Managing in an Uncertain Economy
Bill Warner Monday, February 01, 2010
There is no one single thing that will protect your business in this economy. You need an array of actions to maximize your chances of getting through this downturn and pull you through what might be in store for us, whether it’s further depression or looming inflation.
Cash remains king
Have you tried to get a business loan lately? Pretty tough isn’t it? Better take a look at your line of credit and see if you can get a higher limit and a better interest rate over a longer period of time while you can.
Take a really hard and pessimistic look at your cash position. How long will it last in the grimmest of sales forecasts? Establish refreshed limits on your cash reserves and then create the cost and expense budget that would achieve it.
Have you looked at your accounts receivables and their aging? Do it now. If needed, establish new goals for collections and execute them with discipline.
Of course, manage expense
Take a more insightful approach to managing expense. It’s not just a budget cutting exercise, although you may find unnecessary things to eliminate. More importantly, it’s a matter of getting more for your dollar.
This is about working smarter, being more focused and increasing productivity. Consider things like:
- Taking stock of your knowledge of your market and determine if there are better ways to reach your customer
- Looking for ways to reach additional customers within your current market, with essentially the same marketing dollars
- Creating teams of people that look at process improvements in marketing, sales, development, manufacturing and customer support, looking for ways to be more productive. Constantly ask why we do things they way we do them. Give them a reward when they find substantial improvements
- Analyzing your lines of business, bringing focus on those that are performing poorly. Find out why and fix them or eliminate them entirely
Communicate
Often overlooked, communications is even more important in tough times. When employees are left in the dark about the business situation, they will surely make things up based on any observation they make or rumor they hear. As they make up the situation for themselves, they will take care of communications for you by simply telling others what they believe to be true. Pretty soon, your business picture is painted with a brush you never held.
It’s time to over-communicate. Use whatever means of communication you have to your employees:
- Frequent all hands meetings
- Management meetings with stress on getting information to employees
- Newsletters to all employees
- Make a point of walking around every day, talking to everyone you meet
Most employees can deal with any news you give them, as long as it is the truth and you are realistic. When employees know the truth and the ramifications of it, they will work hard to achieve the company’s goals.
Get the best from the best
Take the time to realign everybody’s roles and responsibilities with the company’s goals. Everybody needs to understand what they have to do and why they are doing it. This will turn out to be a giant productivity improvement by getting everybody on the same page, and being able to clearly see how everybody’s job fits into the strategic plan for the company. It will help eliminate unnecessary work that is not important to achieving their goals.
It’s also time to put more discipline into managing the performance of people. This means setting realistic expectations, working with employees to meet them, and rigorously assessing their performance. This will bring the best forward as they rise to the challenge and will weed out those that are not been performing.
Just as in most start-up companies, you need all “A” players, because everyone has to be an outstanding performer to get you through the tough times.
Look to the future
In a way, this is all getting you repositioned for the good times. You business will come out of the downturn being stronger, more focused, more productive and with excellent people. Take the time also to look at new business areas you might attack when you are ready to spend some of your cash reserve.
Do the market research that will lead you to new opportunities. You are looking for the next great deal in which to invest your hard earned cash. You may find an acquisition or new partner that you never expected. Your new found strength may be just what they need at a price that is very attractive to you.
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VC Investment Outstrips Fund Raising
Bill Warner Wednesday, January 27, 2010
In 2009, the venture capital industry experienced the biggest gap between investment and fund raising in the last six year. In a recent Wall Street Journal Venture Capital Dispatch blog, it was reported that investment was down nearly $10 billion, from $30 billion to $20 billion, while fund raising declined $17 billion, from $30 billion to $13 billion. This $6 billion plus difference is the amount more invested than was raised by VC’s.
Bad news for companies
The implication is that although venture firms still have a lot of money, it is still going to be increasingly hard to get funding because they are running low on available funds and it is still very difficult for them to raise further funds from their limited partners. Their limited partners are still suffering from the economic downturn and have not opened this investment class for funding.
Corporate and other private equity investment is also suffering, further reducing the number of options for equity financing.
Is IPO the answer?
Another source of funds could be successful IPO’s, which could breathe more money into the VC firms. We have recently read about an emergence of IPO filings, including Motricity, a former RTP darling. However, many analysts are quite skeptical that 2010 will bring much hope in this arena either.
What companies need to do
2010 is not going to be much different than 2009; perhaps worse, with respect to your chances of getting new VC investment. It is still a game of the “best of the best” getting due consideration. It means that you need to have a very compelling business, with meaningful and growing customer traction, having the potential for large and rapid growth, to a level that will provide a handsome return.
Due diligence will be treacherous, filled with disappointment for many, but there is still gold in “them there hills.” You will have to mine it with a focused laser.
