Startup Depression Suppression

Back in July Jason Calacanis said he was retiring from blogging and starting a private mailing list.  Well the retirement turns out to be a bit Bret Favre style.  Over the weekend he sent out an email entitled “(The) Startup Depression” which drew a great deal of attention and led to him posting the content on his blog.

It’s both a rambling and greathearted article.  A worthy read.  And one that I can best supplement by book ending the beginning and end.

Jason started out by stating:

“It’s my believe that the economic downturn will be much worse than it
is today, and that 50-80% of the venture-backed startups currently
operating will shut down or go on life-support (i.e. 3-4 folks working
on them) within the next 18 months.

Make a list of every Web 2.0 startup to raise an A or B round and
cross 80% of them off the list, because they will not make it to their
next round of funding or profitability.”

HE ended with a must read top ten list of specific things that an entrepreneur should do in trying times closing with:

“Raise money: I know I said above most folks won’t be able to raise
money in the down market, but that’s not because the money isn’t out
there–clearly it is. The issue is that the big money out there
doesn’t want to fund small ideas that are in the death spiral. Build a
plan based on revenue and taking market share and folks will consider
funding you.”

I completely disagree with Jason’s first assertion and agree totally with the last.

My take on the startup funding marketplace is that you are going to see the same things in this asset class that you see in all asset classes during cyclical downturns.  A flight to quality.

If you are an entrepreneur running a venture backed startup you are going to have to prepare your team to weather the storm.  Cut costs.  Find customers.  Tightly execute.  Do this and do it well and your VCs will have funds in reserve to see you through the rough seas.  VCs are going to batten down the hatches and start playing things more conservatively when it comes to new deals so that they have the dry powder they need to keep their current good deals going (assuming that their limited partners are willing to make their capital calls and that may or may not be a safe assumption at this

If you have yet to make it to the venture stage of life things might be a bit tougher.  Individual angels are hurting.

To explain via an example let’s say that angel Jill Rich had investable assets of $10 million entering 2008.  Of that Jill had set aside 5% of her portfolio or $500k.  Over the past four years she had invested $200k with $200k reserved for follow on and was looking to put another $50k to work this year.  But Jill has a problem.  That $10 million is now only worth $8 million.  So Jill has gone from being under allocated in her angel investing asset class by 20% to being fully allocated in the asset class.  She has no room for new investments.  Repeat this over and over again with angels and all of a sudden you have them not making any new investments.

Angel funds are a bit of a different situation.  They behave like VC funds.  The ones that I have talked to are merely looking at a exit time horizon in the 7 – 9 year range versus the 5 – 7 year range they were thinking about in early September.  Like VCs they are going to get a little more conservative too.  But they will keep investing.

So things are going to get tough.  New technology startups will be able to get seed.  But only the those with truly superior concepts and management.  Big ideas will continue to garner venture funding, there is too much money out there for that not to happen.

The next two years are going to require focus, something that I preach in both good times and bad.  They are going to require the courage and honesty that Jason reflected in his post.  And the resiliency that he and countless other entrepreneurs have demonstrated over the years.

Perhaps the biggest issue that I have with Jason’s musings is this; there’s nothing to be depressed about.  I can’t predict or control what is going to happen in the broader economy.  To win in a down market all I can do is get up, go to work, and move things forward in a way that attracts interest.  Interest from employees.  Interest from customers.  Interest from investors.  Big interest.

For entrepreneurs there is never time to be depressed.  There is always time for realistic optimism, good business thought, and execution.  And that is now you win in any market be it up or down.

October 1, 2008  |  Comments  |  Tweet  |  Posted in Angels, Entrepreneurship, Startups, Venture Capital