Lots of people with thoughts about how manage there way through the current financial crisis. I have my own thoughts but plan on sharing them at another time. Regardless, Charlie O'Donnell had a great post about how his company is weathering the storm and thought I would reblog it here (and for the record, I agree with every word of it):
Any startup that needs to severely "buckle down" now or any VC firm that needs to do a 180 on their investment strategy wasn't doing it right in the first place.
From the day we took our first investor checks, we've been operating in emergency cashflow management mode--not because we thought the environment was bad, but because of the following:
1) We didn't raise too much money--$350k.
2) Building a new service is hard. The longer you can last, the more features you get to, the more traction you'll have, and the more time you'll have to fix the mistakes you're sure to make.
That makes it a simple equation: Spend less, survive longer, live to die another day.
How do we do that? Well, there's the way we've been doing it all year:
- I teach two entrepreneurship classes on the side to make ends meet.
- We run on four servers we got for free... Two we got from a friend at a startup that blew up and two we got through a big hardware company who seems to have forgotten about the fact that we have them. Lately, we've been asking companies we know who may be upgrading to see if we can grab a few more.
- The servers sit in a old rack we wheeled from 14th and 8th to 23rd and Park when we took it off the hands of someone giving it away on a Unix user list. We now know how many city blocks server rack wheels are meant to travel. The answer is about half the distance to our office.
- We squat rent-free in the small back conference room of one of our investors--soon to be moving into a smaller office across the floor. We're just grateful--we'd work out of the coat closet if they asked us.
- We run some third party software in our stack that would otherwise cost us about 50k/year. We got that we got for free in exchange for kicking the tires on it and getting the company some data.
- When we travel to the West Coast on fundraising trips, we crash with friends instead of staying in hotels.
- We incentivized our developers when we hired them to forgo some current cash compensation for either additional compensation after our next financing or additional equity--and gave them the choice of how much they wanted to do that.
What I'm saying is that, even before the gloom and doom, we watched every penny and saved where we could.
And now, we're out fundraising for our first venture round. If you read the echo chamber, you might think all the VCs have packed up shop and gone home. We've been out talking to VCs and we've generally heard some pretty level-headed thinking. They want to make sure that our burn rate plans are reasonable and that we're giving ourselves enough of a runway--but that's really something they should always be thinking about, right? Good investors have had multiple funds over many cycles and will continue to put money to work in a time-diversified way.
Our current fundraising round is meant to take us from four to eight people (not twenty eight) and give us a full 18 months of running room... And that was also the plan long before the doom.
Anyone who splurges on big fancy offices when they don't need 'em, or who takes ridiculous salaries as founders probably deserves to go under. As Gary Vee said, "This isn't a party. We're building real businesses here."
I think this whole doom and gloom thing is a farce. I mean, don't get me wrong, Sequoia has an amazing track record but they also find a way to stuff 5 million into every first round that they do. Companies should be ultra conservative about cash anyway... The idea that suddenly companies now need to do a 180 on strategy means something was wrong to begin with.
At worst, most companies should need an extra round of financing to weather an additional 18 months. As long as your previous rounds were priced reasonably, this shouldn't be a tremendous issue--certainly not catastrophic. Unfortunately, that's not the case for a lot of these companies. Many, financed by the same VCs that are most likely to sound the alarms, cut off their flexibility by capitalizing at too high a price or ramped up too fast. If you've raised over $10 million, have a headcount over 30, and you don't have a stable revenue stream yet, well... your shipment of fail has just left the factory.
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