Angel investor Ron Conway to portfolio: Cut expenses now

Ron Conway, an investor in more than 100 contemporary tech start-ups and about that many in the last tech boom, sees the current financial environment as very similar to the 2000-2001 tech economy meltdown. His advice, as he laid it out to me earlier today and to his portfolio companies yesterday in an e-mail (after the jump), is the same as it was then: "Raise money internally by reducing cost."

He says, "The funding climate is going to tighten no matter what we do. The sooner we can prepare for it, the better."

At least, he says, entrepreneurs are more mature and proactive than they were in the last downturn. They're coming to him, some with cutback plans and some just seeking advice. As he puts it, the ones who come to him and say, "Walk me through the steps I should be taking," are the ones that will weather the storm.

Conway still feels it's a great time to start a company: if you're a "great entrepreneur with a great business idea," he says, "now is as good a time as any." But "hold on to your day job while you are raising money."

The letters:

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:

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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.

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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.

See also:
CNET's roundup coverage: Tough times for tech
Gigaom: Sequoia rings the alarm bell: Silicon Valley is in trouble