Excerpts from a note to the betaworks companies sent last week. Some other charts, and some color added. This was already posted by SAI and Fred — thank you both.
“By now you have all read the stories from the media and venture capital world about how larger macroeconomic issues will affect the start up world.
Last week, was one shitty week. That said a downturn has been evident for a while here in NY — and most of you have already started to make adjustments to your plan, we first talked about a downturn at the brown bag in February. But two things did change this past week. (a) The credit crisis and the crisis of confidence in our markets got way worse (b) silicon valley woke up that something had changed. The first point is the one to focus on — the second is a distraction. So on to the first point — what changed this week? The confluence of events — from housing, to energy prices, to credit to equity markets, to global coupling to domestic panic, matched with domestic political uncertainty … have created a toxic mix for the economy — a perfect storm. You need to think about things differently, things have changed and your priorities should change. I broke up our thinking at betaworks into two blocks, the first is what you should be thinking about in terms of your business and the second outlines some thoughts on what this means for the market.
#1. Priorities for you and your business:
Remember it’s a cycle, but this is going to be a longer one than we expected (that perfect storm issue)
Andy, David and I and many of you have lived through a few business cycles. Things look ugly but with distress come opportunities. Scarcity drives innovation, always has, always will. Do more with less. DO MORE with less — a trite one liner that you need to make part of your companies DNA. There will be more emphasis on user value, more ways to make money from that value — we will finally fess up to the fact that many of the ad models of web 2.0 dont yield results and we will invent one’s that do, all around there will be more innovation, its counter intuitive but during an up cycle people accept conventional wisdom, during a down cycle people challenge it. Thats good. Very good. And the cycle will winnow competition. Over the last cycle the people who were standing at the end came out on top — it sounds like a low bar but its not. This week the shift (storm) got worse and it became global. Worse in that its clear its going to take a while for the broader economy to recover. And global in that for about a year financial analysts had been arguing as to how linked — or coupled — the global economy was, this week they got the answer. This will effect your business, how is not so clear. Some negatives, some positives — keep reading.
Follow the money
Many of you are running your businesses very cheaply right now and break-even is within reach. Get there. One of the headline shifts that is taking place is that people (partners, investors, the market) are going to shift focus from audience + revenue to just revenue. This happened in the last downturn and a lot of entrepreneurs didn’t adapt to the shift till it was too late. Investors have likely encouraged you to focus on audience, you now need to focus on revenue. Cash is king, cash gives you flexibility and options — once you get to break-even the whole world will look different. Making money, like everything you do — takes work, time and attention. It will take longer than you expect and it happens in ways you can’t plan (see voting example below). Start working on it now. If you have just raised money or are raising, get it closed. The cost of capital is going up — again cash, think runway, cash and revenue.
Watch your spend, make necessary cuts now
No surprises. If you think a piece of your product needs two developers to build it, do it with one. Be excessively creative in thinking about revenues and trying those ideas. Rethink *all* your projections, looking at how reductions in cost and accelerations in revenue strategies affect the numbers. Then redo them again. You’ll be stronger. Face reality as it is, not as you wish it was. Change the mix of sales and performance based employees. Think about what you can outsource — and how you can distribute your costs. There are companies and people we are working with who are doing great things with outsourced teams — its hard and it requires different workflow but when it works it can change your whole business make up. And if you need make cuts, make them now. Don’t cut 10% now and then another 10% early next year — make the change in one fell swoop. Piecemeal’ing your way through change kills momentum, it hurts culture and the team and is a chicken shit way to run a business. You know what your plan looks like. Figure out what your runway looks like and do more with less, figure out how to extend your runway till you get to break-even.
