Ron Conway, one of Silicon Valley’s most prolific angel investors (and he was also an early investor in Google), wrote an email yesterday to the CEOs of his portfolio companies. In no uncertain terms he outlines a bleak immediate future, and gives advice to his startups.
It’s the same advice, actually, that he gave in 2000 during the tech meltdown that was then happening in real time. Lower your burn rates to get at least 3 more months out of your current money, and raise money right now if you can. It’s very similar to what Sequoia (and other VCs, I’m sure) are telling their startups.
One thing Ron made clear in a conversation with me today. He’s not worried about the state of innovation in Silicon Valley, and he isn’t going to stop investing. He’s not pessimistic about the future of technology at all. What he is concerned with is protecting the portion of his portfolio companies who don’t currently have a large cash position to weather a storm, and he’s sharing his experience from the last downturn to help them through this one.
The full text of Ron’s email is below, along with similar emails he sent on April 17th 2000 and May 10th 2000.
——— Forwarded message ———-
From: Ron Conway
Date: Tue, Oct 7, 2008 at 12:12 PM
Subject: IMPORTANT PLEASE READ ASAP …..REGARDING CURRENT MARKET CONDITIONS…Confidential
We have all been absorbed by the turmoil in the financial markets the past few weeks
Unlike the turmoil of 2000 when the “action†was centered right here in Silicon Valley this time is it centered on Wall Street…..but it has rippled to the west coast quickly and we will not be “immune†to its drastic effects.
I was an active investor in 2000 when the “bubble burst†and remember it vividly and want to give you the SAME EXACT advice I gave to my portfolio company CEOs back then.
I have pasted in the emails I sent on April 17th 2000 and May 10th 2000 and every word applies today.
Unfortunately history DOES repeat itself but I hope we can learn from history and prevent the turmoil from occurring again.
The message is simple. Raising capital will be much more difficult now.
You should lower your “burn rate†to raise at least 3-6 months or more of funding via cost reductions, even if it means staff reductions and reduced marketing and G&A expenses. This is the equivalent to “raising an internal round†through cost reductions to buy you more time until you need to raise money again; hopefully when fund raising is more feasible. Letting go of staff is hard and often gut wrenching. A re-evaluation of timelines and re-focus on milestones with the eye of doing more with less will allow you to live many more days, and the name of the game in this environment in some
respects is survival–survival until conditions change.
If you are in a funding cycle, you should raise your funding as soon as possible and raise as much as possible but face the fact that if you can’t raise money now you must cut costs.
While I do not own a large percentage of your company I hope you will consider this thoughtful advice.
I was here in 2000 and want to share what I learned through many years of experience and historical “pattern recognitionâ€!
Here are the two emails from the year 2000 that I referred to above and all the statements apply in today’s market:
To: Angel Investors, L.P. Portfolio CEOs
Date: 04/17/2000 05:24 PM
From: Ron Conway
RE: Market Conditions Effect on Angel Investors, L.P. Portfolio
Companies
The down draft in the stock market sends us some obvious “signals†and we can’t help but mention them.
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!) ro 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.
—————————————————————————-
—————————————-
To: Angel Investors, L.P. Portfolio CEOs
Date: 05/10/2000 05:23 PM
From: Ron Conway
RE: Market Conditions Effect on Angel Investors, L.P. Portfolio
Companies
I want to “touch base†again; given the continued uncertainty in the capital markets.
As the market turmoil continues, we must underscore the advice that we have provided since mid April and it boils down to just a few points:
1) The capital market window is shut, including IPOs and VC Funding (VCs are looking at their existing portfolio funding needs - not new opportunities). Basically the market is now looking for PtoP (Path to Profitability) instead of BtoC, BtoB, etc! PtoE will prevail price to sales ratios! You must lower your “burn rate†to raise at least 3-6 months more of funding via cost reductions, even if it means selective staff reductions and reduced marketing and G&A expenses. This is the equivalent to ‘raising
an internal round†through cost reductions to buy you more time until you need to raise money again; hopefully when fund raising is more feasible.
2) If you have $10M or less in the bank you must do #1 above plus look at M&A options for your company; especially if your company is BtoC, content, advertising model, community, commerce, and even BtoB. An M&A transaction will allow you to gain critical mass and to get two sets of funding sources and rolodexes working on your behalf. M&A transactions take over 90 days so you need at least that much cash to fund your company. You must attend our M&A day on May 24th at the San Mateo Marriott at 3:00 PM. We will have investment banks there in addition to entrepreneurs who have
successfully accomplished M&A transactions. We will send you details.
We are still developing many new funding sources for our portfolio companies that are in funding cycle.
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