Belt Tightening Time in the Valley
By Azam on October 9, 2008
A number of prominent investors from Silicon Valley are telling their portfolio companies to prepare for the worst and long dry season with capital to become scarce. Firms are being advised to cut expenses and switch into survival mode.
Michael Mortiz lead an emergency meeting for Sequoia Capital portfolio companies warning the firms to be cautious and the downtown could be longer that most anticipate.
Ron Conway, the well known Angel investor in Silicon Valley issued an email to his wide portfolio of companies. Ron Conway has been investing in over 100 startups in early stages and a large number of web 2.0 companies.
From GigaOm
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 an eye to 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.
Early reporting from FT on Valley from prominent Investors in Silicon Valley
In the FT Valley’s investors heading for the hills provided an austere point of view
Leading Venture Capitalists:
There will be “no IPOs, little or no M&A” as a result of the broader market upheaval, said Theresia Gouw Ranzetta, a partner at Accel Partners.
Other outside sources of money have also been drying up.
“It’s pretty clear that demand is going to soften across the board for every company - it doesn’t matter if you’re selling to consumers or companies,” Mr Michael Moritz of Sequoia said.
Private equity firms and hedge funds became big investors in early-stage technology companies during the boom, but have already been pulling back over the past year as the convulsions in the debt markets have spread. “If they haven’t gone already, they soon will,” Mr Moritz said.
At the other end of the spectrum, angel investors - the private individuals who occasionally put seed money into start-up ventures - are likely to cut back sharply as they suffer losses elsewhere, said Roger McNamee, a founder of Elevation Partners.
“You have to be pretty objective and look at your entire portfolio,” Mr Andreas Stavropoulos of DJF said. “If companies aren’t making their objectives they have to say, ‘Is our time better spent doing something else?’ “
More Serious
Leading Silicon Valley venture firm Sequoia held an emergency meeting yesterday to tell its portfolio companies to get ready for the worst, GigaOm is reporting and which we’ve confirmed from multiple sources. To drive the point home, startups were greeted at the gathering with a grave stone that said “RIP: Good Times.”
Here are presentation excerpts drawn from a leak to GigaOm and as left in comments on Silicon Alley Insider.
Mike Moritz, General Partner, Sequoia Capital:
- “We’re talking survival. Get this point into your heads.”
- Companies need to be cash-flow positive, if nothing else in order to justify additional funding
Eric Upin, Partner, Sequoia Capital, formerly ran Stanford University’s $26 billion endowment fund:
- This could be at least a 15-year downward cycle, judging by historical trends; the credit market will take a long time to recover
- Startups need to deeply cut expenses, and throw out existing projections
Michael Beckwith, Partner, Sequoia Capital:
- A dramatic recovery is unlikely
- Spending cuts will accelerate through this quarter and into next year
- Only lean companies with proven sales models will be acquisition targets
Doug Leone, General Partner, Sequoia Capital
- Get aggressive with public relations communication strategies; cut marketing that doesn’t work
- Offer a product that reduces expenses and drives revenue
- Preserve capital over trying to gain market share
- Begin with zero-based budgeting to help prioritize necessary expenses
- Have at least one year’s worth of cash available
- Reduce expenses around products and boost sales; if product is ready, cut engineers (wow)
- Build essential product features first
- Reward salespeople based on commission, not base salaries
Reading List
VentureBeat Sequoia Meeting and more details
Categories : TechTags : Accel Partners, DFJ, Elevation Partners, Michael Moritz, Roger McNamee, Ron Conway, sequoia capital, Stavropoulos, Theresia Gouw Ranzetta
Belt tightening makes sense only if you haven’t figured out a business model that will get you to revenues and net profit. If you have figured it out, now is the time to take advantage of everyone else’s weakness.