Know you data
You have heard me rant about this before, but you have to know what’s going on, know your data really really well. Financial data, your burn, your cash flow, revenues, runway and site usage data. You cant “follow the money” if you dont know where things stand. There are a lot of things you can do to improve everything from burn to traffic. But first you need to know where you stand. So every week you have a picture of your position — make this a habit. I used to hate to do this, but once you make it a habit it becomes a tool. During an up cycle you can follow instinct, and usually your raw instinct is what you should follow — during down cycle your instinct can lead you far astray (see Zillow example below). You need to know you data. At betaworks we are going to offer some SEO / SEM / analytics to our network. All part of knowing where things stand and optimizing from there.
Take the offensive. Many of your competitors are not as well positioned as you — this is an opportunity to take share. These points are in order of priority — once you know where you stand, where you are making money, what your burn is — think aggressively about growth and market share.
This is my favorite slide from the sequoia deck (link to the deck is below):
East Coast, West Coast drama
The fact that the west coast seemingly woke up to this shift — spilled a lot of ink — this week is something that needs to be considered in a balanced way. “High time” was my first reaction to the Valley waking up — heck back in March or thereabouts there was a small run on a CA bank, I thought that would be a wake up call that things had changed to West Coast VC, seemingly it wasnt. My second reaction was lets skip the fear and panic. Media will do what it always does, there is a lot of drama that will be injected into the conversation. Fear and loathing, RIP, Armageddon, War and Peace … all good movies / books but the media will blow this out of proportion — thats what they do (I love this quote from the sequoia meeting: “It¹s always darkest before it¹s pitch black”, really,?@#!). Also note many of the people writing went through the last contraction — it was painful for them personally and they are finally getting to talk about that pain. Leave that to shrinks. Focus on the fundamentals and how to adapt to change and you will get to the other side of this stronger and better. Alan Patricof outlined more of an East coast view yesterday: http://bit.ly/26hbqA . This cycle of technology and software innovation isnt stopping. Markets winnow out losers from winners. Entrepreneurship isnt easy, if you thought this was about a quick flip — its time to go home now. You are building companies — you know what you signed up for. This isnt like the last cycle where companies have been spending like drunks, the last party we had at betaworks, was the brownbag, it kinda said it all, bring your own lunch. Winners will emerge from this cycle — smart leaders will adapt, others will die. This is what we all signed up for when we decided to be entrepreneurs. Fear has become a key currency in our culture — dont trade in it, its a distraction — use it to change if you need but then put it aside. Sorry about the Doll$ar image up above — it just cracks me up. Read this if you need a kick in the pants: http://bit.ly/dcl0T
#2. Big, broad changes.
With the economy heading into the worst setback most of you, most of us, have ever seen — think big, broad changes. Its been a long week, but let me try to anticipate a few. Useful to think about how things will change now.
Momentum and change.
Some of our business is based on momentum. Thats taken a turn for the worse. You have to adjust fast — thats your job. I love this example that Gurley uses — where Zillow surveyed average decline of housing prices across the US (20-30%) and *then* asked the surveyed people how much they had personally lost in value — people said 0%. As humans we accept change as something that someone else needs to adapt to. Think about your business, you have to change, not someone else. See: http://bit.ly/1wE8K2. And remember a Welsch maxim or two: Control your own destiny or someone else will and Change before you have to.
Cost of capital
The cost of capital has gone way up (again face reality as it is, not as you wish it were). Dont panic, just make sure you realize the rules have changed
There will be a flight to quality, this always happens (history: http://bit.ly/ppHcO) . But this time I think its going to be more than that. For TV and print this has been an unusual year, the shift to online has been stemmed first by the Olympics and second by the election. That said year over year % growth in ad spend has been down across the board (see slide 32 of the sequoia deck, linked below). Expect the next year to be ugly and different. I think spend will move online, very fast — print may slide downhill, right downhill. And people will look for ROI — real measurable results. Monetizing social media is hard — two of our companies Lotame and Lookery — are focussed on just that. Much to do here, much money/share to make/take.
