Yesterday Sequoia Capital and Ron Conway communicated with their portfolio companies to guide them through troubled times. Today Benchmark Capital joins the fray, with what a source says is an email from General Partner Bill Gurley to their portfolio companies (See our interview with Gurley and new partner Matt Cohler from earlier this year).
Like the advice being given by Conway and Sequoia Capital, Gurley is urging his companies to remain calm, but get tight control of their finances, starting now.
Gurley also says for companies to expect “across-the-board reductions” in valuations, and a tough market for raising money – “Basically, the cost of capital is going way up.” Hedge funds are probably out of the picture for startup financings, he says, and corporate, strategic and angel money will decline.
Gurley also notes that major opportunities will become available to those who “play the game frugally.” He says “The real key is to have a keen understanding of the game on the field and to be the one that adjests swiftly, rather than the one that moves after it’s become blatantly obvious to everyone else it’s time to move.”
The full memo is below.
The recent downturn in the public markets (now known affectionately as “the U.S.
Financial Crisis”) is obviously on everyone’s mind. Some of the entrepreneurs and
executives with which we are privileged to work have reached out and asked what
this means for private companies, the VC world, and Benchmark. As such, I thought
t might be a good idea to send you our thoughts on the current situation, and
ispecifically what it means for venture backed companies.
From a high level, this downturn is different from the Internet bubble of 1999. First,
the last downturn started in our backyard. We were the speculators; this time it is
someone else. This means that the “crash on the beach” wont be nearly as severe.
In the Internet crash, many times the customer was actually another VC‐backed
company and as such, there was a strong negative spiral. That said, while this
downturn might be shallower than last; it could last longer in terms of absolute
time. The American consumer is super‐leveraged which wasn’t true before the
1930’s or the 1970’s. The overall economy will have trouble gaining momentum
ith this debt anchor, and my best guess is the contraction is not finished yet. As
wsuch, it might take a long, long time before we see glory days again.
Like every major shift in the environment, this one will offer opportunities as well as
risks. JP Morgan was able to buy two great assets as substanti al discounts with
government assurances, precisely because they played the game f rugally while
others were more risk seeking. The real key is to have a keen understanding of the
game on the field and to be the one that adjusts swiftly, rather than the one that
moves after it’s become blatantly obvious to everyone else it’s time to move. Many
companies that thrived post 2001‐2003 were simply “Last Man Standing” in their
ndustry. It doesn’t sound all that glamorous, but it was the exact right strategy to
ideploy at the time.
It terms of defining our current situation, let’s start with the impact on the actual
capital in “venture capital”. The institutions (limited partners) that typically invest
with Benchmark and other venture funds are not the ones on the cover of the
financial news everyday. In fact, these limited partners are typically quite
conservative and have a very long‐term perspective. Certainly, new precedents are
being set every day, so it’s hard to say the word “never” in this environment. Still,
e are unaware of any situation where capital availability for us or any other VC
wfirm is in question.
With that said, I think access to other forms of capital that have recently been
available to venture backed companies may be dramatically impacted. As an
example, one would naturally assume that the hedge‐fund rounds of late‐2007 and
early‐2008 are no longer available. Additionally, we would expect that
strategic/corporate investments, venture debt facilities, and even angel financings
could all contract considerably. In all previous economic downturns, this was
certainly the case.
One would also expect across‐the‐board reductions in follow‐on financing
valuations. As financial markets deteriorate three things happen. First, investors
get nervous. As such, they tend to “choke up on the bat” and be more conservative.
