Down is the New Up…

        For the last six months VC’s thought they were really funny whenever they used the phrase “flat is the new up.” This crept into the VC lexicon at the beginning of the current crisis to refer to the small victories investors boasted about when raising capital for their portfolio companies. Actually the reality is quite different – companies should be considered fortunate to just raise capital – at any price – in this environment.

               

            So I really want to be upbeat – believe me. I had six board meetings this past week. In large measure, most of our portfolio companies are performing reasonably well – product development milestones are being met, bookings and revenue forecasts are being hit, our management teams are executing effectively. Unfortunately in some cases these companies are simply worth less than what we valued them for when we made our initial investment; that does not in any way suggest they are bad companies or will be bad investments.

 

            The 1Q09 venture funding data (the focus of my last post) strongly suggests that investors are simply not making new commitments. CEO’s need to carefully manage their investor syndicates because those are the people who will fund your next round. What struck me this week was how supportive most of my co-investors want to be for the companies which need to raise capital now. This is fundamentally different from the last bubble when so many venture-backed companies were just not performing and were abandoned by their investors.

 

            So I make two specific suggestions to CEO’s. One, sort out with your existing investors what reserves have they set aside for your company, reconfirm what milestones need to be met, and agree on when the company simply must be managed to breakeven – that will define your operating and financing plan – period. Pretend your investors are your customers and you are designing a product for them to buy.

 

            Two, you need to cut costs again – and I don’t suggest this lightly. A dollar saved is equivalent to meaningfully more than a dollar raised given all the “costs” (time, effort, fees) to raise capital. Don’t over-engineer the product, don’t over-hire the sales force, do consider a 10% across-the-board salary reduction in exchange for more equity. When we get out of the crisis, you can turn on the spigot again and spend money.

 

            And my advice to my VC colleagues, when the tide recedes it is time to go down and pick up the shells…

 

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