtoB. An M&A transaction will allow you to gain critical mass and to get two sets of funding sources and rolodexes working on your behalf. M&A transactions take over 90 days so you need at least that much cash to fund your company. You must attend our M&A day on May 24th at the San Mateo Marriott at 3:00 PM. We will have investment banks there in addition to entrepreneurs who have
successfully accomplished M&A transactions. We will send you details.
We are still developing many new funding sources for our portfolio companies that are in funding cycle.
Not exactly counter-intuitive, but it certainly slaps you in the face to read it in black and white.
The man’s not wrong…
MA: “….and he does anything to help his startups. He’s amazing.”
actually what happens in times like these is that valuations drop and the new money wipes out the old money, so while he may be doing his startups a service, he is doing himself and even bigger service….
That was a “fantastic” bit of advice
Hah
i hope to do business with Ron one day. so in a nutshell he is saying you guys arent getting any more money from me anytime soon so you better sell lol.
SVD hit it on the head. guy has money, not a genuis. wealthy people make money no matter which way the market is going. i bet he never worked a hard day in his life.
http://www.vato.../show/RonConway
IdentityLocator.com
Ron is just about the hardest working person I’ve met, and he does anything to help his startups. He’s amazing.
The Godfather of Silicon Valley: Ron Conway
and the fall of the Dot.coms
By Gary Rivlin
“By early 2001, 43 of the companies Conway backed were out of business, and he had written off dozens more.”
If i was him and cared about my startup investments I would be rallying the troops. Cohesion and trust is everthing in a time of turmoil.
“I want everyone know that we are a team and together we will get through this no matter what. I believe the people and business models that I invested in are sound in any economy. I have more experience now than in 2000 and I promise you this will not be a repeat. Together, conservative, and diligent we shall overcome any obstacle before us.”
LoanerLocator.com
Dude, when you invest in 500+ companies you’re going to have a lot of failures. Come on, predicting a startup is going to fail is like predicting the Sonics and Knicks are going to suck ass this year.
Although I don’t agree with everything Ron says just because he’s had a lot of failures doesn’t mean anything.
You’re right about the last quote though; it’s pure coach-speak.
Indeed. If you have money and work hard enough, in good time, you share cakes with your startup companies, and in bad time, you get good bargain. That’s the way of capitalism, with smart management.
I hope YouSendIt has an adequate stash of money
As if Start ups could get anymore cheap then they have become. We are a long way from the 90’s baby.
You make people billionaires for cheap now days
I spent the last few days visiting with several well known venture capital firms in the valley. We’re not raising money but I was curious to hear their take on things. The basic message was that they have dry powder, good companies will still get funding, and focus on efficiency is key.
Nobody seemed to give the “end of the world” message. I’m not saying we’re not in for some hard times, but Ron Conway and Sequoia are not God. Let’s remember that Sequoia wanted to pull their money out of Google after they invested in them because they thought the company would go out of business.
That turned out to be wrong in a major way. So while I think there will be plenty of carnage out there, I can’t help but have some skepticism by these public pronouncements.
Very reasonable position, I think. I believe VCs don’t really intend to sound like it’s the last day of the internet industry but startups should really try to hear their message – efficiency is vital and they just can’t afford wasting money for entertainment startups that produce no real value.
With bubbles bursting one by one – housing, credit, and commodity, the Web 2.0 bubble busrt is coming. Under tremendous stress in the financial and economic systems, it will hit the internet space. My analysis on the web 2.0 startups tells me there are a lot of “me too”, duplicates, and no-business-model startups. The trip to deadpool is near.
What Web 2.0 bubble??? Salaries never recovered from the first bubble. sure there is work, but c’mon, companies today already pinch every penny, and bay are start ups have become just a lot of noise
that’s the biggest bullshit i’ve ever heard of in my life. i can show you a ton of startups who again waste way too much money on facilities and perks.
the difference this time around is that they buy $150 desks from IKEA instead of $5,000 cubicles from Herman Miller
Web 2.0 shows a real need, a human one. The entire social networks scene is driven by the need to belong (to a community) in an ever growing disconnected world (families breaking up, friends traveling the globe, evaporation of the ’small community’ model).
However, the web 2.0 startups are indeed ‘me-too’ (and boring like hell). Even FaceBook has no actual (real-world) value and unless one is found will become ‘my address book’ and nothing more. Advertising is nice (as a rev. model) but the last perfect storm around us shows you cannot make it your only model.
