Silicon Valley VC firm Sequoia Capital has a fabulous presentation to scare the bejesus out of their startups on what the current financial crisis means for their fledglings.
While I don’t agree with all of it, it’s got some excellent economic analysis in it of the real reasons there is a very real and serious problem at the moment and why it’s going to be hard for new companies to borrow and in general why we’ve all had perverse economic incentives to take on debt rather than save (I notice it missed deregulation in there, but hey, no one’s perfect).
It’s good and explains some very complex issues reasonably simply (hey, you didn’t want someone with an economics background like me presenting it, trust me) and if it doesn’t make some startups batten down the hatches, start cutting expenses and try to eek it out for a while, I don’t know what will.
Their bottom line : It’s not a normal downturn and recovery will take quite a while. I love the slide, Get Real or Go Home as a conclusion.
I’m not sure I really believe Sequoia really thinks things are this bad, but having the presentation out there probably has put the fear of God into some startups whose burn rates have been something like it was in the 90’s.
Interestingly, the most inadvertent reaction came from VC watcher TechCrunch who had the Post line “Profit Maximization V. Survival Maximization”. While the article was focusing on the role and blame a lot of VCs have (I believe) incorrectly pinned on VCs for the downturn, I thought the headline was a more basic question that I thought a lot of companies should have been asking themselves a while back. Sure, you need a balance of both, especially if the question of shareholders enters the picture, but the fact is a lot of companies have been, for a while now, confusing profit maximization with survival maximization and a lot of them are probably going to be treated unkindly by the increasingly likely recession coming on.
Long term view, stick with the three rules of why you should be starting a company :
- You can do something no one else can do
- You can do something better than anyone else can do (and defend your ability and advantage to do so)
- You have a particular insight into consumers or businesses you can capitalize on better than anyone else
You’ll notice that these are all based on survival maximization rather than profitability.