The Silicon Valley blogs have been buzzing over the last few days with details of a number of presentations and letters to hi-tech companies by their venture capital backers. These presentations were designed to inform CEOs about the outlook for the economy, and share the experiences and advice of the investors - all with the intention of helping their companies survive.

I'm going to summarise them here, because they give a very interesting and insightful perspective - and some great advice.

Sequioa

Sequia Capital is possibly Silicon Valley's most respected venture capital firm. They've backed many of the web's best-known companies from their first steps.

Last week they held a meeting for the CEOs of their investee companies - with the intention of delivering a short sharp shock.

Here are the slides from the presentation:


The analysis in here is fantastic - and well worth studying in depth. But the key messages are:

  1. This is not a short term problem. Prepare for tough years rather than months. Don't expect bumper good times to return for 15 years.
  2. You need to make sure your company is cashflow positive.
  3. You need to cut costs (but smartly - my addition), reviewing salaries, using commissions and other performance incentives - and using zero based budgeting (more in a later post on this).
  4. Focus on only the genuinely valuable and likely sales in your pipeline, get rid of the noise.
  5. Spend every dollar as if it were your last.

Benchmark Capital

This VC firm has lots of similar advice, but it was particularly interesting to read them quoting a CEO they know who went through the dotcom crash...

Recently, I spoke with an entrepreneur who as a CEO during the dot‐com crash and oversaw a headcount reduction from 130 to 28 (through two major layoffs), and eventually back to profitability and an IPO. If you think a 10% layoff is tough, imagine laying‐off 78% of your employees. It is one of the hardest things I have ever seen anyone do. I recently asked him how that experience has shaped the way he ould advise people on running a startup. He had a list at the tip of his tongue (included now):

1. You don’t realize how fast things spin out of control. There are self‐reinforcing negative affects in a downturn.
2. Don’t spend money until you have to
a. Don’t move out of your office until you are sitting on top of one another
b. Don’t hire any incremental employee until you just can’t stand it
c. Don’t get more capacity in your data center until your site is going down
3. Better to be “late to the party” than to be early and run out of money
4. Line item review of the budget every month (legal, accounting, everything)
5. Not just a CEO mindset, but a company mindset
a. Everyone must buy into the process
b. But in a calm way - not run for the hills
6. Create 2 or 3 different burn scenarios - know at any point in time how many months of cash is left.

Ron Conway

And finally, angel investor Ron Conway sent these emails to the companies he has stakes in.

In summary

All three of these experienced investors give similar advice - essentially:
1. Cut costs wisely
2. Plan for this lasting a long time
3. Don't expect to be able to raise outside funding
4. Watch the cash flow like a hawk!
5. Act quickly

I'll be writing more blog posts soon about the economic situation and what it means for entrepreneurs in terms of threats - and opportunities.