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Entrepreneur Gets Overwhelming Support After VC Shark Attack
Bill Warner Wednesday, August 19, 2009
Kevin Flannery has had an interesting time since being bled to death by some not so real VC’s on the TV show Shark Tank. This hyped up TV show that portrays venture investing as a visit to a shark tank has tried to embarrass entrepreneurs and make venture investors look like vicious animals. None of this is real and has been put together by some mindless producers who are trampling on one of America’s most valuable assets, the entrepreneur and the business partners who finance them.
The entrepreneur gets even
Since the show was aired, Kevin has gotten hundreds of responses over his website. The vast majority are encouraging and supportive. Comments like “hang in there,” “prove them wrong,” “way to stand strong,” “keep going, the product is needed,” and many others. More importantly, many of these responses are from potential business partners who want to know more about his business. Unlike the Shark VC’s, many saw the value proposition of the WiSpots product line. Several respondents were sales and distribution companies who showed interest in marketing and selling the product. Lots of people had further product suggestions. They even got contacted by potential investors, even ones that had previously passed on the business.
So, at the end of the day, Kevin has beaten back the sharks in an amazing turnaround of fate. We all thought that Kevin now lies at the bottom of the ocean. Not at all. He is alive and energized.
WiSpots update
Long before the show was aired, Kevin had joined with fellow entrepreneur Jason Angel, and formed a new company called Wi-Ficiency. The company offers a suite of physician and patient-centric software and hardware solutions that maximize profitability by reducing costs, improving productivity and generating additional revenue from the patient waiting room, while simultaneously improving patient satisfaction through education and entertainment. This company has far reaching potential in improving the state of healthcare by providing a broad selection of relevant patient information, a targeted marketing and sales channel for healthcare products, state of the art online medical transcription services, compliant electronic medical records, and many more capabilities as they acquire additional technologies.
The winning entrepreneur
It’s a shame that the VC Sharks couldn’t listen long enough to learn of the true business model of this company and instead chose to go for the ratings and throw WiSpots to the fishes. Kevin and Jason are very much above water and riding in a speed boat to their next funding event.
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A Glimmer of Hope in VC Financing
Bill Warner Tuesday, August 11, 2009
In its second quarter Venture Capital Survey of venture financed companies in Silicon Valley, Fenwick & West reported some brightening of venture deals.
Financing summary
The number of down rounds in the second quarter exceeded up rounds 46 percent to 32 percent. It looks like bad news, but this is an improvement over the first quarter which was 46 percent to 25 percent. The difference is that flat rounds decreased from 29 percent to 22 percent. Although this is the second time that down rounds have exceeded up rounds since 2003, it does signal that the bleeding has started to subside.
However prices continued to fall, with a 6 percent decline in the second quarter, which compares to 3 percent in the first quarter. This two represents the second time that there was a price decline since 2004.
Other indicators
Dow Jones VentureSource reported that the amount invested by VC’s in the U.S. in 2Q09 was approximately $5.3 billion in 595 deals, an increase from the $4.0 billion invested in 680 deals in 1Q09, but a significant decline from the $8.3 billion invested in 726 deals in 2Q08.
The health care industry received 42% of 2Q09 investment, and information technology attracted 37%, the first time on record that quarterly investment in health care exceeded investment in information technology.
Fundraising by U.S. venture capitalists was $1.7 billion in 2Q09, which was the lowest amount raised in a quarter since the first quarter of 2003.
There were 67 acquisitions of venture-backed companies in the U.S. in 2Q09, for a total of $2.6 billion, a decline from 70 transactions totaling $3.4 billion in 1Q09 and a significant decline from the 89 transactions totaling $6.5 billion in 2Q08. This was the lowest dollar volume of acquisition transactions since 1999. There were three IPOs of venture-backed companies in the U.S. in 2Q09.
Of course, one point of change doesn’t yet indicate a trend, but these numbers do signal a curbing of the decline of venture capital financing. Let’s look forward to the next quarter being even better.
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IPO’s and Angels
Bill Warner Tuesday, July 28, 2009
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Venture Capital Needs To Go Back To Basics
Bill Warner Sunday, July 12, 2009
Some of the leading venture capital firms are being much more introspective about where their industry stands and why many venture firms are failing. See the complete report in the New Your Times.
The current venture capital model is not working
Sure, there have been a lot of external factors that have driven their failure, not the least of which are the economy and burdensome government regulation. But that’s not the whole story. Venture capitalists are now recognizing that their venture fund model is not working:
- Funds are too big causing returns to fall; now about 6 percent
- Too many inexperienced people are making investment decisions
- Senior partners are losing touch with their industries
Venture funds have to shrink
Many of the leading venture partners see that there will be massive fallout of venture firms, perhaps as much as a third to a half of the 882 active venture capital firms, over the next two years.
