Tuesday, December 23, 2008
As we have declined into this ugly recession there has been a lot of fear mongering in the VC/startup world of Silicon Valley. Articles about the impact of the recession on venture capital and on startups – typically with a gloomy outlook that the glory days are gone and everything is going to be bad for a long time.
The most irresponsible was the now infamous Sequoia doom and gloom presentation to its companies advising everyone to cut deep and fast to “just survive”. But to me this is a terrible mindset and a mindset driven by fear.
I believe Fear is the mind killer [to quote Dune]; you cannot build a company from fear and my job is to build a company or if I fail, not fail due to lack of trying. The implicit contract between great venture investors and their CEOs is to do whatever it takes to build something of high value – company or technology – and create a great rate of return as a result. It is certainly not to survive and create lifetime employment without creating value – and cutting too deep in a young company can destroy the very value you are in business to create. It’s a challenge to cut as deep as possible to create as much runway as possible (which we have done at FirstRain) but not damage the asset which is your very reason to be in business and not damage your support of your customers who are your future.
I also believe that great change is a time of tremendous opportunity because it illuminates underlying power structure that is actually harder to see in a strong market when everything is working – and fear will blind you to seeing the opportunities.
You have probably observed how power shows itself when a company is going through a reorganization – you can see who consolidates their personal power and scope of responsibility as the reorg goes down. In markets you see this in a downturn – the truly profitable pieces of the market show themselves. I can see this today in our December orders – who is buying and renewing and who isn’t. Also as markets shake out you can see new ways to make money that were not visible before. Today we are teaming up with a new partner to take share from their weaker competitor and we have new distribution opening up for completely new applications of our technology. Both of these new relationships emerged as the market cratered in October.
Fear is an indulgence that a CEO cannot allow him/herself – not only is it a waste of time and energy but it can cripple your actions and hurt your company by preventing you from taking the very risks that you need to take. There is some sound advice on this subject in Sunday’s TechCrunch article Fear Kills Businesses, Dead.
The best way I have found to manage fear is to be very conscious of my own mind and just not allow it. This can make me seem unsympathetic – so my apologies if I offend.
Monday, December 15, 2008
I wonder if this downturn is what will finally sort the men from the boys in venture capital? We’ve had too many firms and too many VCs since the bubble but because of the long life of the funds the lower quality of the range has not gone away as fast as I would have expected. But maybe now is the time.
VC funds are an alternative asset class funded by investors like pension funds, hedge funds or high net worth individuals. The LPs commit their capital at the time the fund is raised but don’t have to provide it all at once. Then, as the capital is needed for the fund to make investments, the firm makes a capital call and the investor sends the next traunch.
Well what happens when the investor is a hedge fund that can’t make the call – or a wealthy individual whose net worth is way down and who doesn’t have sufficient liquidity to meet the call? Then not only is it really bad for the investor because they will typically lose their investment in the fund to date, but it is also really bad for the VC that needs the money to continue to invest. See here about the defaulting that's happening now.
In good markets and bad companies usually need several rounds of financing and continuing investment preserves the VC’s position. In a normal market as a good company grows its sales grow and when new money is needed its valuation has grown too. The valuation is set by a new investor, all investors usually come in pro rata, but if they don’t they are diluted but not wiped out.
In contrast, in a bad market, things don’t work as smoothly for the investors or the company. If the company needs more cash to continue in a bad market it may or may not be able to bring in a new investor easily because it has not made enough progress to raise the valuation. That means a lower valuation from the new investor – which can mean significant dilution for prior investors, the employees and founders – or a round around the table from the existing investors, or a sale. In the first two of these the existing investors will need to put up their share or face significant dilution.
But today we are seeing a whole new set of ugly events happening. Now some firms are “triaging” their portfolios, not unlike triage in an ER, and deciding which companies will live or die through the next year. And when companies need money we are seeing pay-to-play financings – this is when the round is set up so that anyone that comes in pro rata keeps their share but those that don’t are wiped out. Very painful for a VC who’s been investing in a company for a number of years.
I’ve been lucky to have some terrific investors in my two companies, long term strategic guys who know how to help a company, and given what I am seeing now I believe more than ever that all venture capital is not equal and I am very grateful for the support I have now in FirstRain. As one of my investors told me last week over dinner – 20 years ago there were 50 great VCs out of 500 (and I was definitely lucky to have one of the great ones in Gib Myers from Mayfield) – and the problem now is there are still 50 great VCs (albeit a younger crop) but now they are out of 15,000. I thought a shakeout would come earlier but with typical fund lengths being 10 years there’s still a ways to go. Good funds like Accel (who just raised $1B) will survive, but maybe this downturn and the cash crunch from the ultimate investors will cause a good shakeout back to a smaller, higher quality venture capital industry.
Wednesday, December 3, 2008
Amusing report on CNN today on the comments made by Gov Ed Rendell on the selection of Janet Napolitano to lead Homeland Security. He says: "Janet's perfect for that job. Because for that job, you have to have no life. Janet has no family. Perfect. She can devote, literally, 19-20 hours a day to it".
Prejudiced and stunningly dumb to say it! And I just posted on this issue last week - how hard it is for women to find balance in a world where men are typically assumed to have someone at home (and often do) and women are expected to be the primary caregiver if they have kids.
I very much agree with Campbell Brown's questions in her report on this incident:
1. If a man had been Obama's choice for the job, would having a family or not having a family ever even have been an issue? Would it have ever prompted a comment? Probably not. We all know the assumption tends to be that with a man, there is almost always a wife in the wings managing those family concerns.
2. As a woman, hearing this, it is hard not to wonder if we are counted out for certain jobs, certain opportunities, because we do have a family or because we are in our child-bearing years. Are we? It is a fair question.
3. If you are a childless, single woman with suspicions that you get stuck working holidays, weekends and the more burdensome shifts more often than your colleagues with families, are those suspicions well-founded? Probably so. Is there an assumption that if you're family-free then you have no life? By some, yes.
The only way we will change assumptions is to live the change and show how women can be in the workplace, in senior positions, with families. And it will change if we live it and point the living out. In most cases I find the prejudice is not malicious in any way, it's just lack of practise. I saw a trivial, amusing example the other day: email from an institution I am involved with where all the other parties are male - a question of whether dinner should be "with wives" or not? That was an easy one to nudge with humor.