Thursday, October 9, 2008

How To Survive the Financial Downturn: Lessons from Sequoia Capital and Ron Conway

Philosopher George Santayana famously said, "Those who cannot remember the past are condemned to repeat it." If there’s anything we’ve learned from American history, and in particular, from the last 10 years, it’s that we must do our best to avoid repeating the mistakes of our past.

With free-spending ways, dot-coms in the late 90s focused on increasing market share with no attention paid towards the bottom line. Many internet companies were losing money, yet still going public on the hopes that ‘brand awareness’ and cornering their market would get them profitable. They were wrong. Their initial stock prices were wildly inflated, because investors were betting on their rise, not their value. When the dot-com bust took place from 2000 to 2002, roughly $5 Trillion dollars in market value went down with it.

As the current financial crisis has swept from the housing bust, to the mortgage industry, to lenders and banks, Silicon Valley has largely sat here watching from the wings. But as history and its mistakes tell us, this time, we must take proactive efforts so that millions (trillions was only on paper) are not lost again. Already, the reintroduction of dot-coms, known as Web 2.0, has made huge changes. No longer do freshly minted dot-coms spend millions on a Super Bowl commercial without turning a profit. No longer are web launch parties full of extravagance and hired talent. But that’s still not enough. Those who want to protect their investments and their money, are sounding the alarms early, because they can’t allow a dot-com bust to happen again.

Over the last few days, Sequoia Capital, a venture capital firm behind Apple, EA, and Google amongst other, held a meeting for their roughly 100 portfolio CEOs. The last time this happened was during the dot-com crash. The messages here were the same: Cut expenses and become cash-flow positive. Here are some excerpts from that meeting:

Mike Moritz: For those of you that are not cash-flow positive, get there now. Raising capital is nearly impossible if you’re too far off of cash flow positive.

Eric Upin: We are in the beginning of a long cycle, what we call a “Secular Bear Market.” This could be a 15 year problem. Previous recessions have averaged 17 years.

Michael Beckwith: Look at eBay (1,000 planned job cuts) – this is just the beginning.

Doug Leone: In a downturn, aggressive PR and Communications Strategy is key.
Ron Conway, an early-stage investor in Google and PayPal (and an investor in MerchantCircle), re-sent a few lessons learned during the dot-com bust. The messages aimed to help the companies he invested in not make the same mistakes of the previous generation. Below is an excerpt of his email to his portfolio companies back in 2000.

1. If you are in a funding cycle, you should raise your funding as
soon as possible and raise as much as possible.

2. Many companies are ignoring certain VC leads we've provided in
order to concentrate on the top tier only. While we have preached that in the past, this is no longer the case. Currently, top-tier VC bandwidth constraints, coupled with the market down draft, make it very important to take meetings with any VCs where you can get their attention. We have been working hard to open up this new bandwidth.

3. You must aggressively examine and pursue M&A opportunities
(unless you have over 12 months of cash reserves!) ro insure you have critical mass (including funding, customers, rolodex power, market share, cash, synergy, etc.).

4. Be realistic on valuations - they will fall so be ready and
willing to co-operate.

5. Look for corporate partners to invest so you can raise more
money. You should also consider a sale of your company to your corporate partners.

6. If you are entering a funding cycle start raising money sooner
rather than later.

7. While it's safe to say entrepreneurs have had negotiating
leverage with the "down draft" in the market, the VC community will start exercising their leverage.

The Key thing people need in operating a startup is maneuvering room. You need time to move around and time, in the startup world, is infinite if you are generating cash. Of course if you have a large amount of cash on-hand, and generating cash, you can be a consolidator. Take for instance JP Morgan Chase. As the mortgage crisis has led to the collapse of numerous financial institutions, JP Morgan was able to consolidate, or acquire, Bear Stearns & Co. and Washington Mutual at low prices. This applies to startups and small businesses as well. If you have cash on-hand and are generating cash, you can look to expand quickly, easily, and less expensively than the past.

So how do these Silicon Valley lessons apply to Main Street businesses? Like Silicon Valley startups, local businesses need to be nimble enough to adapt to a changing economic environment. On Main Street, local business owners very rarely get to make the same mistake twice, because one big mistake means you're out of business.

While we can all hope for the best, we should also expect the worst. Local business owners must heed some of the same advice towards cutting expenses:

· While it may be hard, reduce hours of your employees, and maybe even consider laying off employees until the economy recovers.

· Turn your attention to products and messages that work – minimize novelty products and the promotion of them.
· Stop advertising in the Yellow Pages. It’s costly, long-term, and often-times, ineffective. Move your advertising dollars to local internet marketing, where it’s cheap and easily adaptable.
· Beginoffering deals to get customers in the door (Buy one get one free, 20% off one item, etc.) – something you can do in real-time online and impossible in the print yellow pages.
· Network, network, network – networking with your local community to build strong relationship costs nothing, and the rewards in terms of attracting new customers and building new relationships are invaluable.

Ben T. Smith, IV
Co-Founder and Chairman, MerchantCircle


  1. Your advise only seems to apply to big-wigs and big-name companies... What about a 2-person company? There are NO employees to lay off. There IS NO fat to trim. How can I spend time networking in the community when most of my time is spent designing & completing our orders, helping the walk-in's, and working on the websites & doing the bookkeeping at night?
    Where are our Angel Investors to tide us over? Where is our VC provider? Would you be interested in funding us?
    We have been networking on Merchant Circle since April, and Google has picked up my Blogs, excellent reviews & websites, but what else can we do? We have wonderful customers, but we need more to stay in business. We are a discount store and can't raise prices. Our jewelry business has been my life for over 20 years, and I live for my customers. I am NOT high maintenance - I don't need much, except to stay in business to continue serving my customers. Any other ideas?

  2. Hi Janet,
    These are all good questions. If you truly have no time because of your business and are NOT making any money, then I would seriously consider broadening your services and/or bringing on an extra employee, so that you can focus on aggressively expanding your business marketing. Not knowing everything about your business, I don't understand how you can be so busy without making any money.

    There are a number of factors to consider if you need to cut costs or save time, you may look to outsource some of your work or investing in technology that might make your job easier. It all depends on how much you're willing to grow or CAN grow.