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!
If you enjoyed this post, make sure you subscribe to my RSS feed!
Comments On This Post
November 24, 2008 at 9:27 am
Yip some big trouble coming… Going to be interesting to see how the world reacts and which entrepreneurs use this oppportunity to take risks when everyone is ducking for cover
November 26, 2008 at 5:31 am
Hey Vinny, as a business major I really appreciated this article as you highlighed some important points with regards to VC’s and the credit crunch.
Indeed hard times are here, but only the fittest will survive. I am well read enough to know that it is the seasoned and true “blue blooded” investors and entrepreneurs who live for downtimes like we are starting to experience now. I agree with your point that most VC’s are just here to bet small and hope to “grow” companies and start-ups quickly so that they can flip them at the going rate. This is really nonsense because the point should be to grow and build companies that can really dominate their markets by being a No.1 or No.2 player. So yeah, it seems like these guys do belong on Wall Street like you mentioned as they obviously have no clue. But what I like about this downturn we are going through now is that it will definitely separate the cream of the crop from the riff-raff with regards to VC’s. I say this because as investors suffer large losses elsewhere, they are not able to fulfill their commitments to the venture funds. This will in turn hurt small funds first, which may already be scrounging for new limited partners to replace the money from existing investors who are beginning to come up empty-handed. Less money for VCs would mean less money for startups.
On the other hand it is not all that bleak for VC’s and startups. Ever since the dot com bomb investors have been shying away from tech stocks fearing the post 2000-bubble risks rather opting for more leveraged investing strategies to be safe. However, over the past 5 or so years we have really seen a shift in perception with regards to investors and technology. Water finds its own level, so yeah, despite the downturn of the economy I would take heart in the fact that investors will return to technology which is what really drives venture returns, and reinforces the desire to invest in start-ups.
But for now it will be interesting to see who will be able to ride the credit crunch storm we are in…and ultimately, who will survive.
Goodluck to you and everyone at SynthaSite during this uncertain time we are in, as you continue to grow a solid company and provide world class service!
December 1, 2008 at 4:43 am
My anxiety grows each day when I think about the mess that is coming. My plan is to just do my best to survive the storm and be ready to take advantage of opportunities when things start to turn. I just hope that time isn’t too far off
.
December 1, 2008 at 11:38 am
Great post Vinny – I’m glad to see I’m not the only one scratching my head at many of the huge investments in companies that seem like a huge, but attractive, drain.
Things are going to get a lot worse…
December 1, 2008 at 10:42 pm
Things are pretty bad now and I am scared to see where they are going. I live in Canada and there is still speculation as to how bad it is going to get here.
Good post.
December 9, 2008 at 3:54 am
They say that when the going gets tough, the tough get going – and so they did … right out the company’s front door with huge severance checks – Now many more of us are leaving the same way, minus the fat checks and with pink slips … this week people in California are trading guns for food – what is coming next?
Things are downright scary, but what you say makes a lot of sense. All the VCs who went for funding small startups with shaky business plans in the hopes of making a quick buck (OK, several million quick ones!) are getting their comeuppance as they go bust.
Every cloud has a silver lining … this one is too dark for me to see it right now, though!
December 9, 2008 at 2:07 pm
Great work. Keep on blogging.
December 10, 2008 at 12:45 pm
Hey Vinny,
I thank YOU so much for stopping by my blog the other day. I’m pleased to have you come thru!
As you can see ya boy Shawn Collins joined me as my 1st friend on Google Friend Connect. I invite you in your time to please sign up and join too. The friend numbers are gonna get mad outta control. It’ll benefit you too. Hopefully, you’ll comment my blog and drop by again soon…:-)
ya boy Shawn
January 2, 2009 at 10:34 am
I agree with bad entrepeneur. Let's see who will survive this storm.
January 6, 2009 at 7:24 am
Why don't we just try to be positive? I know times can get hard, but i'm sure that if everyone try to be positive and act like always, things can get better sooner.
January 6, 2009 at 10:54 am
Fully Agree with you Vinny!
January 7, 2009 at 6:45 am
Vinny. Loved the post some solid information. Definitely some tough times but many great companies emerge from during economic downturns like these.
January 12, 2009 at 2:19 am
This only shows that some people cant accepts the fact that a crisis can provide new insights.
January 13, 2009 at 5:14 am
I dissagree. I think it is always darkest before dawn. My venture is booming.
January 15, 2009 at 1:52 pm
Howzit Vinny — I'm really curious, how are you going to monetise SynthaSite? I understand you can't give details, but is a plan in the works?
January 21, 2009 at 8:12 am
Yes and no- It now a new year with a new president and change will happen. I am not from US but you have a leader rather than someone in a "bush" -I can see a good year ahead but to survive a focus on aggressive marketing!
January 21, 2009 at 6:39 pm
Hey Henry. Absolutely. We're already selling (lots of) domain names at $14.95/year. It's part of our basic offering – more to come pretty soon!
