temp 003 In reading up on this topic and meeting friends on both sides of the entrepreneur/VC table in recent weeks it seems that panic has set in all over…and with good reason.

Obviously things are going to be tough in the next 2 years, no doubt worldwide, and this means that VC have started their warnings to their portfolio companies again – just like in 2000.

Some of the best VC’s in the business are getting proactive. Both Benchmark and Sequoia, are giving their "troops" some training: Sequoia Capital’s 56 Slide Powerpoint Presentation Of Doom

Sure things are not like the burst-tech bubble, its wall street this time, but it does mean recession and it does mean longer times for exits for the VC and entrepreneur.

Pressure is mounting on portfolio companies to conserve cash, reign back and to find a partner/M&A or more cash ASAP…then batten down the hatches…all good advice in good time or bad if you ask me!

So how does this affect those raising funds now?

In summary, its going to take longer, going to be much harder and will cost me more (I.e. lower valuations) but I don’t think that VC funding will go away just because there’s a recession coming. Certainly Ron Conway says he will keep investing and he is one of the most successful Angels in the Valley.

Valuation discussions are going to be tough but its better to get funded than not, a friend has just lost $1M he personally invested and the VC’s wouldn’t fund his round despite him having many great things about his company and being a long way down the road. That’s very harsh but shows you how tough it is out in the market right now. Also it shows the greater exposure for later stage companies. The figures below seem to show more "insulation" for earlier stage deals.

I don’t agree with "giving in" and taking any valuation but I do believe in being pragmatic and getting funding rather than not…it’s a balance.

I read a great post from Matt Marshall today (Expect to see start-ups and VC’s hit standoff over valuations) and below are his thoughts on valuations as of today, read the full post for more excellent detail.



Matt’s thesis:

Let’s take a look at the valuations of start-ups during the last boom, and how they trended in subsequent years. The National Venture Capital Association’s statistics are about as good as we’re going to get. They aren’t perfect, because they rely on valuations as voluntarily provided by the NVCA’s member venture capital firms, so the sample size may be too small to be completely reliable. But with that caveat, they do show that from 2000 through 2003, valuations fell pretty hard. You can see it took a while for the valuations to hit bottom, even though the market crash took place in mid 2000.

Earlier stage companies will have it slightly easier than later stage private companies. They’re more protected from the market, because they’re not searching for an IPO just yet. However, that’s not to say that investors won’t fight to hard to lower valuations even at this level.

Third quarter statistics on valuations won’t be out for another couple of months. And even then, those stats won’t reflect what happened in the current fourth quarter, which is when the real pain will be felt.  It may be next year before we can give a serious assessment of the true fallout for start-ups. Expect to see more companies go out of business too, as VC’s in some cases decide not to invest at all.

Now I don’t totally agree with his comments about not being able to raise any funds at all at non-funded early stage due to all the turmoil and if I did I shouldn’t be a startup CEO right? But you should be prepared for it to take a long time. My friend Bill Gurley at Benchmark told me "6 months" is now how long it’s taking to make a decision on a deal, even a good one.

So what do we learn from all this? Well if you are a startup and early stage you will feel less pain and if you are already VC backed then you are in a better position than Angel or seed stage businesses as you have the "time and money in" factor on your side BUT you will be hit harder on the next round.

If you don’t have any VC yet, be prepared, make sure you are running as lean as you can and make sure you can make any funds last longer…better still start selling TWICE as hard. Give yourself at least a 6 month runway for the next round or longer…get more funds from your existing backers and if you can’t then cut back to the bone and try and keep the business in shape operationally. Don’t cut your sales and marketing too much as you need that engine to balance the costs, otherwise there should be no limits to the cuts IMHO.

Here’s what Scott Painter (Painter has raised hundreds of millions of dollars in his career ($350 million for CarsDirect, alone) said on a great blog post on this topic at GigaOM (http://gigaom.com/2008/10/12/12-steps-to-short-circuit-the-fundraising-marathon/):

“VC’s are still sitting on large funds. The biggest financing impact will be on mid- and late-stage companies that aren’t yet self-sufficient. Rounds for startups are still closing. They did last week, as well. True enough, there is
panic. But this does not mean entrepreneurs should pack it up and go home. Building companies during a recession is certainly more challenging, but sometimes it’s a better test of what should survive in the first place.”

On a final point, don’t kill yourself over this, go as far as you can and be persistent – on the other hand if it’s over then it is, and it’s time to move on…don’t have a nervous breakdown over keeping a "dodo" alive against all the odds. Just make sure you do the right thing for staff and shareholders!

One final piece of advice, try and tune all your marketing and sales on positive "revenue generation" messages if you can…and make your products/services the best "value" in your marketplace so you will be able to win more business vs. your competition. For sure, people will all be looking at ways to increase sales and reduce costs…they will also be looking at cash flows and deals on financing any capital and G&A expenses…