Given the events of the last few weeks, there are many provocative questions being asked about what the subprime implosion and subsequent bailout mean to all of us. Will the bailout bring liquidity back to the market? Are we descending into the worst recession we have seen since the 1930s? Is the US secretly a socialist regime shrouded in capitalist clothes? Amongst all the questions, very few are oriented towards the startup that has no leverage and is still building product or traction into the market.
While I’m not here predicting the “bread lines” scenario, for most entrepreneurs and even us VCs, our companies are our lives. The last time around, many “whistled by the graveyard” refusing to believe things were different until it was too late. It would be irresponsible not to consider a tougher environment. The following are things to consider for any entrepreneur beginning to prepare for upcoming market volatility:
1. Cash is king once again, and is all that matters. Preserving, extending, replenishing it. If you have less than six months of cash, you need to seriously evaluate how to replenish your balance sheet. Venture is generally the last industry to be impacted from market implosions given the long term nature of LP capital commitments and horizon for our investments – raise your money now if you can.
2. Planning to hire a lot more people? Especially sales folks? Slower, more responsible growth will be cheered, but running out of cash will not generate sympathy. Rather than hiring a bunch of sales people, who may spend months to get productive and still be pushing on a rope, keep the team lean until you feel that your customers can feel the bottom. People do not make any decisions when they are worried about their own jobs. No point subsidizing commiserating Happy Hours.
3. Focus resources on a great, specific product. In a tough market, large companies are cutting wholesale. R&D groups are in disarray or not as productive because they too are worried about their jobs. Smaller companies have finite resources and are all playing the “last person standing” game. Building a narrower product that is incredible at one thing and working outward is better than building a broad set of functions in parallel. Get to the 10x customer value proposition (3x improvement at 1/3rd the cost) and start selling as quickly as you can. This will help you leave competitors in the dust.
4. If you have venture investors, ask them how much they have reserved for this investment. All responsible venture firms create budgets for how much capital a specific company will need over its life. It’s how we know how many new investments we can make. If there are no other investors out there, your existing investors will be your support structure. Their summed reserve amount is the most capital you can plan on being available to you.
5. Work even closer with your investors to define value creating events. No VC will simply hand over all that reserved cash. Start early, work with them to adjust near and longer term goals to realistic levels, and document them, so that when you visit the partnership having accomplished your objectives, they’ll have your check ready to go.
6. Check in with your local banker. Many of the emerging growth banks specifically stayed clear of any credit derivatives or subprime mortgages. Their balance sheets are strong and leverage relatively low. This market could be an opportunity for them to grow share. The stronger the relationship you build now, the more likely they could be a supportive source of venture debt or capital.
7. Maximize any existing space and avoid signing new long term liabilities. This benefits you in a few ways: first, you avoid things like security deposits that tie up cash that can be used for operations; second, the commercial markets could be affected just as much as residential ones and you could negotiate a better deal after the ripple effect hits the economy; third, it can foster a “cash is king” mindset amongst the team. Everyone is in this together.
8. Try to do deals where you get paid upfront, and avoid doing deals that require significant cash upfronts. Again, cash is king. Better to use cash for business deals rather than security deposits (number 6). EVEN better to structure a win-win partnership that allows you to operate longer, rather than letting someone else carry your cash on their balance sheet. If the only deal is an upfront cash deal, hold out a little longer. If someone else jumps in now, you’ll be there when they go away. If no one else does, people will really begin to feel pain and you might be able to structure the “death blow” deal against a competitor or lock up some invaluable web inventory for a song. The flip side is if you can get money upfront, that is worth a lot! Whether that’s prepaid inventory, annual billing terms with cash paid upfront, or non-recurring engineering that actually subsidizes your team, keep all the chips in your corner you can.
9. Quantify marketing and shift it towards DR (direct response). There is a reason why in recessions, even before Google, brand advertising pulled back but DR grew – it has a defined ROI! Examine all “goodwill” oriented marketing costs. Paid search, display advertising (esp with its recent contraction), email marketing, webinars, and other forms of spend can be a much more efficient way to generate leads or acquire customers. All of them are measureable – what better way to know if your cash is well spent?! In addition, many ad networks will do guaranteed placement or conversion deals in tough times IF YOU HAVE THE CASH. This is the Internet era, don’t let marketing spend a dime without knowing what you get back.
10. Start thinking about potential HR upgrades! Tough markets mean top candidates are much more available than normal. Think about swapping out B- employees for A+ folks. Every person in a tough market has to contribute – sharpen the blade and drive productivity!
Got any other tidbits? Feel free to post them here….