Today, this is a returns driven business. Venture firms simply figure out how many deals they can support with their professional staff, divide that into the size of the fund, and then force feed that amount of investing into their deals. This is an over simplification, but they definitely need to spend more time on figuring out how much a business needs and then provide that amount.
With the glut of money that has been flowing into the venture firms, an increasing redundancy of companies in the same industry space has emerged that tends to drive up their valuations. This also puts pressure on returns when it comes time to exit.
The look of the new venture capital firm
Firms like Greycroft and Andreesen Horowitz invest much smaller amounts of money in many more companies at earlier stages of maturity. Yes, venture firms that actually invest in start-ups. They handle the investor productivity issue by spending less time in taking board seats, focusing only on what they know best, and having a professional staff that is really current in the industry.
The capability of the people in the firm matters a lot. Many of these new firms are shying away from the young MBA’s being put in significant governance positions, when most of them have never run a company. They cite too many bad decisions have been made by people who really don’t have the appropriate background. Their advice for young MBA’s is to get a job in an operating company and learn the ropes before trying to become a venture capitalist.
Being current in technology is probably more important than many years of experience. Although both are important ingredients in a company, they cite the fact that too many companies are being run by people who have lost touch with technology. We are in a very dynamic and changing industry. Staying current means you have to pay attention to it every day.
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Stimulus Money - A Long Shot
Bill Warner Sunday, July 12, 2009
The likelihood of getting any of the stimulus money into your business is remote, but nevertheless, there is a chance. I read an interesting article in Entrepreneur that gives a step-by-step process for business owners to consider.
Considerations
Taking this on is not for the faint of heart. Do your research to see if it is worth your time.
- This is big money, a million or more. So, if you are not in that league, this may not be for you.
- Better know how to sell to the government. If you don’t, your chances are even smaller.
- Make sure that your industry is one of those targeted for the stimulus money.
- Follow the process offered by the agencies involved in making the decisions.
- Understand the reporting requirements and strings attached to the money. You don’t want your business tied down in a process that may be detrimental to your business.
Once you have thought this through and understand how much of your time is going to be involved and what future impacts to your business are at risk, you can decide whether or not stimulus money is for you.
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A New Venture Capital Fund That Acts Like Angels
Bill Warner Monday, July 06, 2009
Mark Andreessen and Ben Horowitz just announced a new $300 million venture capital fund that looks, smells and walks like an angel fund. Andreessen Horowitz is focusing on the best entrepreneurs, products and technologies in the industry. Read the details in BLOG.PMARCA.COM.
The founding principles make a difference
Their founding principles are extraordinary and may spell what could be a refreshing new model for venture capital firms:
- Their claim is that technological advancement is at the core of human development. Although this is generally accepted, the founders’ backgrounds indicate how serious they are about moving technology forward.
- Furthermore, technology change fosters continuous opportunity for even greater changes in the future. In other words, investors need to understand that this a continuum that will drive even greater advancements as new technologies are developed.
- Here is the one that catches my eye. They say that the technology start-up is all about the entrepreneurial team and their vision. This kind of pokes a stick in the eye of the limited partners who mostly think it’s all about them. They obviously have investment partners who agree with this principle.
- New companies today need a lot less money than they used to in order to get started. The services available on the internet today make it much easier to launch a company. Once a company is successfully launched, more money will be needed for market expansion.
- Having the best possible team of advisors and investors to support an outstanding entrepreneurial team is also a refreshing principle. This firm can certainly bring the best of the best to support great entrepreneurs.
- They cite the importance of trust in building a great company. This too is revolutionary and bodes well for a new attitude between venture capital and entrepreneurs.
- They are not buying into the promise of clean tech, biotech, transportation, nanotech and life sciences, and will stick to their guns by investing exclusively in information technology innovation.
- Just like angels, they will focus on their own geographic area of Silicon Valley.
Focus on start-ups
Their fund is huge. Nevertheless, they are building their firm on the idea that it should be the kind of firm they would want to work with when they were young entrepreneurs starting new companies.
They will invest anywhere between $50 thousand to $50 million, depending on the company’s stage of maturity. This will include start-ups with seed round financing as well as later stage financing rounds for high-growth companies.
Andreessen and Horowitz will be the only general partners of the firm, and will personally make investment decisions aided by a small staff of other professionals.
It’s all about the entrepreneur
They are looking for the best of the best in entrepreneurs who have a compelling vision about taking on a big market opportunity. They favor strong technologists who know what they want to build and know how to go about it. They also have the belief that the founder needs to be the CEO, and favor entrepreneurs who have that potential. They believe that the CEO skills can be developed.
