VCs Speak On The Economic Downturn: Batten Down the Hatches

This is part one of our coverage on today’s Downturn RoundTable hosted by VentureBeat. For Part Two, which details the Entrepreneur panel, click here.

Today at VentureBeat’s Downturn RoundTable, two panels of Silicon Valley’s elite – one made up of Venture Capitalists, the other of experienced entrepreneurs – offered a roomful of startup CEOs their advice for weathering the economic crisis. And while the two panels differed in some respects (with the VCs saying that they’re open for business and the startup veterans calling this a falsehood) the general consensus was at least in part optimistic: Money will be tight and many companies will endure painful cost cutting, but it’s cheaper than ever to run a startup and innovation will continue to thrive.

The VCs

In a panel moderated by VentureBeat’s Matt Marshall, John Doerr of Kleiner Perkins Caufield & Byers led off by agreeing with the themes in Sequoia Capital’s 56 Slide Presentation of Doom, expressing his concern that we are just entering an economic crisis of confidence, and that startups must enact swift and effective cost cutting – a sentiment that was echoed throughout the panel. Kittu Kolluri of New Enterprise Associates emphasized the need to cut burn rates, and to figure out how to generate revenues as quickly as possible. Early Google investor Ram Shriram said that we would likely be seeing company valuations shrink and expressed that it would become very difficult to get money. Benchmark Capital’s Matt Cohler (formerly at LinkedIn and Facebook) agreed that it is essential to be conservative with spending, but emphasized that an important part of being conservative is to refrain from panicking.

Of all of the investors the most optimistic was prolific angel investor Ron Conway, who said that we are in much better shape than we were during the last bubble. He recalled that during the dot com bubble 70% of the startups his angel funds had invested in during 1998/1999 went out of business within a year. In contrast, only 13% of Conway’s current portfolio is facing shutdown. He attributed this in part to the burn rates for companies, which have gone from an average monthly rate of $750k in the first bubble to around $200k now. He went on to say that if a company does need to raise money, it should turn to its original investors, who are the most likely to support them.

Kolluri showed some optimism as well, saying that some of his firm’s best investments came during the last downturn, and that it continues to invest at a regular pace. It may be more selective, but he believes there will certainly be innovation to be found.

After broadly expressing their thoughts, the panel gave some more practical advice. Before the roundtable John Doerr polled executives from Kleiner Perkins’ portfolio companies for some tips, and compiled the following list:

1. Act now. Act with speed, and raise more money if possible.
2. Protect the vital core of the business. Use a scalpel instead of an axe.
3. Get 18 months or more of cash in the businesses, against conservative revenue forecasts.
4. Defer Facilities expansions. Instead of buying more PCs or more software, use webbased stuff.
5. Negotiate. Negotiate with all your supplies and vendors, get more favorable payment terms.
6. Everybody in your organization should be selling. You need everyone to be selling the ideas and the organization. This is about increasing revenues.
7. For people with bonuses, offer equity instead of cash. Doerr noted that he once had a voluntary salary deduction program for people who remained during the downturn – Investors will be on board with this idea.
8. Pay attention to where your cash is, and keep it secure, in a place fully backed by the government. Doerr said that he’s been putting money into treasuries.
9. Make sure that for the revenues you plan, you have leading indicators that tell you 90 days in advance whether you’ll be getting revenues or not.
10. Overcommunicate with your employees, investors, and customers. Let them know your resolve. Don’t sugarcoat it.

The other panelists chimed in with their own tips:
Ron Conway – Stay open minded to M&A and move fast on M&A. Also, your biggest non variable cost is your rent. But your lease isn’t set.. In 2000 I spent many hours in front of landlords, negotiating, saying we’d give them more equity and that we’d leave afterward. About half the time it worked.

Ram Shriram- At this point, money may be worth more than equity. Use your equity rather than cash to pay if you have to.

Matt Cohler – Avoid long term spending commitments. None of us know how long this will last. Given that, operate under the mentality of uncertainty, and be careful. For example, be careful about facilities commitments. Unlike lots of types of spending, these are really contracts. Another example is IT spending in general. One of the things different in this downturn is that there are lots of tools and services and marketplaces that are free/low cost and flexible. You can turn them off, dialing up and down spending.

To close, Cohler also affirmed that despite some belt tightening, Benchmark and other VCs are still open for business.