Venture capitalists: We are open for business, but take our advice...
At a VentureBeat panel about managing through the economic downturn VCs offer sober advice for entrepreneurs.
At a VentureBeat panel about managing through the economic downturn, the vibe was oddly upbeat. Yes, we're in a slump. Yes, it is systemic, not limited to the tech economy. But each of the venture capitalists on the panel said, "We're open for business." There is capital available. Although, perhaps, not for business as usual.
The strategies for muddling through this economy start with these 10 tips from legendary VC John Doerr:
1. Act now. Focus your business, cut what you need, or sell if you must.
2. Protect the vital core of your business. If you have to cut, use a scalpel, not an axe.
3. Get 18 months or more of cash. And do it against a conservative business plan. Plan for the worst.
4. Defer expansion. Delay facilities and capital expenses. Instead of buying PCs or software, use "our technologies," by which he means, Google Docs (which is free) and similar Web-based back office tools. Reprioritize and rationalize all your R&D.
5. Negotiate. In this climate, everything is negotiable, including your lease.
6. Everybody sell. It's an honorable profession. Everyone in the company should have a focus on bringing in customers.
7. Offer equity instead of cash. For people who can accept it, offer to swap cash remuneration for shares of the company.
8. Pay attention to where your cash is. Put all your cash into the most secure possible instruments. Money market funds are not guaranteed. Look at treasuries.
9. Make sure you have leading indicators for all your revenues. 90 days is a good benchmark. You want to see the trouble coming before it hits you.
10. Over-communicate. With employees, investors, key customers. Don't sugarcoat things (and reread tip No. 5).
Other VCs chimed in with their tips:
Matt Cohler of Benchmark Capital: Don't panic. Look at things seriously, but breathe and be rational.
Ron Conway of Baseline Ventures: "React proactively. It's all about months of cash." If you have less than a year, he says, you are at risk. Go to your current investors and get a bridge loan. If you can't get a loan from your existing investors, then you know they are not "with you." And forget bank loans or new investors. They take too long.
Also, says Conway, "Renegotiate your rent. Your lease is not sacrosanct." In fact, he says, you can offer equity instead of cash for your rent. During the last downturn, he says, about half of landlords offered this deal took it.
Ram Shriram, an individual investor, echoed Doerr. "Right now, equity is cheaper than cash. Use it."
Kittu Kolluri of New Enterprise Associates: "Your time is more valuable than our money." Look at your business and ask yourself if it is going to become a long-lasting business. If not, the best thing may be to go in a different direction. "If you have an idea that is worth funding, you will get funding."
If you can't make it work, says Conway, do an "orderly shutdown." Don't put your team through the agony, he says. "It's not easy, but it is simple."
New entrepreneurs, according to the panel, will find the doors of VCs wide open. "To be clear, we are open for business to new investments," Cohler says. Doerr concurred, vehemently, that Benchmark is investing in digital technology, as well as green tech and bioscience. Conway said, "I still see five new opportunities a day."
However, all entrepreneurs should be warned: "Our first priority is to our current portfolio companies," Kolluri said. And as Jason Calacanis, serial entrepreneur now at Mahalo, said on a later panel: "The VCs lie. They're circling the wagons. They're going to invest in their winners, shut down their losers; that's what they do. Their whole business is hit-based."
But I found the upshot was still oddly positive, considering the bleak economic outlook. There are opportunities. And some of the most interesting current Web businesses started in the last downturn, as well as major shifts in our economy, such as blogging. Nirav Tolia, founder of ePinions, echoed Bill Campbell. "Cut expenses. Don't cut hope."