Entrepreneurs, Venture Capitalists Gather to Figure Out What the Heck Happened

Posted by: Rob Hof on October 29, 2008

… and what comes next. Crowded into a small meeting room in a Silicon Valley hotel this morning is an overflow gathering of entrepreneurs at VentureBeat’s Downturn Roundtable. They’re here, at $189 a pop, to talk about how the market meltdown and continuing financial crisis is affecting entrepreneurs and their startups—a crisis that has prompted several VC firms to tell their firms to cut back, which they’re doing with alarming speed.

I’ll be liveblogging the panels. First up is a panel of topnotch VCs and angels, moderated by VentureBeat editor Matt Marshall, after the jump.

John Doerr of Kleiner Perkins notes the obvious, that the world has changed, but says it's clearly more than subprime mortgages that are the root of the problem. He says it's nothing less than a crisis of confidence in companies, government, and the financial markets. "It's really hard to predict what's going to happen."

Kittu Kolluri, a partner at VC firm NEA, says the firm will continue to invest at a "regular pace," but it will be much more careful in choosing its investments.

Matt Cohler, recently departed from Facebook to Benchmark Capital, says being conservative makes a lot of sense--but he defines "conservative" partly as "You shouldn't panic."

Ram Shriram, an angel who invested early in Google, sounds the most downbeat. "This is no normal business cycle. This is a crisis of confidence. This is one (recession) that will take a long time to work out. We've lived in a world of free capital for so long," but no longer will "every idea in Silicon Valley" get funded. "This is one (time) to hunker down and cut costs deeply. This model of growth at all costs, with no revenue model, is no longer...."

Uber-angel investor Ron Conway says the crisis didn't start here as it did in the dot-com crash, but the Valley will feel the effects, perhaps deeply. "the entrepreneurs that act proactively are the ones that are going to survive this."

What if a company has only a few months of cash left? Conway says getting acquired is the only solution if they can't get more money. Actually there's another solution: Shut down. But he says unlike in 2000, VCs are continuing to invest fairly actively. "The venture capital community is not shutting down."

So what can entrepreneurs do to avoid the grimmest scenarios? Cut costs so you have a year and a half of runway, and get a bridge loan to shore up finances. So there you go: Investors are assuming at least a year and a half of pain here. I wonder if that will prove to be a little optimistic.

Doerr has 10 pieces of advice for entrepreneurs: "Use a scalpel instead of an axe. Get 18 months or more of cash into the business. Defer any facilities and expansions and be really frugal with capital expenses, put that stuff off. Re-prioritize and re-rationalize R&D. Renegotiate (with suppliers). Sell (that is, spread the word on the company as widely as possible). Pay attention to where your cash is (put it in the most secure financial instruments, like Treasuries). Overcommunicate--with employees, investors, customers."

Conway ads: "Be open-minded on M&A, and move fast on M&A. We have six companies that faced the fact, and I bet four of them will have successful transactions."

Cohler chimes in: "Avoid long-term spending commitments. None of us know how long this is going to last."

Conway: "Don't think your lease is sacrosanct." In 2000 or so, about half the time, his companies were successful in getting lease breaks.

Now questions from the audience: Why did the Valley tech community rebound so well from the last downturn?

Conway: "We will never stop innovating here." Kolluri: Being cash-constrained forces startups to find the right business model." Conway: He's still seeing five startup opportunities today. "So innovation in the Valley is not slowing. If I was seeing fewer than five a day, I'd be worried."

Doerr in response to a question on whether venture capital firms' limited partners will be able to meet their capital commitments notes that there is a lot of venture cash around, so he doesn't seem to see a big problem there yet.

OK, a break now. Entrepreneur panel is up in a half-hour.

OK, now the entrepreneur panel. Moderator Kara Swisher of the blog Boomtown asks what the biggest mistakes people made during the last boom. Toni Schneider of Automattic, creator of WordPress, says his biggest mistake was not panicking enough last time. Pretty much the same story for Nirav Tolia, who cofounded epinions, and Jason Calacanis, who had Silicon Alley Reporter and now heads Mahalo. Calacanis says his big mistake was not laying off the right number of people the first time. Max Levchin, founder and CEO of Slide, says his mistake currently is not having a cofounder to help handle everything.

Kara asks why entrepreneurs often don't recognize when their company isn't working and they're spending too much for the current level of business. Levchin says it's human nature. He also says it's key that at least one of the founders of a startup is inherently frugal (often immigrants, he notes).

Are VCs really helpful? Kara's skeptical. Levchin says they're good mainly if they're supportive of entrepreneurs even if the startup needs to change direction. "Most funds are probably in the tighten-the-belt mode." Schneider says the most unhelpful investors are ones constantly giving you advice you've already thought of.

Calacanis says it's understandable VCs have suddenly changed direction in what they're telling entrepreneurs to do: "The world has changed very quickly in a very fundamental way. John Doerr is a f-ing genius and he's perplexed. This is a rare moment in time." He suggests not putting too much stock in VCs and what they say; entrepreneurs should keep their own counsel.

Tolia disagrees, saying investors in epinions saved the company (which ultimately was acquired by Shopping.com, which eBay then bought).

Calacanis says this is a great time to start a company because there are more people available with time on their hands to try new stuff. He thinks, as he said in a recent post to his email list, that more people will spend time on online games and other community-oriented and social experiences. (I'm not so sure about that. If you're out of a job, you're going to be spending a lot of time looking for another one, not playing games online, methinks.)

After a long windup, Levchin says he has changed his bearish view that the credit crisis would stunt the creation of startups. He now thinks the entrepreneurial spirit will win out even with less investment money available.

Schneider's also optimistic about the downturn creating time for people to try new things and allowing startups to run more lean because talent won't be quite as expensive. These guys are entrepreneurs, for sure--optimistic to the last dollar.

Calacanis says you'll know the bottom is here when Google lays off people, which he thinks will happen.

Kara asks if these guys see big companies like Google, Microsoft, Yahoo, and the like to be a fertile source of buyouts for startups. Calacanis doesn't think so.

One tip for what entrepreneurs should do? Levchin: Be contrarian, so hunker down and build a company. Paul Sieben of law firm O'Melveny & Myers: Have a backup plan. Tolia: Overcommunicate with employees even when there's bad news. Calacanis: Focus on the product, turn off CNBC, don't watch the Dow. Focus on the instrument panel (page views, visitors, etc.) and everything will be fine.

Questions from the audience: Any tips on how to keep the intellectual capital in your company fresh? Levchin: Don't be afraid to go out and recruit good people, though you need to be more careful. Calacanis: "This is when talent shifts and you can grab them."

Q: What are you guys doing to MAKE money, as opposed to cutting costs? Levchin: 95% of the companies in this room, if you look at their profit and loss right now, most of the money is being spent on humans. Firing humans is essentially like lopping off fingers. So much better to make more money than cut costs. More specifically, he thinks entertainment is going to be appealing in this economy--especially if they're cheap but people want to do them a lot, like movie tickets during the Depression. Today, direct consumer payments like premium games or virtual goods.

Tolia notes that performance-based advertising, like cost-per-click ads such as search ads, are still working well. Calacanis notes that huge ad agency WPP wants 50% of its spending to be on performance-based ads, vs. 25% now. "There's going to be a flight to measurable media."

Last question from Kara: What will be the next big thing? Levchin: mobile. Sieben: cleantech. Schneider: personalized search. Calacanis: trust-based services and expression-based services. But biggest will be a new device that's a little bigger than an iPhone screen for games and other social experiences.

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