I do hope web 2.0, and social networks specifically, find a viable revenue model real soon, but I do not expect many to survive. It’s most probably going to leave just a few big ones that provide a real sense of community to real people.
The best thing that ever happened to my company was being rejected by Sequoia. We didn’t take the dilution, we have been cash flow positive for 7 quarters and plenty of cash now from operations. We grew 60% each of the past 2 years and just released a new version of our product.
We decided to bootstrap our business and now in a major growth phase with a real business model selling B2B and our sales exceed all our competitors except the large public companies.
The only thing that could make it better is if TechCrunch would have covered our latest product release, when we gave them an exclusive and they still ignored us.
Signed,
Happy that we are not at the mercy of any VC or angel investor.
share a link AllenD.
Great Allen, you have created curiosity with your post, but there is no link.
Thanks for sharing, but I think it is important that we realize that times are very different *and better* for companies in the valley today. Business models are real…the interfaces for user adoption and value are here in web 2.0, and clean tech is about to get a bunch of federal funding.
Sure, times are tough and will continue to be, so pragmatism is important, but it is also important that our innovators and entrepreneurs keep the optimism that makes this country great going.
good post on this need for optimism here on mashable:
while this is news, and important to talk about, we have to make sure that the positive of the situation also stays in focus: companies today are *so* much stronger than the web 1.0 bomb companies that blew up back in the day.
here is a good article on mashable about the need to stay positive in tech:
http://mashable...nology-economy/
What is happening is the end of artificial bubble financing of America’s economy, which was 75% based on consumer spending, largely on borrowed money, foreign money no less.
Now the music is over and I can’t see how Silicon Valley is going to do any better. Silicon Valley’s mentality of producing no real value other than a promise of a quick flip for the owners, especially on web 2.0, has to change.
This is the best time to invest in tech start ups. Nothing like the last tech crash. Not even close.
Dearest Alex,
Hi, great-grandson. I saw your post and I was reminded how on December 6, 1941, as a midshipman vacationing among the coconuts and palms I forecast that no American battlewagons would ever be sunk from the air, and how your grandfather, back on his next-to-last CIA day of April 30, 1960, told Eisenhower “oh sure” about whether to send Powers on one more mission, and how your father just out of the service decided to open his brokerage business on a Sunday to show how different his would be–Sunday, October 18, 1987. I must say, dearest Alex, that it warms the cockles of my heart to see you continuing the family tradition in such grand fashion.
Love, Great-Granddad Bejeebers
Is it nice to post an email when it clearly states that its confidential? I’m the guy that makes fun of everyone and everything, and I think its wrong. Damn!
VCs typically lag the public markets by a bit — their fund values don’t vary day-by-day, and they have dry powder by defintion of their funds.
So, I’d give it a full 2 more weeks before the VC market entirely evaporates.
Then, the VCs will simply make the same mistake they made last time.
They won’t invest now (when they should, with their investment horizon), and will instead rush to mass invest in 2-3 years, when valuations are much higher and the good companies have already grown beyond their investment stage.
If Silicon Santa is worried, I’m worried too.
I have been doing consulting in the automotive sector for a couple years. As many know, the American automotive sector has been struggling for sometime – rumor has it that Detroit is in line behind Wall Street for Federal handouts.
Last year we heard automotive ad dollars were going to be cut and to expect major difficulty in sales. What we saw was a flight to Internet advertising instead. Many traditional companies spending money in traditional media desperately need the same bang for a much smaller buck – they’re converting these dollars from national TV buys, etc. to Internet ads to reach their markets. The result, instead of a down turn we saw a slow down in the first quarter and then a sell out by third quarter. Things aren’t looking bad (yet) for 2009 either.
I would imagine similar stories can be heard in other sectors. I don’t see an extended downturn for tech, I’m hoping more and more of the world wakes up and embraces the efficiencies found on the Internet (in advertising, in broadcasting, in finding and consuming media and entertainment, etc.).
Already Done: A $25 Billion Lifeline for GM, Ford, and Chrysler – FlowChart (usnews.com)
http://zz.gd/1a89cd
Here’s one rescue plan that many Americans don’t even know about.
