Vinny Lingham's Blog

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!

I’ve been very quiet lately, mainly because there are a lot of changes happening at the moment back in Cape Town.

As many of you know, Synthasite is launching soon (final confirmed date for the Technology Preview / Pre-Alpha is 4th June 07). We are looking forward to showing the world what we’ve been up to. Just to set expectations, we’re not releasing a fully functional application, but instead we’re trying to get feedback from our users in the early stages of development, in order to ensure that Synthasite will ultimately meet expectations by the time we get into Beta. In my previous blog post on Synthasite, I explained that I will be taking over Synthasite as CEO and spinning it out of incuBeta as a separate company, with incuBeta still retaining a small stake. I also indicated that we were going to attempt to move it to Silicon Valley in order to be closer to the action.

To this end, I’ve spent the better part of the past two months chatting with a few of the VC players in the space, both in London & Silicon Valley in order to get feedback, and potentially, Series A funding. The feedback we got just from the meetings were excellent, but most importantly, after speaking with VC’s in London, the view is that if development work can be done in a lower cost marketplace, such as Cape Town and the business development team is based in the business area’s that really meets the requirements of most startups.

So, in order to cut a long story short, I, along with the Synthasite team, will be basing ourselves in Cape Town permanently to develop Synthasite, and instead of moving the entire team across (disruptions and all), we’ll instead look to setup a Biz Dev office when the time is right, in key markets. The best part is, if we keep Synthasite in Cape Town, then there is really no need for a Series A type round of funding.

In order to focus on Synthasite, it was announced internally, and now to the rest of the world, that I will be leaving incuBeta on a full time basis, and moving directly into Synthasite, effective 1 August. It’s been really great growing a startup into an award winning company, but my passion has always been startups and I’m finally able to move into a full time role doing that in Synthasite. I’m lucky that there is a strong management team in place at incuBeta to drive the company forward, and the people on the ground are very capable of delivering. In order to ensure that the company can operate independently of me, there will be a full operational and relationship handover before 1 August.

In many ways, this has been a lifestyle decision, and I’m going to also try to cut down on the tremendous amount of air miles that I continue to rack up! As many of you may understand, the disruptive nature that flying around the world has on a person, on an almost monthly basis will eventually wear you down! I would like to spend at least the next few months firmly grounded in Cape Town, enjoying the life there (and I’m in Johannesburg right now!). Charlene, my wife & co-founder, will also be leaving the company to pursue her studies further and we’re planning on taking some much needed time off and we’re going to spend those airmiles going to places that we haven’t yet seen over the next year.

On a final note, in addition to Synthasite, I have setup a small Venture Capital fund for Cape Town based startups, called Lingham Capital (no site just yet), and I will aim to assist them with small amounts of seed capital and expertise in building their businesses, all of which will need to be globally focused in the medium term. I do not intend on investing in more than 5 startups at any one time, including Synthasite. My only other investment so far is SkyRove, which is a Social WiFi business based in Cape Town and after 1 August, I will be assisting Henk (the CEO) with taking his business to a global audience.

It’s really sad to be leaving incuBeta, but I know that all my relationships both internally and externally are all intact – so it’s not really a goodbye! I’ll probably post more reflections on this, and a slideshow later this week – but this was just a relatively quick heads up.