Five Years Too Late

September 19, 2008

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.

Reblog this post [with Zemanta]

September 8, 2008

Five Years Too Late

Filed under: venture capital — Tags: , , , , — fiveyearstoolate @ 6:19 pm

Welcome to our blog, Five Years Too Late. What are we doing here?

In 2003 the venture capital industry started blogging, opening up the kimono just enough to give entrepreneurs and others insight into how this traditionally opaque industry works. VC blogs shared investors’ perspective on different sectors, how to pitch your business, trends in the economy, and what they look for in a founder.  In the five years since, dozens more VC bloggers have jumped into the fray, to the point now where there is even a consolidated RSS Feed that aggregates 84 different VC bloggers.

So why start a VC blog now, in 2008, and what are we looking to say with this one?

First off, we think that 2008 is pretty similar to 2003 in some important ways, and like that year represents a good opportunity to start some conversations. In 2003, we were collectively about 3 years into the “nuclear winter” that followed the excesses of the 1990s. The robust IPO market had disappeared, funding was harder to come by, and people dismissed the businesses that had been such darlings just a couple of years before. Today, as then, there is a drumbeat growing louder and louder telling us that technology, venture capital and the economy (particularly here in New York) is dead. That many of the companies the venture industry invested in these last five years (“Web 2.0”) were just another bubble, and that many of the companies being funded today (in Cleantech) are the next one.  We think at times like this it’s more important than ever to ensure that clear voices are heard. Plus, we disagree with a lot of that stuff, but think the discussion is one worth having.

Secondly, we think New York is really hitting its stride as a technology nexus. As a New York City venture capital fund these past fifteen years, we’ve watched the community here grow in fits and starts, and are genuinely excited about the companies being founded in our city. We are very focused on helping build out the ecosystem here, and will be spending time here talking about what we’re seeing as New York (“Silicon Alley” if you like that sort of thing) continues to develop as an entrepreneurial community.

This blog will have two voices. We work together as investors here at RRE Ventures, but have distinct voices and points of view. Most often we’ll write together and blend our thoughts (we’ll see how that goes…) but from time to time you’ll hear one or the other of us independently, as the mood strikes. Just by way of introduction:

Stuart Ellman: I co-founded RRE when I was 27.  That is probably too young but now I have 15 years experience and I am only 42.  I have been through all of the bubbles and busts, have invested and founded B2B, B2C, enterprise software, hardware, in the cloud, as a service, tools, software platforms, testing devices, incentive systems, wireless companies, semiconductors, mobile platforms, payment platforms, and some really cool clean tech companies. I have had really great years and some that seemed like a black cloud was following me.  I have never seen the venture industry as unsure of its future as now and the time just feels right to blog out my thoughts.

Eric Wiesen: I was an entrepreneur in college, then a Silicon Valley lawyer, and then an entrepreneur again after leaving the law but prior to moving to New York, getting my MBA and joining RRE Ventures. I am hugely optimistic about and excited by the possibilities of the web, mobile technology and distributed computing and media, but at the same time I’m something of a skeptic. You can find me at most NYC tech events, or follow me in the various webby ways available today (see my tumblr, follow me on twitter, or connect on LinkedIn).

Welcome to Five Years Too Late. We’ll be around, talking about tech, VC and New York. Happy to have you.

Blog at WordPress.com.