Lessons From The Last Crash

Crash It’s pretty rare that during a crash and recession there are employees and managers with recent experience on how to handle the situation. Well, the “good news” with the Great Depression 2.0 is that a whole bunch of us have relatively fresh experience.  Last time the financial grenade went off in our lap.  This time, we’re collateral damage, which means it should be less painful assuming similar size crashes (which is looking less and less like a valid assumption).

In any event, here are some lessons I learned from the last time through this mess:

  1. Cash is king.  In the startup world there is a giant “scale of justice” with capital on one side and ideas/execution on the other.  Depending upon the macro environment the relative value changes and right now cash is king and ideas/execution are cheap and getting cheaper.  Some investors will be faster than others to take advantage of this, but over time all will.  Valuation and terms will be far less favorable to entrepreneurs (here’s a good article on what terms will deteriorate).  If the last bubble is any indication of how much, look for 50%+ decline or more that will come over the next 4 quarters.
  2. Survival is relative.  The company may survive but the cap table is unlikely to.  That means that Common (mostly founders) are going to get squeezed out.  Employees that remain with the company will get refreshed.  Going forward, if founders stay with the company, they will get compensated as employees (via option refreshes after Draconian recap rounds).  As a founder, you have to go through your personal ROI…most will find that it’s best to stay but some won’t.
  3. Cutting costs is a tactic, not a strategy.  Most of the venture world is ignoring the forest to focus on the needles on the branches of the trees. This is necessary but not sufficient.  Like they say, the first thing you do when you find yourself in a whole is to stop digging. Ok, fine. But that won’t get you out of the whole. If you are burning money, quickly do your layoffs and and then get back to figuring out how to make money off this opportunity…how to get out of this hole.
  4. It’s darkest before it goes totally black.  Hope is around every corner. Entrepreneurs by their nature are optimists and you have to sell hope, but don’t do it if it’s not grounded in reality.  Now more than ever is a time to be a pragmatist.  If that’s not your constitution, find a colleague or board member who has it and use them as a sounding board.
  5. Cost savings sell.  If the past is any clue, then what will really sell in the next couple of years is cost savings.  I was in a board meeting a couple weeks ago for a company that sells a solution which helps large companies cut their telecom expenses.  One of the board members is a a Fortune 500 CIO and his point was that the prospects of the company were never better…the world is clamoring for cost cutting and that’s exactly what we’re selling.  Forget pitching your value as better service or more revenue.  Eventually people will come around, but right now it’s better to sell what people are buying and what folks are buying right now are cost savings.
  6. There is no exit strategy.  Unfortunately the only exits in the next couple of years will be asset sales and wash outs that return pennies on the dollar to Preferred and little or nothing to Common.  So unless you have a deal that is closing tomorrow, plan on living off existing cash for the foreseeable future.

Most people will tell you that unless you already have angel or VC funding today, there’s no chance of raising money in the short term. They continue by saying that these angel- or VC-backed firms are the “lucky ones.” Maybe.  I actually think that the folks who have a business buy don’t have the pressure of lots of shareholders, a big board and a high burn rate are the real lucky ones.  Remember that these venture backed companies may actually survivie, but the real question to ask is which companies are most likely to have a good return for Common.