TechCrunch is a very active, successful blog focused on Silicon Valley companies, and filled each week with news of startups adding wrinkles to stuff like Twitter or coming up with new ways to search.
Some of these companies are doing cool things, but like back in the dotcom era, the business model for some of them seems really elusive.
Anyway, it’s a great daily read and there is a post there this morning relaying the advice of one of that sector’s most active investors, Ron Conway, on the things companies should be doing to ride out the economic storm rolling over right now. Given our sector, particularly on the network operator and software and services sides, is filled with investor-backed start-ups and early stage companies, the advice is relevant.
Conway sent this e-mail out to his portfolio companies this week, stressing he is very positive about the future, but that right now companies need to get very smart and hang on.
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 fundraising 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.
I don’t trade in rumors or background information, but will say even before the markets went sideways last month some companies in this space were really struggling along. Some will, unfortunately, fail, and there will be staff reductions and much more of that consolidation that has long been anticipated. One well-known network operator closed its doors last week, but there has been no official announcement, and I’ll wait on that unfortunate confirmation.
There wasn’t room for 300-plus software companies when the economy still seemed strong. There definitely isn’t now, and the companies just entering the game now with their own software offer just plain mystify me.
That said, there are still companies going foward with plans, and I’ve talked to lots of people with buttoned-down plans and stable backers who are still moving foward.