With this week’s bloodbath in the stock market epitomized by headlines from BusinessWeek like “The Sky Falls on Wall Street“, famed angel investor Ron Conway and big name VCs like Sequoia warning portfolio company CEOs of the huge iceberg immediately ahead, what are entrepreneurs to do to keep spirits up and look alive?
I found this post dated last January by Will Price, CEO of Widgetbox particularly insightful. Some excerpts below.
Times are bleak, but the sky is darkest before dawn. Great companies that succeed in adapting to this harsh weather will be one of the strongest built:
If I take the last downturn as my guide, I can say with confidence that venture investors would be well suited to continue to invest right through the downturn – in 2002 and 2003 terrific companies were formed and funded at very reasonable valuations and with business models that reflected the demand for capital efficiency and economic viability.
Like Occam’s Razor, recessions whittle away unnecessary and non-value-added businesses and the capital, purchase order, and resource scarcity inherent in downturns forges companies of real substance and durability.
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However, history suggests that capital efficient companies solving well-characterized pain points will continue to be great investments. Valuations, input costs (labor, rent, services) will fall, and future returns will show that 2008 and 2009 were great years to do start-ups. Similarly, in early 2009, as the consumer start-up market finds itself cut off from funding, it will be pay to make bold and brave investments in the consumer space.
Entrepreneurs building a business during these times should well, focus on the business fundamentals. You can’t control the weather, but you can control how you build your business. Given the weather, a solid foundation is must. That means a real product that solves a real problem that real people would want to dive into their wallets to pay you:
None of us can predict the markets or future valuations, we all, however, can understand fundamentals. Businesses that solve real pain points with disruptive technology, a huge value/price advantage, and a scalable business model will work – the kiss of death, however, will be getting the capital structure ahead of those very same fundamentals. Failure is often a function of too much capital and too high prices suddenly running into economic expectations that are materially reduced with respect to market size, market growth, and trading multiples.
On going back to the fundamentals of a solid business:
None of us can predict the markets or future valuations, we all, however, can understand fundamentals. Businesses that solve real pain points with disruptive technology, a huge value/price advantage, and a scalable business model will work – the kiss of death, however, will be getting the capital structure ahead of those very same fundamentals. Failure is often a function of too much capital and too high prices suddenly running into economic expectations that are materially reduced with respect to market size, market growth, and trading multiples.
I agree with the general assessment of this statement, although Twitter isn’t exactly the perfect example to illustrate this point. Granted, if you are broke, you better focus on doing things to get out of being broke, but if you have a truckload of cash and being profitable is a “nice to have” .. then oh well, you can do whatever you want on your own time.
At least from what I understand anyway, Evan Williams already made a bunch from his Blogger/Pyra Labs acquisition and is in no hurry to make more money. As for Twitter investors, they aren’t either. Twitter is funded from Odeo’s funding; the latter company has already been written off as “dead” – and unlike VCs, angels don’t have fiduciary duties and thus don’t have to “go after” that money.
Ron Conway himself once said that the lack of fiduciary duty makes him more productive and thus has no interest in moving to becoming a VC. Super angel investing is just fine 
