Hard times are coming – batten down the hatches
Much has been said over the past few weeks, since the major Wall Street crash in September. CEO’s worldwide have been focused on reinventing their companies and reassessing their growth plans – and figuring out how to survive the impending downturn. I have been no exception. The truth is that right now, if you can’t deliver real value in a matter of months, your back is really going to be on the ropes.
If you don’t believe you can do it, rather head over to business school – the real hardcore entrepreneurs are rolling up their sleeves and getting on with it.
Sequoia Capital pulled their CEO’s into a room about a month ago and gave this presentation:
The reaction to this presentation was felt worldwide – TechCrunch even released a Layoff Tracker.
Adeo Ressi from TheFunded.com also responded with this presentation:
There is a crisis coming in Venture Capital and particular how it relates to early stage startups – with no clear path to monetization and no IPO market – it appears that VC might be doomed… and many of the companies that were funded by short term thinking VC’s are in danger of hitting the TechCrunch Deadpool.
The reality is that Venture Capital has exploded massively over the past 20 years – too many funds with too many people that didn’t spend enough of their own years building companies, that are now trying to help first timers – surely a recipe for disaster (perceived experience + no experience = trouble). The efforts of governments to stave off recessions also doesn’t help the causes of the blue blooded entrepreneurs that live for downtimes. Recessions weed out the crap – both companies and investors that don’t make the cut lose out. Those who are in it for a quick buck will not survive. Those who are in it for the long haul with smart business models & strong execution skills will thrive.
My single biggest pain point with most VC’s that I have met, is that they want to make a lot of small bets (as opposed to fewer larger bets) so they can build companies that they can quickly flip into the market at the “going rate” for startups. It’s interesting to hear how some keep the investments small because they feel that the average exit price is between say $50-$75m, so therefore if they invest too much they won’t make a good return because there is no IPO market in the mid tier. So much for having a mindset about building solid businesses…! That’s half the problem with those VC’s – they are not looking to build businesses, they are looking to trade equity.
Sounds like these guys belong on Wall Street – and we all know how that turned out. Anyone who can look at a business and extrapolate out how much it needs, based upon the average amount that they expect to sell it for shouldn’t be in the business of investing. Each and every company is unique – sure some businesses are built to flip – but surely investing is about looking at market opportunity and trying to build companies that can dominate or thrive in certain markets. If we now say that all markets are created equal and therefore all companies in different spaces are sold for roughly the same price (without going into the deeper math around this flawed equation), it’s no wonder that so much junk actually gets funded and the average VC returns have been so low and that LP’s are pulling their funds. This methodology is really putting the cart before the horse and putting money with many of the 2nd tier VC friend of friends and not into the hands of real entrepreneurs (see Adeo’s presentation above).
I live for volatile times like these. Business will be ruled by those who respect chaos and have a disdain for the complacency that order brings. If you think you’ve won the game, then you’ve just lost – Andy Grove of Intel had a famous quote that comes to mind: “Only the paranoid will survive”.
What I think this recession will bring:
1. Better companies, that make money – not stupid ideas that bring in lots of “eyeballs” (re: 2000 bubble nightmares). The vast majority of companies that are VC funded will not survive this downturn if they cannot generate returns with their business at a ROE (return on equity) rate which is acceptable to their shareholders.
2. Not everything is about sharing and caring! We only have a fixed number of hours per day – there is only so much we care about what others are doing. The social revolution online needs to improve – too many players vying for too little time. This will force the information deluge to become more targeted and more relevant – the crap will be largely ignored and most companies won’t have a critical mass or value proposition to become sustainable businesses.
3. Less VC’s – I must say that in the years that I have spent meeting and engaging with VC’s, I have only been impressed by a handful of VC’s. I would argue that only 10-20 VC firms in the valley in particular (out of thousands) are even worth considering as VC partner (for both Limited Partner investors & Entrepreneurs alike) – the rest are doomed to mediocrity – and they won’t ever understand why, nor should it be explained to them.
4. Less companies that are able to survive on advertising models that don’t deliver real value to advertisers. In a downturn, affiliate marketers thrives because common sense re-enters the market and media prices move down toward real value linked to ROI – not “brand” inflated prices. This was my biggest criticism of the past 2 years – many affiliate marketers went out of business competing with media agencies who were incentivized by their clients to spend more money by paying them on % of spend models – which I truly detest. These agencies will now be taken to task by their clients and will see precipitous downturn in their businesses that are not ROI linked.
5. A new generation of business leaders – with every recession you find that those who build houses quickly on sand, are destroyed by those who built it properly on rocks. These business leaders will rise to the top in the years to come, much like Larry & Sergei (Google) did.
Recessions flush the market of inefficiencies, mediocrity & mimicry – let’s enjoy it and position your business for the upswing by delivering real value to customers and stakeholders alike! Good luck!
