More reasons to watch your burn

Despite these tough times, there are still some bullheaded companies who think they can grow their way out of this mess or find the right M&A partner to bail them out.  I can guarantee you that this is a recipe for disaster.  I was on the phone today with the CEO of one our portfolio companies, and we were joking that we were in unprecedented times since we have been approached by a number of bankers about buying companies that are much larger than us.  So if these bigger private companies are hawking themselves looking for a deal, where does that leave a small startup?

It goes back to my one of my themes about building a business – focus on what you can control and don't try to find a savior by looking at external forces.  What this means is figure out what your core business is and take a scalpel and lop off the areas where you do not see an immediate return on investment.  If you believe you will find a strategic partner to buy you, forget about it because every other private company that has been funded during the last 5 years is trying to do the same.  In addition, I can also promise you that any large or small company looking to buy a startup does not also want to pick up a large burn rate.  Even on a private-private merger, most of these VC-backed companies will do nothing unless the deal is cash flow positive on Day 1.  Do yourself a favor, build an expense line where getting profitable can happen with the cash that you have.  This way you can control your own destiny and also even make yourself a more attractive strategic partner to any company in the future.  One other point for all of those advertising related startups-go find some other revenue streams like becoming a platform for partners via cobranding or hosting fees which scale with usage or find some other premium model because the ad market is drying up and the dollars will flow to some of the larger, more established platforms.

A ray of light in this environment?

I did an interview with Rich Maguire of Datamation last week which he just posted yesterday.  While the markets seemed to get excited for a day about the bank bailout, attention is turning toward an even bigger problem for startups, a potential recession.  The consumer no longer has that ATM called their house and confidence and spending to boot are down.  So what's an entrepreneur to do these days and are there any pockets of opportunity?  Trust me, I am not going to give the party line that it is great to start a company now because, you know what, it really is hard to go out and do that.  However, if you are brave and bold enough to do so, I will tell you that you could be well positioned 18 months from now when the economy does get back into gear.  This market will truly separate out those who are just in it for the money, and those who are out their to build an insanely great product or service.  As for the article from yesterday, here is an excerpt and hope you enjoy.

“We know that whether it’s media consumption, content consumption or even enterprise application, that we’re going to be more and more connected. Speeds on wireless devices will get faster, networks will get faster. Devices will get better. They’ll be more and more to do out there.”

Human activity on the Web creates an explosion of consumer data – every nugget of which is worth something to someone. “Data is everywhere,” Sim says. “Every time you turn on your computer, every click you make, everything you do is a piece of data that’s logged somewhere.”

There’s profit in figuring out “How you take that data and turn it into real information, and use it to sell subscription services, target better from a profiling perspective, etc. So I think the data-driven Web is going to be another opportunity.”

His enthusiasm for the Web, however, doesn’t mean he’ll be funding such Web-centric ventures like Facebook-style sites. We don’t need another Facebook, he points out.

“I think the point is that social networking is weaved into the very existence of all the things we do. You see apps getting weaved into your email. People are getting more and more connected out there, and used to that, because of Facebook.”

This saturation will result in consumer behavior being adapted in large businesses. The potential marriage of social networking and the enterprise has piqued investor interest. “How do you take this social networking and information sharing stuff – the clip and blog and share – is there any opportunity to benefit the enterprise? On a content layer? So I’ve looked at some companies along that spectrum as well.”

Be prudent but don't panic!

The alarm bells are ringing in Silicon Valley and start-up land today with Sequoia Capital and Ron Conway telling companies to prepare for the economic meltdown and to raise cash by cutting their burn.  This is not new news as being in New York we started to feel the real economic impact in mid-September as Lehman melted down and as Merrill Lynch was bailed out by Bank of America.  This is all prescient advice and something I have been espousing to my portfolio companies for awhile – see my last post from mid-September on Doing More with Less, a mantra that all startups should live by.  All that being said, it is not time to hit the panic button.  Don’t go out and fire everyone wholesale and skinny down just because everyone else is. Do it because it is right for your business and because all of your leading indicators tell you to do so.  Do it the right way by not making a 20% cut across the board but by thoughtfully thinking about your business, your priorities, and where you need to focus your capital and resources to grow your revenue but conserve cash.

The good news is that many companies I have seen have learned their lessons from the last bubble bursting and rather than subscribe to the "if you build it they will come" model have turned towards the "release early and release often" model of gaining customer traction sooner rather than later and at much lower costs than before.  As I look at the current landscape, obvious areas of concern are any companies with high fixed costs and heavily reliant on direct sales whether it be advertising related or enterprise related.  It is clear that for these big ticket sales that many corporations are in the mantra of doing nothing rather than doing something and that startups should adjust their budgets accordingly to reflect this reality.  For those companies that live by the frictionless sales model and that are capital efficient with a low fixed cost base, take another hard look at your organization and priorities and haircut unneccessary expenses.  Once you do all of that and feel that you have 18+months of runway, look on the positive side as there will be many great people on the market.  Yes, cash is king and if you have it and conserve it, there will be some phenomenal opportunities to pick up some great talent.

Delivering on Q3 forecasts!

I received some incredible news last night from two portfolio company CEOs updating me on our Q3 numbers.  They not only hit their respective forecasts set early in the year, but they beat them.  Normally I expect our portfolio companies to hit their numbers, but I am ecstatic because we delivered in the midst of the largest financial crisis we have ever seen.  While much news on the technology world is of doom and gloom, and while I too have been advising portfolio companies to conserve cash, it is nice to see that companies are still willing to spend if you deliver a strong value proposition.  More importantly these numbers speak to the commitment of the respective teams to do anything possible to deliver on the Q3 forecasts.  In each company, sales reps and executives flew out to key prospects and knocked off obstacle upon obstacle until they walked away with an order.  Ok, it is not as dramatic as it sounds as there were numerous meetings and technology proof of concepts before getting a sale, but the point remains that the companies that delivered did not wait for the orders but went out and got them.  There were a number of stories of sacrifices that were made including one sales rep who was expecting his third child yesterday but was at a prospect getting the contract inked and another one of a sales rep and sales engineer who camped out at a client’s office all day and wouldn’t leave until they had a signed contract.  Extraordinary times require extraordinary measures, and I hope that stories like these inspire you to keep fighting the good fight and to go out and make things happen.  Startups need to be scrappy and tough to survive!