Congress is giving away $25B to Detroit. While we were watching the horrors of the mortgage debacle, Congress decided to bail out the “Big Three” domestic auto companies. This, even though:
- They’ve built inferior product for decades, unwilling to do the hard work to change themselves to compete directly with Toyota, Honda, Nissan, who build superior products with the same US workers
- We’re bailing our Chrysler, which is now not Chrysler, it’s Cerberus, a huge private equity firm, with no shareholders, no public company disclosure rules
- They get access to capital at under 4%: what interest rates are you paying? They were paying much higher rates before this bailout, because **they’re a bad risk.** Here we go again…
- The domestic auto industry has had 40 years to change and compete with the best foreign manufacturers, and they’ve failed repeatedly. Why would that change now? Then, where will we be?
Socialism corrupts efficient markets, at the personal or corporate level.
i think the determining factor on how different this will be from 2000 is the % of each fund’s portfolio that will require triage in the down economy.
in 2000, that % was so high that it detracted greatly from the time available to consider new deals. the irony was there was still plenty of money around, and innovation did not stop, but no one had time to invest. and so nuclear winter set in.
i don’t know what the % will be – each fund will be different. but i agree with the above posts in that the business models overall are more robust than they were in 2000. i’m not saying there aren’t any dogs out there, perhaps its more a comment on how ridiculous it was in the dotcom days.
bottom line going fwd – you need to be solving a very real problem, with felt pain. the VC’s i know who actually did some A rounds in 2000-01put their money into teams that understood a real and focused customer problem very well, and could provide a meaningful level of solution.
It is worthwhile advice however obvious. The problem is that sometime CEOs are not quick to recognize some of these things and what is obvious is lost for the trees.
Again, great advice.
3-6 months more funding than anticipated? I don’t think so. This bubble-burst is going to make 2000 look like a pimple. I’d estimate 12-18 months at this rate – or longer. Sales-enhancing companies will see a shorter time horizon and Cost-reducing companies will be even further from the shoreline. If I was still in a startup I’d be doing a Personal Plan-B after I slashed all non-essential staff after they delivered the most bare-bones product/service to sell. Conway is never going to suggest looking after yourself because he wants his investments to at least try to succeed – as should any investor. Keep the company alive at all costs, except for your health and well-being. This is going to get really really ugly….
yada yada, slow times…slow market…tighten belt…yadda yadda
(Ron Paul 2008)
Regardless the causes of the economic downturn, we need someone more than a Ron Conway to get us out. We need a leader who understand Austrian market economy to take us out. Fewer government intervention, permit market to correct, permit price to reach equilibrium.
Write in: Ron Paul 2008.
(Ron Paul 2008)
Good advice. I’d like to add a couple of things…
1) I don’t believe we’ve seen the bottom of the barrel in terms of the crisis by a long stretch.
2) I’d like to extend Ron’s rule of thumb: If you have $10M or less in the bank – AND you have no business model that guarantees substantial revenues within 6 months – you must do… [esentially sell to corporate partners, cut costs or find mor cash asap]
Cutting costs is always good in situations as the one we’re certainly getting into.
Even more interesting to me though is how little there is an emphasis on sound business models and real sources for revenues. We’re talking about business startups after all not about high level R&D funding.
Meanwhile we’re plugging away at our nimble company creating a great product with a solid business model and real customers that are excited about the things we do. We’re doing this without any outside funding so while we’re certainly not immune to financial crisis and recessions we’ve had to watch our burn rate all along
.
B +ve, its a great opportunity, especially for startups
http://www.kree...cash_crunch-wi1
from http://www.pbs....226_000453.html :
Here is my solution to adding jobs to the jobless recovery, to bringing Silicon Valley back to life, and to taking outsourcing and offshoring off the front page. Next week, Every venture capital firm in America should take five percent of its available funds and invest that money with best deals they’ve all had sitting on their desks for months. It doesn’t matter what the startups are. Give them the darned money, which I calculate to be about $5 billion spread across a thousand new companies. It isn’t tax money, government money, money taken away from education or Medicare. Its just money that was already intended for high-tech investment – money that probably would have been lost anyway. INVEST IT! Stop trying to pretend you are so smart or that your input and board membership really makes a difference (it doesn’t – you heard it here first) and write the checks.
JY – your strategy is exactly why other people dont want you manging their money.
I know of non-dilutive grants from the government supporting engineering headcount to encourage startups to establish engineering centers in Singapore. Does this sound interesting in such times?
