October 2008 Archives

The Death Spiral

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This slide from the infamous Sequoia deck is one of my favorites:

Running lean is something all startups should practice at all times, even if they are profitable. Keeping costs under control is an art and a science and is even more critical when you're just starting out and don't have any revenues.

So add in our economic woes and in the short term, the death spiral becomes a high probability and high burn startups can't pull out of it, because funding has almost all but dried up. Venture funds are pulling back and getting super conservative; they have good reason too - the crappy economy does not allow startups with slow to prove business models to survive. At the early stage, it's even worse; us angels and early stage funds can't give a startup enough money to last out past when the bailout plan and economic recovery will begin. Early stage startups need enough runway to get to positive metrics so that they can raise the next round. If they can get to profitability, even better. However, if you try to raise money now and your metrics are average or not all that great, you won't get your raise.

Hence you enter into the death spiral and you're dead.

UNLESS...you reduce burn now. Do whatever it takes: layoffs, cutting salaries, removing non-essential services and perks. It's all about survival now and for as long as you can, to give you as much time as possible to get your metrics to a positive place. Activate revenue generation immediately; don't wait. Start getting cash in now and you'll be able to last even a bit longer.

And if you're starting a company right now, begin with good habits of running lean. Don't get into thinking you can run the company as if it were a bigger, more mature company. You can't. The bad economy exacerbates these problems.

It's times like these when you really find who truly believes in the company and the idea. If you need cash in your life (ie. have a family), you should seriously reconsider being in a startup. Startups need to run lean to survive; it means that there is a huge amount of sacrifice that its employees take on to really run lean. Those who are truly believe in the company and idea will stay no matter what it takes; they will not leave when you cut salary or perks. And they will work their butts off for minimal pay and equity alone. If you can't live in an environment like that, I would really urge you to look at what is truly important in your life before joining a startup.

Betaday 10-14-08

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Today we had our second Betaday at betaworks in NYC. It was at the Soho House, a posh movie screening house right next door to our offices in the Meatpacking District:


It was a great event and provided the opportunity for media companies and ad agencies to network with the startup community of NYC. One exec remarked that without Betaday, it would be next to impossible for execs to find and connect with these startups. It's so true; without events such as these, where would they meet young companies like these and look to do potential partnerships with them?

Looking forward to the next Betaday!

Party Like Its 1999

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Every Monday, I have jazz piano lessons. Today, I went to my lessons and asked my piano teacher whether or not he was feeling the bad economy's effects.

He said it was exactly the opposite. Over the last few weeks, he's been overbooked on playing private parties all over LA. He's had to turn away business and refer people to friends. It's been almost too much to handle but he takes the work when he can get it. It's cash in the bank and you can't ignore that.

We talked about the fact that there was a glut of private parties happening all over LA. It seemed to him that people were partying in the middle of all this bad news, and the fact that many a rich LA person was down millions of dollars in their portfolios. So in the midst of all this gloom, they have started throwing big ass parties - we guessed it was to drown their sorrows in big happy, drunken, piano playing filled moments.

Boy.

We watch our portfolios drop in big ways. We get depressed. So we throw a big party and live it up. Party like its 1999 - don't know what happens when the clock turns to 2000. World might explode. Better drink up and have a great time now before it's too late.

Crappy Economy Means Change in Strategy

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The economy is affecting everyone. But it's also interesting to see how it is affecting my angel investing strategy.

Like all other investors, I sent out my own doom and gloom email to my companies. Here is mine:

------email--------------------
Well, I should have been more closely following the blogs, but for some
reason missed this. Of course, you may have seen this already.

I am sure by now I am not the first investor to be telling you this. More
data from a presentation from Sequoia to its portfolio companies. Better
hunker down the long haul. This problem is now worldwide which means it
isn't just a local US problem. Thanks to some of our once esteemed
financial firms, we've now taken down the system worldwide.

Early stage is the most risky. It's where cash is very scarce, and you
don't have revenues yet. The problem is the economy is going to be
harshest on all you guys because in a good economy, you may not have
problems.

Make the hard decisions now before you're laying off people and in
survival mode. Extend your cash as long as you can and work as hard as
possible to get your metrics into a great place. VCs have cash to give,
but they will not give it to you if your metrics aren't anywhere but
great.

Also, the more you can find revenue that is not advertising based, this is
a good thing. Over and over again, the forecasts for positive advertising
spending have turned out to be wrong.

