What to Do When the Sky is Falling

We are less than ten years removed from a complete meltdown in the equities markets, and yet once again we collectively find ourselves in the midst of a frightening financial collapse. The last one, from 2000-2002, was directly centered on technology, and it still feels recent to many of us. Companies had raised too much money, avenues for monetization dried up, and there was a shakeout throughout the tech industry. This time around, financial services firms are at the root of the crisis, and for a while people in the technology world were optimistic that it wouldn’t affect us much. That would have been nice.

There is a tremendous amount to be said about why this happened, who’s to blame and what happens next. But for now, here are a few thoughts about how this is going to impact our portfolio and technology startups generally. What is happening this week (even considering the public market reaction to the new bailout proposals) will have some meaningful effects on stakeholders in the technology industry, both direct and indirect. Earlier this week, we commented on likely fallout on the security industry, but even firms that don’t sell directly to Wall Street will be indirectly affected. There are a few takeaways from this:

First, be aware that raising money is going to be harder. In times like this, investors raise the bar for potential investments. This happens not because investors are cruel, but because our calculus around growth and return has to change during an economic contraction. Whether you are selling to Wall Street, media, retail, small business or consumers, economic troubles like these probably slow your growth. If you are offering a free service that will later be monetized with subscriptions or advertising, it’s time to adjust your projections for uptake. All of this impacts our view of how much money you will need to reach break-even, the likely proof-points you will have achieved the next time you go out to raise money, and how much a likely acquirer will pay for your company. This analysis raises the bar and tends to contract valuations.

Second, and related to the above, if you can raise money, raise as much as you need. There have been people calling the bottom since before the real problems began. Expect this to go longer than you think, and adjust accordingly. Cut your burn. Hire great people who can do the work of two or three. Be careful, because if this goes on for two or three years like it did the last time, you don’t want to raise twelve months’ worth of cash now.

Third, and particularly relevant to New York, expect to see a bunch of interesting, if non-traditional talent entering the market. One thing we’ve known for a long time is that there is a lot of technical talent locked up in the big Wall Street firms. A lot of those people are going to be shaken lose. First Round Capital has a great little site put up that looks to capitalize on this. If you are looking for people, this could provide a great new source of talent, and could certainly go toward the frequent complaint that New York is a hard place to recruit.

As we advise our portfolio companies and look to make new investments, we’re thinking about all of the above. The fundamentals of technology businesses haven’t changed, but we expect sales cycles to elongate, pilots to drag on, user growth for anything paid to slow and churn to increase. The IPO markets are on hold, and we don’t know for how long. Public companies will be getting their own houses in order, and with depressed stock prices will pay less for the startups they acquire.

Good companies will continue to be successful, but we are going to be very careful about follow-on rounds for our companies and will be encouraging them to be as lean and judicious as possible. These cycles come and go. Make sure you are managing the turbulence as best you can.

Eric’s Email Misadventure

We love hosted software models. You can call it SaaS. You can call it cloud. You can even still call it ASP if you’re old-school like that. Scalable. One code base.  Subscription revenue. Users can’t screw it up and incur a bunch of support costs. All good.

But a few weeks back the potential downside of these services showed up in an unpleasant way, right in my inbox. All of a sudden I just wasn’t getting very much email. This isn’t ego – the volume of mail was suspiciously low, especially given how many emails I had sent out the previous week, having recently returned from vacation. There was nothing obviously wrong. Emails weren’t bouncing and if you sent an an email called “test” it arrived no problem. The IT guys sent me emails in from all kinds of crazy domains to see if I had an overactive spam filter. Mail from Russian ISPs arrived unmolested. “No problem” they declared.

Problem was I’d had several people tell me they’d sent me emails that I didn’t receive (including a company that showed up at our offices having confirmed a meeting via an email I never got). So they looked. And looked. They deleted my profile on the exchange server and reinstated it. They were about to blow up the whole exchange server and start over when they figured it out.

When I got back from vacation I had put in place a new signature for my emails, one which featured the URL for my tumblelog, wiesen.tumblr.com. It had not occurred to me (or to anyone) that this would be any kind of issue, but when the IT guys started pulling apart an email we knew failed through repeated testing, it was in fact my signature causing the problem. Specifically, the string “tumblr.com”.

Any email that contained that string failed to deliver to my inbox. Apparently (we later learned) a hosted security product used by our (hosted) disaster recovery product had somehow flagged poor tumblr as dangerous, and was simply killing any emails containing the domain. No quarantine, no spam filter. These were killed long before they ever got to our server.

All’s well that ends well, of course. I changed my sig (although I’m sure many people are deprived for the lack of my scintillating content) and sent out a big mea culpa to anyone I’d emailed in the affected week (since it was all replies with my quoted signature that got blasted) and we moved along.

But it certainly highlights a slight lack of control and transparency that comes with outsourcing (for lack of a better word) one’s software. Convenient and easy to administer? Absolutely. But imperfect in ways I hadn’t necessarily focused on prior to this misadventure.