We have already witnessed skittishness on behalf of follow‐on funders, as well as a
lengthening of the time it takes to complete a fundraising. The second reason
valuations will fall is that the public market comparable valuations have fallen
materially. This will have a direct impact on exit prices, be they an eventual I.P.O., or
M&A. In fact, I was recently at a gathering of corporate development execs, and
their number one concern was that private company executives have not realized
that the scoring system was just reset (expectations too high). Lastly, investors are
more concerned that a protracted economic downturn will negatively impact each
private company’s specific results, increasing the likelihood of a revenue or cash
If we leave you with one message it would be this: financings as we know it just got
a whole lot tougher. Basically, the cost of capital is going way up. This is, of course,
a sweeping generalization. Some of you have tons of cash, and some of you are
profitable, so the immediate impact will obviously be less. That said, if you do need
to go to the market for capital in the foreseeable future, you should consider that the
environment will be much less hospitable than it has been for the past 3‐4 years
which have actually been pretty benign), and that this less hospitable environment
(could persist for time measured in years not quarters.
Another obvious strategy is to extend the runway. Hopefully, everyone is aware of
exactly how many “months of cash” they have at their current cash level and burn
rate. If you have a method for increasing this runway, we think you should do it, and
quickly. . This serves two purposes. First, it gives you the opportunity to outlast
the competition, and second, it puts more time between now and when you are
forced to re‐enter the capital markets. One could argue you should draw down your
bank lines right now. Why? When you need the money, the fundi ng source may just
say no (they did last time). What are you going to do? Sue them? Take away their
warrant coverage? So what. If they get cold feet – you won’t see the cash, I don’t
are what the term sheet says. The bottom line is that you should watch “months of
cash” as your most important variable.
Be calm, but pragmatic. The purpose of this letter isn’t to send everyone off in a
panic. It’s simply to convey that the rules of the game have changed. One key
problem is that during these market downturns, most people don’t adjust quickly
enough. As an example, not hiring heads that were previous TBH isn’t really a
reduction in expenses. Also, 10% cuts rarely lead to anything other than multiple
rounds of cuts, which have a harrowing affect on culture. It’s easy to mentally
nderstand this is the right thing to do. It is ten times harder to make the actual
udecisions to affect change. These are extremely hard decisions.
You may know that I am involved with Zillow. They did a survey of their users to
ask what they thought was the current impact on home prices across America. The
average answer was that homes in America were down 20‐30% in value. The
survey then asked what the user thought had happened to the value of their own
home. Miraculously they thought their own home had retained value against the
odds! Surprised? It is human nature. As most of you read thi s, you will be thinking
in the back of your mind why your company is different than the average company
like these homeowners) and why you are the exception that doesn’t need to take
(action right now. This could be a rationalization.
Recently, I spoke with an entrepreneur who as a CEO during the dot‐com crash and
oversaw a headcount reduction from 130 to 28 (through two major layoffs), and
eventually back to profitability and an IPO. If you think a 10% layoff is tough,
imagine laying‐off 78% of your employees. It is one of the hardest things I have ever
seen anyone do. I recently asked him how that experience has shaped the way he
ould advise people on running a startup. He had a list at the tip of his tongue
1. You don’t realize how fast things spin out of control. There are self‐
reinforcing negative affects in a downturn.
2. Don’t spend money until you have to
a. Don’t move out of your office until you are sitting on top of one
b. Don’t hire any incremental employee until you just can’t stand it
c. Don’t get more capacity in your data center until your site is going down
3. Better to be “late to the party” than to be early and run out of money
4. Line item review of the budget every month (legal, accounting, everything)
5. Not just a CEO mindset, but a company mindset
a. Everyone must buy into the process
b. But in a calm way – not run for the hills
6. Create 2 or 3 different burn scenarios – know at any point in time how many months of cash is left.
I include this mainly because it highlights a “very high bar” in terms of frugality.
It’s one thing to say you don’t “waste money” and another to live as lean as you
possibly can. As mentioned before, in market downturns, frugality is not only a
virtue, but also it could be the difference between survival and failure.
Many great companies emerged from the 2001‐2002 time‐frame. Companies
built during tough times typically have incredible focus, great cultures, and a
true desire to compete and win in all environments. For many, this downturn
period could be opportunistic: a real chance to differentiate yourselves from the
other players in the market. However, it is imperative to understand that the
environment has just shifted to one where differentiation will likely be defined
not by aggressiveness, but rather by adaptability.