“Don’t worry” does not exactly sound like responsible advice at a time like this. After all, we often remind our CEOs of Andy Grove’s famous adage that “only the paranoid survive”.
But it is a serious piece of advice that we are giving to all of our portfolio entrepreneurs. Over the last two weeks, many of our portfolio CEOs (and fund investors) have been asking us for our take on the current financial crisis. So here it is:
The bad news
Let’s first understand that things will be bad – really bad. In fact, this downturn will almost certainly be deeper and longer than the post-Bubble “nuclear winter” of 2001-2004 that so many of us struggled through as entrepreneurs and investors. That crash was precipitated by a financial bubble seeded largely by the venture/technology markets and abetted by all-too-willing public investors. But despite the fall in IT spending and concurrent drop in the NASDAQ index, the general economy kept humming along. In the five dark years following NASDAQ’s peak on March 9 2000, the Dow Jones actually went up. In the same five year period, the national housing price index nearly doubled. Most Americans hardly noticed the Internet Bubble and crash.
Now this is a totally different story. This economic crisis is about all of us. It’s about a fundamental realignment in global asset values. Whatever happens to venture/technology will be collateral damage, but will likely be worse than what we in tech experienced after the Internet Bubble. If that felt like a nuclear winter to tech companies, this one may well be an ice age for all of us. We may be wrong about this, but we’d rather be wrong on the upside than wrong on the downside.
The good news
As an entrepreneur, there are a lot of factors that figure into your success or failure. Some you control and most you don’t. Macroeconomics is one that you certainly don’t. So if, like me, you believe in worrying only about the things you can control, then this is a great time to get focused on building your business and stop fretting about the economy (see Focus on the Controllables).
In fact, a recession is probably the best time to start a company. Great companies like Disney, GE, HP and Microsoft were all started during recessions. As the clever folks at Google like to say, “creativity loves constraints”.
Why? Bad times can build good DNA. A down economy does not leave room for entrepreneurial sloppiness. It forces entrepreneurs to be honest about how good their products are. It mandates financial discipline. In other words, it is a perfect time to get focused, get real and get lean.
After the giddy NASDAQ highs of March 2000, it took most people way too long to come to grips with reality. I had personally just joined the venture business and my first company, Evolve Software, went public in August 2000 – a full half year after the peak. Most companies did not start cutting back until late 2001 and by then it was too late. The smart and lucky ones survived the ensuing five years and some became big winners. But most companies just ran out of money and ran out of time.
Plenty of smart people have already made prudent recommendations to their teams about what to do in this environment, so I won't repeat. See in particular Sequoia’s doom and gloom presentation to their portfolio CEOs earlier this week and Jason Calacanis’ email. But let me summarize with just two simple rules that we've tried to impress upon all of our CEOs:
Rule #1: Don’t run out of cash.
Rule #2: See Rule #1.
Then, go out and build the next great company.