January 21, 2009 at 9:30 pm
Re: "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"
So true i have recently been involved with a company light that- the software served to try and "play" with google to earn profit from adsense- with googles update- the sites have been unlisted -they are crying foul- (everyone else fault- But really is the was business model-
Thanks for the words of wisdom
Dan
http://www.PolishedDiamonds.co.nz/
January 22, 2009 at 9:11 am
Things are currently pretty bad. I am just wondering how long it can go on like this
January 23, 2009 at 10:54 am
[...] the quantum of posts on this blog to pick up considerably in the new few weeks. Since my previous post, things in the global market have gotten far worse (as expected), the only glimmer of hope for the [...]
January 28, 2009 at 7:04 am
I checked out your SynthaSite -very cool and very easy to use. Hopefully every business owner will learn someone from the changes today….survive and move on
February 8, 2009 at 6:29 am
If the news is anything to believe, the worst is yet to come. Its predicted that this the worst hit economic crisis that the world has witnessed. Hope people have the grit to pull themselves outtta it
February 8, 2009 at 7:00 pm
Hi Vinny,
Really good help – I see a lot of the blind leading the blind, just because some have some experience………Desperation breeds following someone who might be able to help…………
February 10, 2009 at 2:33 pm
I couldn't agree more with these comments. The VC model is busted. Anyone who has a time horizon of 2-3 years is not serious about building anything. An extension of this is that VCs fed off each other. One VC invested and made little progress. Their exit route was to sell to another VC at a profit. The chances of this second VC doing anything constructive were even more remote than the first time. The cycle repeated itself several times until we got the mess we have today. Just as banks have toxic debts that are interconnected, the VCs have similar problems and it will take a few years to all wash out.
Here in London I can see signs of new sources of VC money coming into the market. That has to be the hope for the future, as the old sources have tired ideas and some historical problems to sort out.
February 14, 2009 at 12:43 pm
I understand the point you make. That will be part of our future. It is topical as well that we should be returning to economic Darwinism, so close to his anniversary. However, we cannot ignore the fact that the current model of economics and markets is broken and can't be allowed to continue. What is put in it's place will be the other part of our future, and it think it might have a kinder, more rounderdoutlook
February 20, 2009 at 2:38 am
Good points Clementi. It's a matter of rolling with the changes, protecting yourself and at the same looking for how it can be changed for the future. it won't happen quickly (these processes are wrapped in red tape) but hopefully plans can start to be put in place.
March 9, 2009 at 3:15 am
Although i guess i m too late to comment but still , we cannot ignore the fact that the current model of economics and markets is broken and can't be allowed to continue. i think obama will put a stop to this
March 13, 2009 at 6:03 am
For companies that have enough cash to spend away, this is the best time to acquire struggling companies, hoping that when good times come, these acquired companies can be profitable. This is a natural economic cycle that we just have to hang on. Bad times don't last forever.
March 15, 2009 at 7:43 pm
I totally agree with you Vinny
Well done
March 22, 2009 at 3:01 pm
I agree as well. I Also I think Intenet business Is probably one of the most secure at the moment.. Other than that hopefully more renewable real business starts after this..
March 29, 2009 at 4:06 pm
Well done Vinny!
March 29, 2009 at 8:19 pm
Now that 2009 is moving forward, do you have anything to add to your post- recessions (or so called recessions- depending who you talk to) bring opportunities. I hope more will see th online option as a way to bring more business
April 1, 2009 at 7:48 pm
I think entrepreneurs are going to get the short end this time around. This sad to say.
April 2, 2009 at 10:38 am
I funny agree with you Vinny
April 17, 2009 at 8:24 pm
Vinny. Loved the post some solid information. Definitely some tough times but many great companies emerge from during economic downturns like these.
May 4, 2009 at 6:34 pm
I agree with you Vinny….
May 8, 2009 at 6:52 pm
Nice one Vinny!
May 18, 2009 at 10:39 am
It's more of a question of "Let the last man stand" . Those companies with a good equity can withstand the storm in the market. Most companies will see a depreciation in figures if a risk option is not implemented.
May 25, 2009 at 11:53 am
Hi Vinny,
The videos here have brief explanation and really good. I will be waiting for your new post.
Keep going…
May 25, 2009 at 6:53 pm
Great post! it was also good to see (on news) A company like Zappos, selling shoes online and focusing on "the customer" and actually listener to what they want. A great way to build a loyal following online.
May 28, 2009 at 2:39 pm
Looks like this will shake things up somewhat. Sort the wheat from the chaff so to speak.
May 28, 2009 at 8:22 pm
this post is getting old, but it still relevant. Many successful businesses were founded in a recession type environment. I believe it makes the business stronger to survive, so lets hope the same happens in these times
May 30, 2009 at 6:26 pm
Recession is going to an end. Market are ready to rebound and back to normal i think. Let's see by the end of this year 2009. Thing will get better soon
May 30, 2009 at 6:33 pm
In mandarin character the word crisis are come from two word opportunity and failure. In every economy crisis there are still people who succeed, even more than the richest in the world.
June 21, 2009 at 4:30 am
Great Points Vinny! You are a true visionary. I'm looking to capitalize in my businesses no matter what the economy does; just got to be start.
