RIP Good Times? A Different Perspective

Rip Good Times A Different Perspective

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I put this presentation together to encourage a group of entrepreneurs I was to speak to at a conference in Reno, NV last week.

It's funny how times change.

People who have been following our blogs over the past 2 years know that we've had a more pessimistic, contrarian view of the venture business, even as the number of VC investments, fund sizes, deal sizes and valuations had been going up.

Now, of course, the world is totally different. Whether or not you believed that we were in a Web 2.0 technology bubble, Sequoia declared that the good times were over and it's now time to hunker down and fight for survival. In their widely publicized "RIP Good Times" meeting, they extolled the virtues of cash conservation to all of their CEOs and told them that they had to change in order to survive.

Now, we are contrarians again.

Our companies did not need Sequoia to tell them cash is king. They had been operating that way for years. In fact, more than a third of all of our companies are on track to be profitable this quarter. Many have been maintaining profitability while growing for many years.

The reason that we feel like we are contrarians again is that we have not seen such a good environment for building companies in years. Entrepreneurs are more focused on getting to profitability and building companies based on solid fundamentals. Before, we felt like lonely voices in the VC world, which seems to be filled with people working toward billion dollar exits for money losing companies.

Over this entire year, we've noticed a trend. Some of our companies started seeing a steady flow of high quality resumes from competitors. I think it's now about to turn into a flood! It will be much easier to hire great people who are more hungry and realistic about compensation and how long it will take to build shareholder value.  

For entrepreneurs in it for the long haul, this downturn just bought them more time. Impatient VCs won't be hounding them to take more risk, to grow faster, to get more aggressive. Remember, as an entrepreneur, you have one company. You don't have a portfolio of companies. You can't afford to play venture lotto.

Remember what we said back in 2006 about Foxes and Hedgehogs in Silicon Valley?

"Foxes are great at raising capital - they thrive in bubble markets. Hedgehogs would rather bootstrap - they do far better during the inevitable crashes."

For all you hedgehogs out there, this is your time to shine!

Comments

[Prof. Gary R. Evans]

Yes, Ho, you are right. I am telling my students in my finance classes that this is a time to be buying and students in my entrepreneurship class that this is a time to begin building companies. Would you want to buy real estate and stocks ar peak market or when prices are depressed? Would you want to raise funds when it is a national mania or when only the most level-headed are in the market?

Generally, I tell my students again and again that this crash is the best thing that possibly could have happened for their future.

These kinds of markets take out the trash.

Gary Evans at Mudd

[Sam]

In addition to the increase in availability of human capital (as the natural result of unemployment) there is tremendous opportunity to secure infrastructure on the cheap.

As an example from my world, landlords are bending over backwards to attract or retain any company with a viable business model. Deals are getting written at terms considered untouchable 12 months ago.

If you've got the stomach and the desire, there has never been a better time to start or grow a company. Labor is cheap, infrastructure is accessible, and the opportunities are out there.

[Ho Nam]

Gary,

I wish I were back in college now! What a time to be getting into the market for the first time! For my kids, who are both under 2, this is the best thing that could have happened to them. The money we will be investing on their behalf (like 529 plans) will be invested at what could turn out to be historic lows and will have decades to compound in value. Young people, over their lives will be buying in, not cashing out. If you are a net buyer, you want price to be low! If you are a net seller, of course, it's the other way around. If you were counting on the cash in the short term, you should have been out of the market. A tough lesson for some folks.

Ho