You basically plonk a team in Singapore, pay their payroll out of Singapore, and every 3 or 6 months, get reimbursed up to 50% of their base salary. This might be a good way to stretch startups’ existing venture-backed dollars in such tough times.
Does it makes sense? Thoughts guys?
Given the credit crunch and need to get more out of existing cash, outsourcing and off shoring is going to take off regardless of that fact that nobody here likes it…. it will help companies burn their cash more effectively and make it though crunch times.
This was exactly what happened in last bubble bust.
http://www.confiz.com
Michael Arrington – October 8th, 2008 at 7:08 pm PDT
Ron is just about the hardest working person I’ve met, and he does anything to help his startups. He’s amazing.
—————————————————————————————–
So if you know and respect him, why publish his confidential emails?
Granted, the content is not sensitive, but if he put ‘confidential’ in the header it must have been for a reason. It’s not a big a deal, but in his position I would still feel let down.
yeah – he’s tagged it as confidential and you then go and make it public?
WTF ?
earn more at
http://www.zidd...php?referralid=(yUMz0ljxJ
As many of you, I think this is not a bad time for no-ones without funds to get out with new products.
The times are bad if you are already funded, if you have a staffed company, if your business model is not strong enough, and you have to spend every month thousands of bucks to keep alive a product that generates no or little revenues
but the storm out there maybe is cleaning the path for newcomers!
Bleakness is just a perception. Entrepreneurs are creatures that thrive in almost all circumstances. There are many successful people that still make money in war/famine. The logic to survive is simple, if a well/river dries up, go else where to look for funding.
Online companies are inherently international and I’ll to highlight there is funding opportunities outside of the U.S, specifically Asia. The level of innovation may not be as high in the Valley and VCs+Angel investors are not exactly spoilt for choice.
True, valuation may not be as high but this region is growing and has lots of room to grow. People here have savings(at least more than the average Americans) and are getting online in record numbers.
I belong to a Singaporean company that provide online engagement tools for E-commerce stores and we were funded through a grant that is country-blind. Singapore recognizes merit and not where you are from. If you have what it takes and want have a stake in Asia, Singapore can be your launchpad. There’s a reason why people call us Asia 101.
For more funding information, do go on this site at http://www.idm.sg and if you wanna chat with me to find out my own experiences as well as how to expedite the funding process, you can chat with me on my homepage at Zopim.com
Cheers,
Julian Low
Michael Arrington could you please respond as to why you publicly post the confidential email of a man whom you say you respect?
Would be good to get a clear response as to your ethical stand point on this issue.
I agree with chanchisang. What is the motivation in sharing a confidential email to the public?
Best regards
The market collapse crisis will turn around in due time. This too shall pass…
This advice is useful to most of the startups.
Why panic, in a couple of months we will all be back on track, the worst part is over. People who are going to react now are too late. If you now start telling to reduce costs or raise funding as soon as possible. What have you been doing the last 12 months
Great! There go my hopes of funding. I only needed 100K or so. I needed to expand my sites useless features.
http://www.frie...ow.com/home/why
Any takers?
$100k shouldn’t be too hard to find
We’re about to raise $700k (pretty easily).
Then again, we rock!
/flex
Dear Tim,
If you raising 700k, then maybe you can help us raise 1.6 Million for our project.
Thanks
Humair Imam
Huamir_Imam@yahoo.com
This advice is not just for startups – established companies will be tightening belts too. And contrary to some opinions (Miles) the funding market won’t bounce back quickly. There were a good 2-3 years of winter the last ice age (2001-2003+) and this market could be even worse, especially for those of us outside of SV (in Boston, it’s nearly always Winter… heck, our Sand Hill Road equivalent is Winter Street in Waltham… brrrrrr).
The bottom line is that if you are not already funded and don’t have a sustaining source of revenue on the near horizon, you need to consider options. For very small startups like mine (givvy.com), going into “labor of love” mode with rent/mortgage paid by a real job is probably the right answer. With organic growth we may be in a very good position in 3 years for either funding or M&A, but today all we have is some very nice functionality and a great vision – neither of which will put food on the table yet.