Much web 2.0 was about advertising to the tail, the wonders of google and adsense. The truth that most people havent spoken up much about is that (a) neither Google or Yahoo did a great job of monetizing much outside of search (b) the Google business is still mostly in the head of the curve, not the tail. The scale focus on auction based ad buying has distracted us from other business models. This week I had a bite with the CEO of Hi Media (who bought Fotolog) — they are an ad network, but they are now making a lot of money on payments. And a significant chunk is via “microfame” payments — fotolog users voting each other up in popularity based boards, in september, month some users spent more than $2k each voting on these boards (http://flog.fotolog.com/rank). Many of our companies are experiment with payment models — Tipjoy, Ideeli, IILWY, Covestor, SomeEcards … there is money to be made here — from payments to item sales to t shirts. Businesses to be built.
The elephants will dance
Pieces are going to move on the chess board, big pieces — anticipate and watch and plan — this shouldn’t be your focus but things are going to have change around your business, and they might effect you. IMO, Yahoo is going to be sold or bought, AOL sold. Ebay will either be sold or bought or broken up. Facebook is going to have to change (cut spending, focus on revenue) or it will be bought, same for Linked-in. Microsoft, News Corp. TWX and other media companies will be buyers. What does Google do in this cycle — freeze or bold? The newspapers — do they act out of fear or freeze up? Tel co’s and cell co, cable co’s — the pipes — do they jump upstream? Why care? — well as these pieces move around the chess board they may well effect your future, so watch carefully. If Paypal — which by some estimates is now 50% of the value of Ebay — gets spun out of ebay then they will accelerate services beyond advertising. etc. etc. Remember september 11th 2001 — how, the day after, it felt like just another day — it wasnt the world had changed, and that awful day was just the demarcator that history used. Again everything has changed, and now is simply the line that history will use. So consider the moves the elephants make, the equation for them, public or private has changed.
I think this cycle is going to drive another significant shift in how open and interconnected the web is. This is good news for you, this is bad news for the Facebooks of the world who tried to replicate the walled garden strategy of web 1.0. Think about what happened through the last cycle … start with AWS. In the 1990’s internet companies had to own everything top to tail — today you can use Amazon and other services to pop up a new box for hundreds of dollars, if that. Thats a huge shift — its also a shift towards interdependency. We are all now dependent on the amazon’s of the world for parts of our infrastructure. I think this turn of the cycle or screw is going to drive a lot more openness. This in turn ties to the market figuring out how to rapidly establish bottom’s up standards, this is about working with others and figuring out how to do things without having to do all the work.
some light reading for your weekend:
Silicon Valley Finds It Isn’t Immune From Credit Crisis – WSJ.com
Sequoia Capital deck startups and the economic downturn
Inside Details of Sequoia Capital’s Doomsday Meeting With its Companies – G…
VC dean Alan Patricof warns against panic, urges entrepreneurs to seize the…
Master of 500 Hats: Fear is the Mind Killer of the Silicon Valley Entrepren…
Angel Investor Ron Conway Emails His Portfolio Companies Over Financial Mel…
Benchmark Capital Advises Startups To Conserve Capital, Look For Opportunit…
How Bad Will The Ad Market Get? Time To Get Out The History Books
News Corp. Estimates Cut in advertising
Some notes I was sent from the Sequoia Capital meeting:
Today, Sequoia Capital hosted a mandatory CEO All-Hands Meeting on Sand Hill
Road. There were about 100 CEO¹s in attendance and let me tell you, the
mood was somber. I¹m not one to perpetuate doom and gloom or bad news, but
let me underscore this for you: We are in a serious economic downturn and
this is just the beginning. Immediate, decisive and swift action is
required, along with frugal, day-to-day management of expenses and our
business is required.
***Here are my notes from the meeting. Keep this note in your in-box and
read it every day. I¹m serious folks, this is for our survival.***
· Mike Moritz, General Partner, Sequoia Capital (he moderated the
· Eric Upin, Partner, Sequoia Capital (Eric ran the $26-Billion
Stanford Endowment Fund and knows a few things about Economics and
· Michael Partner, Sequoia Capital (Michael was recruited to start
Sequoia¹s very first hedge fund, coming from Maverick Capital and Robertson
· Doug Leone, , General Partner, Sequoia Capital
Slide projected on the huge conference room screen as people assembled
inside the conference center to take their seats: a gravestone with the
inscription: RIP, Good Times.
