STARTUP MONEY CRISIS (one of a series): 2008 October 13 is it time to start or stop?

Here is the question I'll address today. It came in an email that showed the entrepreneur is concerned with today's money market conditions:

Would you please discuss in your next blog the effect of the Wall St. Crisis and present Credit Crunch on StartUps seeking  loans, venture funding, and angel investment.

Should we put plans on hold, reduce product line introductions, cut operating/development costs? Are we at the peril of venture capitalists in giving up too much equity with reduced funding options?

How should we change our financial, operating, and sales strategies?

CURRENT MONEY IMPACT ON STARTUPS

• US startups are finding their investors in 100% re-think mode. All the existing business plans are being aggressively re-thought.
• Near panic  has hit some VCs. They are calling their startups daily, demanding various acts by management. Some are pretty foolish. Others are just stupid from people who know better.
• Asian startups are being less impacted. China is one example. Good internal demand will produce a solid economy compared with the recession in the US and slowdown in Europe.
• Clever VCs are looking for opportunities to exploit the panic of other investors. They know startups will be fine in the two to three year period it takes to get them valuable enough for an IPO.
• Angels are a mix, like the VCs. Often they have more experience with downturns than other VCs and come up with wise action plans for CEOs in messes like the current money meltdown in the US.
• Startup loans and venture leasing are continuing. Those financial institutions did not do mortgages on homes.

WHAT STARTUPS SHOULD DO

1. Last blog I said focus on HOPE. Read it now.
2. Pin down your best chance plan for getting to break even cash flow. What year will do fine for now. That establishes your target (goal).
3. The next step is to figure out what you need to change in your plan to hit your target. Start with reviewing your sales forecast and look how you can add more realism and confidence to it.
4. Beware of spending a lot of time on cost cutting on expenses. You'll find a savings of a mere month or two after even the deepest cutting. You need years, not months in a situation like this.
5. Go after headcount next. With your revised sales forecast, you can then focus on who you need to achieve those numbers by those dates. Keep an open mind about who you cut. Be bold. Be wise.
6. Revise your sales forecast in light of what you decided to do with headcount changes.
7. Examine how much time you just gained in your march to cash flow break even.

EXAMPLE OF WISE THINKING
For instance, you may decide to not hire five engineers in the US and instead hire a general manager and sales person and two support engineers to aggressively build sales in China. The net would be fresh sales with a higher confidence level and a modest cost savings. The cash flow break even date would move in, be shorter, by around six months or more.

VENTURE CAPITAL GOUGING
You are about to learn what your favorite VC is really like. Human character comes out in historical moments of cold fear. Like today. The camp will be split into three pots:

• Exploiters. They will use today's fire to get the best deal for themselves. Your objective is to force them to face reality: you will be going IPO years after the fire is out.
• Panickers. They will run around and make startup CEOs go bonkers, demanding impossible acts of management. They are "Ready, shoot, aim!" people, often reactionary and mostly in the extreme. Loss of pride is their great driver in this kind of messy situation.
• Thinkers. They will call for conference call meetings to think through, constructively, what can be done with your startup to get it out in front of your competition and into the lead for gorilla of a new category. Creative and bold, smart and experienced, these are the ones you want.

NEW DEALS WITH INVESTORS
Valuation now becomes the sensitive issue for new deals. It is your job to be realistic.

Here are the Rules of Doing Deals for startups:

• Commandment One: Thou shall not run out of cash before the cash is in the bank. Don't.
• Commandment Two: Take your money when you can get it.
• Competition is your Greatest Friend: Get multiple sources of investors competing for your great deal. I've written on this so many times you may be numb by now. But it is central to you getting a better deal.
• Focus on your business: Leave the valuation talk to after you have presented your numbers and strategy for winning big time. Your business savvy is your strength.

BOTTOM LINE: Don't panic when others around you are. Read IF by Rudyard Kipling. Or David's Psalms in the Bible. They went through hell on earth and became very wise. So can you. As millions have before you. So remember:

• If it is time to not do your startup, that is not bad. It will not be your last good idea, of that I am sure.
• If it is time to shut down that troubled startup you love so much, then now is the time. You'll be relieved and very wise.
• If you have to face a huge dilution, down round, cram down, bloody fight and more, well then that's just how it will be. It will make a man of you, if you let it.

Rudyard Kipling
If

If

If you can keep your head when all about you
Are losing theirs and blaming it on you;
If you can trust yourself when all men doubt you,
But make allowance for their doubting too;
If you can wait and not be tired by waiting,
Or, being lied about, don't deal in lies,
Or, being hated, don't give way to hating,
And yet don't look too good, nor talk too wise;

If you can dream - and not make dreams your master;
If you can think - and not make thoughts your aim;
If you can meet with triumph and disaster
And treat those two imposters just the same;
If you can bear to hear the truth you've spoken
Twisted by knaves to make a trap for fools,
Or watch the things you gave your life to broken,
And stoop and build 'em up with wornout tools;

If you can make one heap of all your winnings
And risk it on one turn of pitch-and-toss,
And lose, and start again at your beginnings
And never breath a word about your loss;
If you can force your heart and nerve and sinew
To serve your turn long after they are gone,
And so hold on when there is nothing in you
Except the Will which says to them: "Hold on";

If you can talk with crowds and keep your virtue,
Or walk with kings - nor lose the common touch;
If neither foes nor loving friends can hurt you;
If all men count with you, but none too much;
If you can fill the unforgiving minute
With sixty seconds' worth of distance run -
Yours is the Earth and everything that's in it,
And - which is more - you'll be a Man my son!

Comments

[Jake]

this is such a good post! i love to read more about financial things.

[Ming]

How wonderful it is to read your insightful analysis of the financial turmoil, and hear your valuable guidance and advice John!

Things will get well for sure. And entrepreneurs will continue to rock!

btw, I love the poem you posted too! :)

[John Nesheim]

Boris, by this time next year we'll all chuckle at how we reacted to the current situation.

Cool heads prevail.

So will you.

[Boris Schwartz]

Dear John,
Thank you for your MENTORING, that each of us need so much in those rainy days.
Boris