I think, it will take time to market recover and economy.
http://www.oxyshopping.com
So how does one get to pitch to Ron Conway?
thanks for sharing
I guess its all about math, make an assumption for how long you think this slow down will last. The assume worst case scenario (no future funding until timeline is done) and ask yourself do I have enough money to make it? Of course is part of your cashflow assumptions is tied to revenue, heavily discount it. It’ll come down to how honest we all are in our models.
Chill people – Looking at your comments all I see is blah blah blah… WHO knows what the future has in store, are you kidding me!! you think RON CONWAY knows anything about anything. Anyone in the business could see the late 90’s bubble, just like anyone in the housing sector could see the housing bubble… so he is no genius for having sent out an email. FEAR is the best tool to maximize the purchasing power – the more the stocks drop, the more the 700B is able to buy us, so it’s all part of the plan. I say don’t panic, go on with your lives, and worst case scenario, you won’t be able to buy a yacht one day… life still goes on and you won’t starve
Interesting times. You can get crushed by the big wave or you can grab your board and ride it. Point Break…
This is common sense and the fact that Conway has to send out an email like this is scary for the investors. Anyone that didn’t learn from 2000/2001 and is making the same mistakes now doesn’t need to be in business and is going to be one of the first to be removed through survival of the best.
Angel Investors and Entrepreneurs – Living a Bad Dream
Watching the economic news unfold over the last week was like living a bad dream. Like most dreams, it was a slow moving series of events that brought us closer and closer to economic disaster as the flow of credit became more and more constipated.
Financial institutions are failing, including our own Wachovia Bank, coming off the failures of Lehmann Brothers, Fannie Mae, Freddie Mac and others. The administration put guns to our heads telling taxpayers that they had to pay $700B or else the world as we know it would end. Congress denied all accountability and served up some more pork to fix the problem, moving us closer to the abyss of socialism. McCain gave a head fake of leadership, while Obama again ducked and weaved his way to looking like the almighty savior with a few good speeches.
So, there in that bad dream stand angel investors, whose portfolios of investments are being crushed by the resulting market downturn. But, the dream is not over. We still have not gotten a complete awakening of what is going on and what else is going to drop on our heads. What does this mean for angel investors and the entrepreneurs that need them?
The Angel’s Perspective
Angel investors are high net worth individuals who have a broad array of investments, less than 10% of which is in high risk start-up companies. Their issue now is what is happening to the other 90%.
• If they are invested in the public markets, they are seeing at least a 10-15% decline in the value of their investments.
• Depending on what they are invested in, their losses could be astronomical especially if they are invested in financial institutions or the real estate market.
• Their own companies are feeling the impact of the slow movement of credit as they try to borrow money for business operations.
This all adds up to a need to conserve cash and reprioritize their investments to lower risk opportunities.
• Depending on their investment strategies, they may decide to sell the securities that have been irreparably harmed.
• They may conclude that the depression in the market is not over and that we are going to fall deeper into depression, and therefore put their money into very low risk investments.
• They may actually increase investments in areas that are fundamentally sound, getting great deals in this depressed market.
So what happens to their investments in start-up companies, that 10% of their portfolio? These are not liquid investments, so they will certainly continue, but they will want to see more aggressive strategies for exits as they will be willing to take a lower return to cash out earlier. Entrepreneurs will have to focus on creating earlier exit opportunities and creating greater shareholder value faster.
Chances are they are going to pull back on making any further investments until the economy stabilizes and they find out exactly where they stand. Getting them interested in a new investment in a start-up is going to be extremely difficult. Entrepreneurs will have to really focus on putting together their business plans to show not only an attractive opportunity but a substantial return more rapidly than ever before.
Many of them are going to move to more mature companies that represent lower risks, as the venture capital world did coming off the downturn in 2001. This will challenge entrepreneurs to form businesses that can reach profitability and positive cash flow earlier.
The Entrepreneur Suffers
Entrepreneurs already have a tough enough time getting their companies launched without investment money and credit drying up. This is not just a bad dream, it’s a nightmare. They are hit in two fundamental ways:
With continuing market depression, it will become even harder to find financing for start-up companies:
• Government budgets are going to come under scrutiny which will impact the lucrative grant programs that are available today. This means that the proposals that are submitted for these programs have to be even more compelling and address a strong and urgent need.
• Foundations whose investments are also in the markets are going to experience lower returns which will reduce the amount of money they will be able to offer to new business ventures. As with government grants, the pressure on the entrepreneur to have a stronger and convincing story to justify the foundation grant.
