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.
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I have video of Ron Conway at the event here: http://scobleizer.com/2008/10/.....n-economy/
the hatches in that picture do not appear to be battened down. i’m just sayin.
moral of the story…act like a bootstrapper.
instead of going though this entire vc/vc backed company “round table” - you could have just asked a bootstrapper how its done.
spend less money than you take in. its a pretty simple formula and it has worked for many years.
Geez, first banks are making home buyers actually qualify for their loan and now VC’s want startups to have a real plan to make money?
Next thing you know parents will have to raise their own children!
http://www.ngagelive.com
Bring Your Site To Life!
What is so interesting about the flood of good advice that is being offered now is that - these practices could be put into place regardless of state of the economy.
This recession may actually TEACH start ups to be more practical and analytical and resourceful during their entire existence. Not just waiting until a downturn to use pragmatic business sense.
In other words - life time lessons
I agree with you. These lessons should be kept even when the economy picks back up.
I agree completely!
Fat chance.
Which reminds me I gotta slap some primer and fresh paint over my backyard basement doors…lol
Oh thank the good Lord that the VC’s are speaking out. Oh god bless them for being so profound. They have the vision and the foresight to lead their flock through tough times. We are all blessed that the VC’s are speaking out now to address these times, time of drought and sorrow.
oh wait…
who the f**K cares what the VC’s say? They are gamblers, bloated fat cats that made it, arrogant know-it-alls that travel in a herd.
“Everyone is a salesperson”
“over communication”
Gosh John, thanks for the wise words - now back to your yacht, mansion, jet, luxury car.
ping us when you have something relevant to offer the people that still work.
Damn, if you get a chance head over to Obama’s TV discussion on Twitter.
cool!
nice!!
Sweet image Jason!!
yes, georges clooney to get a feminine audience !
Oh this is fresh. Maybe if CEO’s such as Jason Calacanis would stop flying from one useless conference to the next and if CEO’s such as that clown who runs Seesmic would realize that trying to live the jet-setting European lifestyle on VC money is not conducive to having a profitable business, VCs wouldn’t have to lecture their portfolio companies.
What is even more amazing is that only in tech could you create a “business” yet not have a business plan. Try doing that in the non-cyber world and see how long your business lasts. You’ll be done in 2 months, tops. Did everyone suddenly forget about the mess that was created post the dot com frenzy during the early part of this decade?
Dude, if it wasn’t for Calacanis flying around from one useless conference to the next, (a) I wouldn’t know who the hell he is, and (b) I wouldn’t know what Aloha or Maloba or whatever the f**k it’s called is, either.
Nirav does not understand the nature of the IT business, It is about market needs, innovative ideas and most of all, proper execution of them.
I am afraid that he is thinking about shoe stores or other similar outfits…
Web 2.0 startups is not tech. The technology is trivial. It’s a media business. Intel is tech.
Actually, I think you misunderstood my point. What I’m saying is that all this talk about cutting expenses is incredibly laughable. The first thing a business savvy person has in mind is to reduce spending while increasing revenue. To reduce spending only during economic downturns is woefully bad management practice and it would even make a 1st year business student cringe.
I’ve been on the business end of the IT business for 10 years, so yes, I do understand it. Market needs, innovative ideas, and proper execution are all part of the equation, but survival is also contingent on a proper business plan. A proper business plan must extend beyond putting Google Adsense on your site.
I couldn’t agree more.
Plusmessiah:
My bad. Replace the term “tech” with “Web 2.0.” The point remains the same.
This is an industry filled with idiots. Idiots with several things in common.
1. They are young and inexperienced.
2. They are not people persons.
3. They have bad posture.
4. They command an audience of fools, otherwise known as Techcrunch readers.
Interesting article, VC’s are seeking companies that are already profitable and overlooking some that have yet to prove they can turn a profit.
Most of the items on the list make sense to me, but will someone explain what this one means?
“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.”
What’s an example of a leading indicator and why is this important?
Imagine if you had some people with actual success in scalable startups OUTSIDE SILICON VALLEY - giving some advice. Now that would be amazing.
Wow, these guys are hardly behaving as the brain trust that they should be… I’m just a WordPress Consultant but they seem to be staying together as a fearful herd. It’s actually a good time to be buying advertising and they don’t mention promoting your business at all!
Some good points but what else do they have to say about this job-shedding economy? Sounds like they are doing what they always do — look for companies that are already successful and make them more successful.
is offshoring a viable option to conserve cash ?
http://www.confiz.com
Absolutely!!! == No experience, a socialist, no track record other than his terrorists connections, ho clue about the economy, promising tax cuts for everybody when the reality is that democrats ALWAYS raise taxes!!!
Just imagine: if Obama were white, would you really *REALLY* consider voting for him??? NOOOO WAY!!!
You want crazy old mccain “I dont use the internet” instead?