Read on and see the embedded pres:

http://gigaom.com/2008/10/08/sequoia-rings-the-alarm-bell-silicon-valley-in-trouble/

http://gigaom.com/2008/10/09/what-startups-can-learn-from-sequoias-doomsday-warning/

Thanks for listening...Dave
------email--------------------

The Sequoia deck was very enlightening and pretty much says it all. The world has changed; many early stage entrepreneurs are too young to have experienced as adults any economic cycles. I lived through the dot-com boom and bust cycle, and also the other one back in 1990 when the first Bush invaded Iraq. It's a sobering thing to have done so.

During the 1990 downturn, I was working on a Master's in Product Design at Stanford. I had completed a summer internship at Apple and managed to land a job continuing my work there, which allowed me to stay on as a full time employee and take a year off from school. The fall/winter of that same year, the US was into Iraq, beating back forces bent on invading Kuwait. Shortly thereafter, the economy goes downward. EVERY ONE of my fellow students in my Master's program did not get a job for OVER 9 MONTHS after graduation the following June. I was incredibly ecstatic and thought myself super-lucky that I had a job, and one that didn't lay me off thankfully.

During the dot-com bust, I was at Yahoo and we came through it with a stock that was down to 9 bucks and laying off 1000s of people. If you've ever laid off people, let me tell you it SUCKS. First there are all the planning meetings beforehand, behind closed doors to see who would be let go and who would stay. Then the big day comes; everyone is supposed to wait in their cube until the whole process is over. You just sit there and wait, in anxiety, wondering if you are going to be axed or not. When you go and get them, there is a mix of emotions: tears, fears, anger - you have to know how to deal with it all. This isn't about the people anymore; the corporation exists to survive for itself, not for its people. The harsh reality is that we're all expendable in corporate terms. No more IBMs with their plush retirement and pension plans, no more thanks for all the loyalty you've given the company for 30+ years. If you're not part of the solution, you're gone.

Personally I was also extremely lucky again. There were two things that pushed me through the dot-com bust in decent position. First, I was so freakin' busy at Yahoo that I did not deploy my personal funds into any stocks. Thus, when the markets crashed in 2001, I was heavily in cash. Geez. A bit of laziness saves me from a superb drop in stock market value. Second, I told my broker that whatever funds I did deploy, I did not want to be in PC manufacturers, ie. Dell, HP, etc. I told them that these were now commodity products and that these guys were going to get killed at some point in the near future. Little did I know that during the dot-com crash, these guys took down the value of many a fund, and because I told my broker not to buy these stocks, I managed to keep my stock portfolio breaking even, whereas other portfolios were heavily invested in these companies which just tanked at that crash.

Freakin' lucky bastard I am.

Now we're in another downturn. It's too early to tell what personal moves I'm going to make although I think about it every day and there is ongoing strategizing with my broker.

But it's effect on one part of my portfolio strategy has been growing clearer. Angel investing at the early stage is inherently risky. But now, the economy is going to make certain strategies even more riskier, and this is compounded by the fact that further fund sources are going to be even more conservative and picky on which companies they invest in. This means that whereas great metrics alone may have gotten you your next round, now it's not enough.

Early stage startups typically raise about a million. It lasts them for about a year. However, raising money in 2009 is going to be SUPER TOUGH.

Now my strategy has shifted to investing only in companies which are either generating revenue, or have businesses that naturally generate revenue from usage. That means no more exploratory forays into social networks or consumer companies that depend chiefly on advertising. As I said in my doom and gloom email, every positive forecast about advertising spending has turned out to be DEAD WRONG (kind of calls into question forecasting and research in general).

This economic downturn is a worldwide phenomenon now. All our economies are intertwined, and I'm sure many countries counting on the ol' faithful US to prop up their own economies were slapped rudely in the face. Guess what. Build up your own economy and make it great. Depending on someone else to do it for you is not working!

But it also means that we're going to take a long time to pull out of this. Early stage is super risky because we can't give them enough to survive long enough to prove out certain types of business plans. Only the ones who are generating cash from the get-go are going to be the strongest. Everyone else has a greater chance than ever now that they will run out of money before they can prove out their biz models. We don't know how long it will take to recover, and we don't know if the bailout plan will affect things quickly or slowly.

So I'm really only investing in clear revenue producing startups now. It seems to be the only thing that reduces risk. By the way, since the economy is way down, it just happens to be a great time to invest since prices will be really low; you just have to have cash to deploy.

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This page is an archive of entries from October 2008 listed from newest to oldest.

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