They are all about the product and that companies are build around products. Investors need to intimately understand the company’s products. Surely, Andreessen and Horowitz are very capable of carrying out this principle.
It is exciting to see the emergence of this venture capital firm, run by two leading entrepreneurs and investors. Their ideas are refreshing and bold and may spell a new investment model for venture capital firms for the future.
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Venture-Backed Liquidity Continues to Plunge
Bill Warner Thursday, July 02, 2009
Venture-backed liquidity continues its plunge that started in 1Q08. It’s now down to $2.8 billion, a 57% drop since this time last year, and down from $18.4 billion in 4Q07. The number of venture-backed IPO transactions continues to be anemic with three so far this year, versus seven for all of last year. M&A is also down to 67 deals totaling $2.6 billion, down from $16.2 billion in 4Q07 and a drop of 23 percent since last quarter. See all the data at VentureSource.
Venture’s life blood continuing to be squeezed
As you know, these two types of transactions are the life blood of liquidity for venture capital firms. With so few transactions, venture firms are feeling the pain with no viable way to exit from their portfolio companies. Their entire business model is built with the assumption that there will be a sizable exit. Of course, very few of their investments achieve this goal, but they are supposed to more than offset the lower performance or losses experienced in the rest of their portfolio. With M&A’s and IPO’s continuing their decline, venture capital firms are faced with not being able to meet their commitments to their limited partners.
The fallout continues
Unfortunately, there are also an increasing number of venture capital firms backing away from the market in the face of these realities. You have read about the optimism of the National Venture Capital Association’s initiatives to find new venture capital business models and several venture capital firms experimenting with new markets as well as smaller investments with small expectations for returns. These are far too late for many firms, especially those that need to raise new funds. We will continue to see the fallout through the remainder of the year.
What is the future of venture capital
With the continued anti-business and anti-venture capital regulation by the federal government, it is hard to imagine how the current venture capital market will survive. We are more likely to see a continued weeding out of the weakest firms as others redefine themselves with business models that are much more modest with respect to amount invested per company, expected returns and time to exit. Models like this are being tried as some firms actually are dipping down to take on some pure start-ups. Others are playing in the debt markets which would be an entirely different model for achieving returns to their limited partners.
What about entrepreneurs
As for entrepreneurs, you have to analyze the viability of any venture firm that you approach by taking a hard look at the value of their current portfolio and where they stand with their current fund. You want to determine if they are going to be able to be with you in subsequent rounds and whether or not their key personnel will be there to assist you. A lot of hard questions need to be asked about their business model so that you can satisfy yourself that they will be a long lasting partner or not.
They will certainly offer low valuations and strict terms, but the negotiation is a two way street. Make sure they are really going to be worth what they claim to be.
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Venture Capital Firms Chase New IPO’s
Bill Warner Friday, June 19, 2009
We all know that the IPO market for venture-backed companies has pretty much disappeared, substantially destroying their business model that requires high value exits via an IPO. Dixon Doll, in his interview with the Wall Street Journal gives us an update on the reshaping of the venture capital industry. Doll is a seasoned business consultant, a leading venture capitalist and the outgoing Chairman of the National Venture Capital Association (NVCA).
NVCA’s “Four-Pillar Plan”
The NVCA’s Four-Pillar Plan is targeted at restoring the venture-backed IPO market, and it takes unprecedented cooperation between the private sector and the government’s taxation and regulatory policies. Given the slap that the venture capital world just took in the SBIR renewal bill, that cooperation is not evident.
The NVCA’s direction is to convince venture capital firms to modify their financial models and business practices to focus on small-cap IPO’s, moving away from blockbuster winners. Another bubble is bursting. This will require substantial reshaping of the way venture capital firms structure their deals and the transition will take five to seven years to complete. But, given the state of the IPO market, this makes sense.
This means that venture capital firms will have to go after more deals, with less money per deal, driving for quicker exits, and culminating in smaller IPO’s. This opens up the venture-backed IPO market to a whole new set of investment banking firms that will be able to service this opportunity. It won’t be just the big firms like Goldman Sachs and Morgan Stanley.
The task ahead
Doll points out that this is going to be a painful transition. Some venture firms won’t make it. It will require a massive education initiative to explain how this can work. This education will have to include entrepreneurs, venture capital firms and investments banks who currently don’t view that they have an IPO market available to them.
There is considerable skepticism throughout the industry. Even if the NVCA pulls off this first pillar, the government regulatory and taxation policies will represent another giant hurdle to jump over. Doll has always been a positive and aggressive thinker. If anyone can make this change happen, he can.
