Tech Capital Partners Blog

By now most everyone, including yours truly, has seen the Sequoia 56 slide missive on the current state of the VC market: R.I.P Good Times

And you probably have seen:
Ron Conway: Cut expenses now
Benchmark: Conserve Capital

Whether you are funded or embarking on fundraising, these are very well argued essays on capital management that might inform your approach.

I hesitate to add the following link because of the gratuitous use of the F-bomb, so be forewarned. However, Dave McClure does add an interesting counter perspective to the discussion

Dave McClure: Fear is the Mind Killer of the Silicon Valley

I concur with the need to focus on efficient deployment of capital. However, I would argue that there is an important difference in the Canadian VC market…

We have been living in a low liquidity market for 2 to 3 years.  At this point, liquidity in the Canadian VC market is lower than I have ever seen it and the specter of the formation of new capital pools gets bleaker by the day.

Attracting capital today is a monumental task.  A build it and they will come, “Field of Dreams”, strategy based on a solid dose of hope is not the kind of plan that would attract a lot of attention.

Companies that have been funded need to recognize that subsequent rounds are not an entitlement.  In fact, it is not necessarily the case that the existing syndicate will be ready to support you.  As we have seen over recent history, when a VC fund finds it has less capital than anticipated it will triage the portfolio in an attempt to allocate cash resources to the perceived winners.  At times, VC funds can use pretty crude metrics to make these decisions which do not necessarily take into account the fact that in technology the path from A to B is never a straight line.

The immediate reaction may be to reduce burn, which of course is pretty easy to do. You might not have much of a company left after blindly cutting costs but it can be  done.  Certainly, one wants to come out of the other side with a strong position in the marketplace rather than being the company that blew its lead due to timidity.  However, slide 49 in the Sequoia presentation is a sobering diagram.

So here is the question I think we all need to be asking:

How do you balance capital conservation with business priorities?
These discussions need to be held at the management level, at the board level, and with the investors.  It is likely there won’t be general agreement so a consensus will need to be built.

Obviously, the specific tactics will differ for every situation.  However for venture backed companies good shareholder management will be a key success factor.  For this, I can offer some general suggestions:

• Be realistic:
  • Your customers will change their buying patters.  Have you included this in your analysis?
• Over communicate with your investors:
  • Nothing is more frustrating than a portfolio company that only reaches out to investors when they need money. Failing to communicate puts your investors on the defensive immediately. If your VCs are half as “value add” as they told you they would be when they invested, they should be able to provide some very good input.
• Set expectations early:
  • Don’t be unnecessarily negative, but now is the time to deliver the bad news. Lay a realistic foundation as a basis to move forward. Setting this baseline now will hopefully keep you from having to spend half of every future meeting explaining missed targets that aren’t realistic in today’s market.
• Determine the ability/appetite of your investors to continue supporting you:
  • Selling your investors on your company is a continuous process.
• And last but not least, be upfront.  And ask your investors to be upfront with you.

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