Prudent Advice for Startups as We Head Into a Downturn

It’s no secret that the global economy is in for some tough times, and no category of the economy feels the pains of a downturn more than startups.  With that in mind, I thought I would share some prudent advice that veteran investors are giving their portfolio companies as we head into this downturn.

Advice from renowned angel investor Ron Conway in an email to his portfolio companies (originally sent at the onset of our last downturn in 2000):

1. If you are in a funding cycle, you should raise your funding as soon as possible and raise as much as possible.
2. Many companies are ignoring certain VC leads we’ve provided in order to concentrate on the top tier only. While we have preached that in the past, this is no longer the case. Currently, top-tier VC bandwidth constraints, coupled with the market down draft, make it very important to take meetings with any VCs where you can get their attention. We have been working hard to open up this new bandwidth.
3. You must aggressively examine and pursue M&A opportunities (unless you have over 12 months of cash reserves!) to insure you have critical mass (including funding, customers, rolodex power, market share, cash, synergy, etc.).
4. Be realistic on valuations – they will fall so be ready and willing to co-operate.
5. Look for corporate partners to invest so you can raise more money. You should also consider a sale of your company to your corporate partners.
6. If you are entering a funding cycle start raising money sooner rather than later.
7. While it’s safe to say entrepreneurs have had negotiating leverage with the “down draft” in the market, the VC community will start exercising their leverage.

Conway’s email went on to stress the importance of companies’ Path to Profitability (PtoP), which I think is the most important take home message.  Cutting expenses, extending runway, and executing on (or at least showing) a clear path to profitability are of paramount importance for startups as we enter these difficult and uncertain times.  This stresses the importance of building a doomsday operating plan that outlines the knobs that can be turned if revenue slips and runway needs to be extended by judiciously managing expenses.

However, this does not mean that innovation should take a back seat to financial solvency.  Rather, companies must accept that the revenue opportunities that they have built into their operating plans will not be what they assumed – as consumers, enterprises and advertisers will all be dialing back their budgets.   But talented people pursuing innovative and sound business ideas should always be able to find funding – the catch is that business plans must make sense under assumptions that may have seemed almost draconian just a couple of months ago.

To end on a less pessimistic note, there is one thing that is important for technology startups to remember…  Unlike our last economic downturn, the technology industry is not in the eye of this storm.  This downturn is a Wall Street driven phenomenon, which must be kept in mind when drawing comparisons to the early 2000s.