Will Your Company Survive the Next Crash?

There’s been a lot of discussion recently about runaway valuations, unicorns and the impending signal that we are approaching another bubble that will come crashing down and crush the dreams of another wave of entrepreneurs.

For those of us who were in tech during the first dotcom bubble in 2000, as well as the second crash in 2008, this sounds like a familiar story. If you’re an entrepreneur today, it would be wise to start thinking about how your start-up will survive if history repeats itself.

In both of the earlier cycles, I recall seeing a presentation from Michael Moritz of Sequoia. In it, he said to act as if you won’t be able to raise new money, reduce your burn by 25% and eliminate all external consultants and non-essential personnel. This is advice I would give to my own entrepreneurs in a time of crisis, regardless of an impending crash or not.

Then last night, I saw this tweet from Marc Andreessen:

So what does this mean for entrepreneurs who are currently trying to determine their fundraising strategy?

(1) Figure out how much money you need to get to cash flow break-even.  At Scout, we tend to invest in businesses that can be capital efficient on less than $5M, but sometimes getting to profitability isn’t achievable within this range.  In these cases, its critical to make sure you have a deep understanding of the metrics needed to raise a follow-on investment.  In a down cycle, this is a very competitive process.

(2) Start your fundraising at least 6 months before you run out of cash.   The current environment has entirely too many early stage companies competing for the Series A and B rounds, so plan accordingly.

(3) If your initial set of conversations don’t go well, see if your existing investors have an appetite to bridge.  The best way to buy more time is to get more money.  If you are doing a good job and building something worthwhile, then your existing investors should have incentive to provide more capital. If they are not interested, you should ask them to be candid as to why not. They may have concerns that need to be addressed before you talk to any outside investors.

(4) Use your networks.  The best way to make progress is with warm intros from people who have stronger relationships than you.  It’s important to reach out to your existing investors, advisers and mentors early in the process to help expedite getting new money.

(5) Be smart with the capital you already have.  As we’ve said before, the number one thing that kills early stage companies is running out of capital.  So in a questionable environment, don’t waste money on things that aren’t core to your business or demonstrating metrics to get to the next level. You’ve heard it a million times, but try to exercise lean thinking in every stage and aspect of your business. If the bubble pops, we’ll all need those skills.

Hope this helps.

Will Your Company Survive the Next Crash?

The Importance of Responding to Email

There’s been a lot of discussion lately about the proper use of email since the Sony – North Korea incident.   In fact, Fred Wilson and one of our co-investors Gotham Gal got wrapped into the drama and Fred shared some great advice on limiting what you put in email.

I’ve been spending the last several years trying to examine how I interact with email and determine how this impacts my relationships, potential liability and in general, my communication skills.

It’s important to note that from my West Point and military background, it’s been ingrained that that you should always properly follow up with people whether that’s returning phone calls or emails.

I try to bring the same level of discipline to my work life.  While at AOL, I found it invaluable to always send a note and tell someone how nice it was to meet them.  This has served me extremely well and enabled me to build a very strong network of people in media and tech – many of whom have ascended to C-level positions.

Unfortunately, the flow of information is too much.    I’ve turned to tools such as SaneBox (thanks to Tom Katis) and Followup.cc (thanks to Ari Meisel).

While these tools help unclutter my inbox, I still try to invest the time into responding to entrepreneurs.  As an entrepreneur, I know how tiresome fundraising can be so I try to exercise mutual respect and respond.    Sometimes the inbound email doesn’t make it through SaneBox, so if I don’t respond, I might not have seen the email.

I think it’s important to touch on a point that Fred made in his post, which is that everyone should consider their emails as public information.   Whether you get hacked or not, if you limit what you write in email, you will be thankful in the long run.   I find this to be especially true when dealing with a legal matter, HR or any sensitive subject.  In most cases, its better to just pick up the phone.

The Importance of Responding to Email

Is venture capital under attack?

I am an early stage technology investor.   It’s what I love and I wouldn’t want to do anything else.

And with the job title of VC comes a few primary functions:

(1) Be great at finding, cultivating, and investing in amazing entreprepreneurs building disruptive companies.

(2) Successfully raise money for our funds from high net worth individuals/angel investors, family offices and institutional investors.

(3) Build profitable companies by providing advice, mentorship and access to our network.

(4) Have exits and distribute money to investors.

While that sounds pretty straightforward, it’s not.  It’s really, really hard and very few firms build enduring brands that survive multiple boom and bust cycles.   At Scout, our goal is to build a great firm that lasts.

Recently, there have been a lot of discussions about what value VCs really bring?   The discussions focus on two key areas: (1) Performance and (2) Access to Deals.

Unfortunately or perhaps fortunately, venture capital as an asset class is under attack. Organizations like the Kauffman Foundation are questioning the returns and structure of the industry arguing that most fund managers don’t beat the public markets and still charge management fees and carry.   In Kauffman’s May 2012 report “WE HAVE MET THE ENEMY… AND HE IS US” they state that they believe smaller funds (less than $400M) with partners that consistently beat the public markets and invest 5% of their own money are the right firms to back.

Furthermore, the very closed nature of venture capital is changing drastically with the emergence and expansion of accelerators, incubators, co-working spaces and online platforms.  Historically, VCs differentiated themselves through their “proprietary” access to the best deals.   But in recent years, entrepreneurs are experiencing an unparalleled level of access to potential investors through online platforms like SeedInvest and Angelist.   Additionally, accelerators and incubators have become masters of the overly produced “Demo Day” where I actually saw a pitch with dancers in silver sequenced dresses. Regardless, entrepreneurs and investors have many more ways to more effectively connect in person and online.   Again, another argument that VCs no longer have their unique closed access to deals.

While this might seem like a good thing, I’d argue that the more experienced, smart money is and will always be more valuable than money from some finance guy that thinks he is going to write 5 checks and find the next Google.    Often these investors have no idea how to value a start-up, how to structure a deal (equity or convertible debt) and more importantly they have no experience building early stage companies.  They simply lack the skill set and required experience.

The people with that experience – VCs.

Now, I definitely think there are some amazing entrepreneurs that sell their companies and become valuable early stage investors, but they are the exception.   Most angel investors simply are not that sophisticated and can’t add the same value that Fred Wilson can add.   Fred is one of the most knowledgeable and successful VCs and he spends a ton of time educating entrepreneurs and investors alike.    He can do that because of his years of experience as a VC.

Almost everyone knows that people are the key to making early stage companies great.  A common mistake that kills early stage ventures is hiring the wrong key people.   If you need a CTO, then obviously hire someone with technology and management experience.   If you need a great VP of Sales, then hire someone with a track record of building a sales team and growing revenue.

This seems obvious, right?

Then why wouldn’t the same hold true when entrepreneurs need money and guidance to build their company.   If you are looking for an investor – it has to be more than money.    You want someone with the experience and track record of building successful companies.  VCs have a tremendous amount of experience in building teams, building products, scaling businesses, securing subsequent rounds of financing, access to potential customers, partners and potential acquirers.

I am definitely not saying that I love VCs, because their are plenty of assholes in VC.   But if you are fortunate enough to attract a VC with a good reputation and track record – you should figure out how to get them involved with your company.

We can make a difference.

Is venture capital under attack?