· The only time Sequoia¹s assembled all CEO¹s like this was during
the dot.com crash.
· We are in drastic times. Drastic times mean drastic measures must
be taken to survive. Forget about getting ahead, we¹re talking survive.
Get this point into your heads.
· For those of you that are not cash-flow positive, get there now.
Raising capital is nearly impossible if you¹re too far off of cash flow
· There will be consequences for those who hesitate. Act now.
· It¹s always darkest before it¹s pitch black.
· Survival of this storm means drastic measures must be taken now, so
you will have the opportunity to capitalize on this down turn in the future.
· We are in the beginning of a long cycle, what we call a ³Secular
Bear Market.² This could be a 15 year problem. [many slides on historical
charts of previous recessions, averaging 17 year cycles.]
· The credit market [versus the Equity markets] are the issue and
will take time to recover.
· Inflection point: Make changes, slash expenses, cut deep and keep
marching. You can¹t be a general if you turn back.
· This is a global issue and not a OEnormal¹ time.
· There is significant risk to growth and your personal wealth.
o Manage what you can control. You can¹t control the economy, but you can
control everything else.
§ Cut spending. Cut fat. Preserve Capital.
§ Don¹t trust your models and spreadsheets. All assumptions prior to today
§ Focus on quality.
§ Reduce risk.
· Note: Michael had a lot of slides that were charts, data points
· A ³V² shaped recovery is unlikely [^]
· Cuts in spending will accelerate in Q4/Q1. Look at eBay
just the beginning.
· This is a different animal and will take years to recover.
· Getting another round if you¹re not profitable will be rough.
· Do everything possible to get to cash flow positive. Now.
· Nail your Sales and Marketing message.
· Pound your competitors shortcomings. They¹re hurting and they will
· In a downturn, aggressive PR and Communications strategy is key.
· M&A will decrease dramatically and only lean companies, with proven
sales models will be acquired.
· Spectrum discussion:
o Capital Preservation ß———————————-à Grab Market
o Everyone should be far to the left (capital preservation)
· Requirements of our companies:
o You must have a proven product
o You must cut expenses. Now and deep.
o Your product should reduce expenses and drive revenue [NOTE: I want to
revisit this with the Management team. Our solution does both, we need to
quickly and crisply define the sound bite here.]
o Honestly assess your solution vs. your competitors.
o Cash is king [have you gotten this message yet?]
o You must get to profitability as soon as possible to weather this storm
and be self-sustaining.
· Operations review:
o Engineering: Since you already have a product, strongly consider
reducing the number of engineers that you have.
o Product: What features are absolutely essential? Choose carefully and
o Marketing: Measure everything and cut what is not working. You don¹t
need large Product Marketing, Product Management teams.
o Sales & Business Development: What is your return on this investment?
The Valley has gotten fat with Sales people: Big bases, big variables. Cut
base salaries on sales people, highly leverage them with upside (increase
variable) and make people pay for themselves via increased sales
productivity. Don¹t add sales people until you¹ve achieved your goals with
sales productivity. Be disciplined.
o Pipeline: Scrub the shit out of it and be honest with yourself.
o Finance: Defer payments, what is essential? Kill cash burn.
· Death Spiral (Nobody moves fast enough in times like these, so get
going and research later.)
o The death spiral sucks you in, you¹re in it before you know it and then
o Survival of the quickest.
o Cutting deeper is the formula for survival.
o You should have at least one year¹s worth of cash on hand.
§ Assess your situation. Drop your assumptions, start with a blank page
and start zero-based budgeting.
§ Adapt quickly
§ Make your cuts
§ Review all salaries
§ Change sales comp
§ Bolster your balance sheet
and save it.
§ Spend like it¹s your last dollar.
· Get Real or Go Home.
—— End of Forwarded Message