• The limited partners of venture capital firms will also feel the pinch in the markets, putting further pressure on venture firms to perform. Raising further funds from limited partners for venture capital will be more difficult as well. As entrepreneurs approach venture firms, they are going to have to show greater returns over a shorter period of time, and the risks have to be well mitigated.
• Angel investors will back away from new investments, unless they see a clear winner that they will be able to get into at a very attractive price. Start-ups are going to have to show a very attractive market opportunity and accept lower pre-money valuations as they have to offer more of their company in order for investors to mitigate their risk.
Existing start-up companies are going to suffer in their day-to-day operations:
• For the limited amount of credit that will be available, the terms for borrowing money for new equipment are going to be more onerous, almost making it worse than spending valuable cash to purchase equipment outright. In the same manner, leasing will become tighter as well. Entrepreneurs are going to have to be even more inventive about finding used equipment or align themselves with partners to share in the use of equipment. Outsourcing the need to companies who have it will have to be a strong consideration.
• Investors are going to find companies that have strong credit worthiness more attractive. Entrepreneurs are going to have to establish strong credit, mainly through the credit worthiness of the company’s founders and of the company’s business partners who are willing to back them.
• For the many rapidly growing companies who need to partially finance their early success through AR financing, they will see even tighter restrictions on the quality of AR backing. Entrepreneurs will need to negotiate more attractive payment terms with suppliers in order to survive, or choose to grow slower, within the limits of their cash flow.
• Lines of credit, the vehicle by which short term cash demands for payroll and other payables are sometimes met, are going to be tougher to get, putting cash-squeezed companies at great risk. This too will force entrepreneurs to reconsider payment terms and other means of conserving cash will be even more important.
A Perfect Storm of Incompetence
We have been deceived and let down by about every agency that should have been protecting us. No matter what you hear from whatever biased news source you encounter, there is blame everywhere:
• Henry Paulson, Ben Bernanke and Christopher Cox, as well as many others in the administration, have known of the implications of providing sub-prime mortgages to unqualified buyers for years. Where were their loud and assertive voices? What did they do to prevent this from happening? They drove us right into a ditch.
• Congressional leaders like Barney Frank and Chris Dodd, the committee members they lead, and the oversight groups that were supposed to protect us have materially caused this whole debacle. Starting in the Carter era, they and others that preceded them have pushed opportunities to the financial industry to offer mortgage loans to low income people, often asserting great pressure if they didn’t. Over thirty years later we have trillions of dollars in bad mortgages. This was not a problem of deregulation. It was a problem of bad oversight.
• Financial institutions took the bait and caved to the pressure to provide questionable loans, knowing that they would be bailed out by Fannie Mae and Freddie Mac. Now, they look stupid, having had foresight as to what it would mean, but did it anyway.
We now are living in a perfect storm created by their incompetence and it is not over. Meanwhile, the taxpayer is going to pay the bill for the results of a dysfunctional congress and an ineffective administration, all of which have not looked out for the best interests of the public and the businesses that drive our economy. The fear lingers as to what further surprises are on the way.
What a great week! I can’t wait to see what is coming in the weeks to come. Now I am going to paint the porch, rake some leaves and scream at the birds. But, tomorrow, the optimism and opportunism of angels and entrepreneurs will continue to prevail.
Bill Warner, Managing Partner, Paladin and Associates
Our company is seeking an investor, we can forward the investor the copy of the executive summary. Please email me with you contact information.
Sincerely,
Humair Imam
Humair_Imam@yahoo.com
Humair.Bin.Imam – Skype ID
history doesn’t repeat (exactly),
but sure as sheepdip it seems to like teaching the same lessons over and again
time to toss off those expensive toys, and cut office leases, and make it all happen via Starbucks wifi …. distributed computing, taken to its utmost level of diffusion…
I’m so glad that we we are working to make some change in this field, with Grow VC. http://www.growvc.com will be more than current VC or Angel business model on steroids.
Grow VC will break the mold and restructure a new better working model for new international start-up ventures. It will change the way new ventures will be funded – forever…
wake up folks, it’s not going to get better anytime soon.
We are all looking for a way out in the downturn of the financial and economic situation. We also know that it’s part of our nature to be attracted to anything new. So we think that it is about time for VC to start moving with New Start up(s) in order to overturn the present situation.