June 21, 2009 at 10:10 pm
I wonder if much has changed, being 2009 now. i guess business school helps with confidence, but the coalface is where the most is learnt- but doing (and making mistakes)
I wonder vinny- could you share mistakes you have made – so we can learn?
June 22, 2009 at 2:09 pm
great job I agree =)
June 22, 2009 at 11:02 am
Great article, very useful – thanks !
June 22, 2009 at 7:18 pm
Re: "with no clear path to monetization" – I wonder where this leaves companies like twitter? or are they betting on being bought buy Google? or even Yahoo?
I though the use of income strategies like Adsense, would have helped companies like this survive – maybe the small amount for adsense is not enough relative to what is being spend?
June 29, 2009 at 2:42 am
I totally agree with you Vinny !
July 4, 2009 at 9:07 pm
Well done thank you =)
July 8, 2009 at 7:10 am
we will always survive all the things that will come. we can always do it. we are humans, that is why. in history, humans have adapted to any kind of crisis and it has survived that is why we still live. we should be proud of it
July 10, 2009 at 4:16 am
Well, there are more things to read in the internet. Thank you.
July 12, 2009 at 8:53 pm
Lets hop summer with bring us some open minds to get things moving again. we had all enough pain for theses current changes.
July 19, 2009 at 8:04 pm
If what I can gather is correct, things here in the UK are set to get even worse. The 'green shoots' we are seeing over the last few months may just be false starts. I for one will be battening down the hatches for sure. Bad times don't last forever but it might be time to start thinking of saving money and cutting back!
July 23, 2009 at 1:23 am
I agree with bad entrepeneur. Let's see who will survive this storm. My anxiety grows each day when I think about the mess that is coming. My plan is to just do my best to survive the storm and be ready to take advantage of opportunities when things start to turn. I just hope that time isn't too far off
July 23, 2009 at 1:36 am
Things are pretty bad now and I am scared to see where they are going. For companies that have enough cash to spend away, this is the best time to acquire struggling companies, hoping that when good times come, these acquired companies can be profitable. This is a natural economic cycle that we just have to hang on. Bad times don't last forever.
July 24, 2009 at 7:29 am
it can be changed for the future. it won't happen quickly (these processes are wrapped in red tape) but hopefully plans can start to be put in place.
Dissertation Help | Buy Thesis | Essay Help
July 24, 2009 at 7:29 am
when good times come, these acquired companies can be profitable. This is a natural economic cycle that we just have to hang on. Bad times don't last forever.
Buy Research Paper | Term Papers
July 25, 2009 at 11:11 pm
Great work. Keep on blogging.
July 26, 2009 at 9:08 pm
m glad to see I'm not the only one scratching my head at many of the huge investments in companies that seem like a huge, but attractive, drain.
July 27, 2009 at 9:44 am
I totally agree with you Vinny. I'm glad to see I'm not the only one scratching my head at many of the huge investments in companies that seem like a huge, but attractive, drain.
July 27, 2009 at 11:04 pm
goooood thanks
July 28, 2009 at 9:10 am
i agree with u. keep good bloging
July 28, 2009 at 4:54 pm
Yeah well done Vinny Good Work!
July 29, 2009 at 5:36 pm
I agree completely, bad times will never last forever just look at the great depression.
August 3, 2009 at 8:53 pm
It sounds like you predicted it before anyone else.
August 7, 2009 at 4:53 pm
thanks for share.
August 7, 2009 at 10:10 pm
Things are downright scary, but what you say makes a lot of sense. All the VCs who went for funding small startups with shaky business plans in the hopes of making a quick buck (OK, several million quick ones!) are getting their comeuppance as they go bust.
August 10, 2009 at 7:55 am
LOVE THIS webite
August 10, 2009 at 7:56 am
many people will like it ,like the most people
August 10, 2009 at 7:56 am
the love it is endless ,
August 16, 2009 at 3:19 pm
well done for you. Thnk you for sharing
August 27, 2009 at 8:10 pm
I think it is always darkest before dawn.
August 28, 2009 at 6:24 am
I didn’t realize getting acquired was such an important goal for so many businesses. Also, I hate to admit it, I didn’t know what an “exit” even was before reading this post and subsequently reading further on another website. Now it all makes sense!
September 1, 2009 at 12:55 am
I wonder if much has changed, being 2009 now. i guess business school helps with confidence, but the coalface is where the most is learnt- but doing (and making mistakes)
September 1, 2009 at 4:27 pm
I know this post was from last year, but things seem to be on the turn(at least in my country). This is the lowest part of the year, but we are seeing banks opening the door more.
September 8, 2009 at 2:47 pm
“Recessions flush the market of inefficiencies, mediocrity & mimicry – let’s enjoy it”
I love it!!
This has really been the case with the auto industry over the last 6 months. This post is almost prophetic. Even the largest of manufacturers are having to trim down and get rid of the mediocrity in their lineup
September 9, 2009 at 1:17 am
All the VCs who went for funding small startups with shaky business plans in the hopes of making a quick buck (
Sorry, comments for this entry are closed at this time.