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Venture Capitalist Gone Wild: the Sequel

Like everyone else, I've been watching the pundits and politicians try to explain to us how this financial bubble could have possibly happened.  Every one is pointing the finger and everyone in search for who is really to blame.  In America when something really bad happens, "someone" has to be to blame.  Reflecting back to the 2000 Internet bubble the answer is that no one is to blame, but "everyone" is.  Bubbles are caused by the systematic proliferation of poor incentives combined with a fear-greed imbalance.  Looking back on the Internet bubble, I should have sold my entire stock portfolio in 2000 when my cab driver was suddenly an expert in U.S. equities. Or investment bankers bidding on my business were telling me my burn rate was too low. Likewise in 2008, I should have been smart enough to sell when systematic (governmental and commercial) incentives were put in place for everyone to own a home.  No money down, 4ish% interest only loans should have been a hint for all of us that something was systematically wrong and a bubble was just over the horizon.

After the 2000 bubble, I lectured often on what I thought happened.  I lived and operated through the heart of the bubble.  I have numerous tales to tell that epitomized that period of history - like watching the valuation of my Internet company skyrocket from $25 million to $250 million in 9 months or an IPO in April of 2000 that was predicted to be worth over $1 billion.  Back then the investment bankers were planning your secondary offering long before you were even public -- just as long as your burn rate could justify it of course.  Messed up incentives from the greedy consumer investors that could now buy stocks cheaply on line to the over funded venture capitalists.   I can appreciate why over the last couple of days that Sequoia Capital has been marketing its end of world presentations.  I'm sure many of their companies have $1+ million per month burn rates and the capital markets doors are shut.  For many of those companies the end of world is near.  If your burn rate is at that level and you have no money, and no business model, your probability of surviving is close to zero.  That is the high risk game of west coast venture capital.  Timing is everything.

Below is a slide from the lecture I gave from 2001-2005ish.  After 2005 or so everyone had forgotten about the Internet bubble, therefore it was less interesting (plus the students I talk to were too young to remember).  Given where we are now with the Nasdaq back around 1500 and Dow around 8200, I thought it was appropriate to pull out the old slide.  The story is the same, but the characters are different.  You'll get the point.

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Operating an Internet Start-up through Bubble II

Image via WikipediaMany of us Bubble #1 veterans are having flashbacks on what it was like to run a company through a capital market crash followed by a recession.  I remember vividly what it was like to run DigitalWork through the 2000-2002.  I will never forget the 3rd week of our IPO roadshow in April 2000.  After we realized the IPO was not happening, we spent the time between meetings in the back of the limo cutting every long term committment we could including leases, advertising committments, software licenses, outside contractors, etc. in order to preserve capital.

Here are a few lessons learned:

1.  Have 1.5 - 2 years of capital on hand.  If you don't see below:

2.  Raise now.  Look to your key partners and customers as potential investors.  If you are so lucky to raise money, be reasonable on valuations and assume it is that last capital you will be able to raise.   

3.  The consumer/small business will cut spending first, and corporate spending will follow.  So don't try and change your consumer oriented business model into a commercial software model thinking that you will ramp revenue.  By the time you change, corporations will stop spending.  Stick to your guns and see number 5. During 2000 many companies, including DigitalWork, tried to sell the infrastructure they built to serve consumers to corporations.  By the time we adjusted it was too late - corporations stopped buying software. 

4.  Cut all non necessary expenses.  Operate profitably if you can.  Duh, but when you think you have cut enough cut 20% more.  It will force you to do fewer things better.  Fire your PR firm, advertising agency, retained lawyers, retained recruiting agencies, external consultants -- you get the picture.  Let expense follow the revenue.

5.  Sell stuff.  In the Internet bubble era we gave everything away to build a "brand" and "get big fast".  You see some of that today.  Once you put a price tag on your product/services you'll figure out what you really have.  In these times fewer, paying users are better than "lots of eyeballs".  At DigitalWork, we shelved all activities that were not recurring revenue generating.

6.  As a leader, stay solid, don't panic.  Focus on what you can control, not what you can't.

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