Downturns

The morning paper this morning is not a pretty picture.

New Orleans is flooded.

Large swaths of the southeast are down and out.

Energy prices are spiking.

The war in Iraq shows no sign of ending anytime soon.

Interest rates are headed up.

The housing boom is showing signs of ending (finally).

We have a federal budget defecit that makes my head ache every time I think of it.

And our trade defecit shows no signs of abating.

Ugly, ugly, ugly.

And yet we’ve had an abundant supply of capital for early stage businesses for the past several years that has led to the formation of many new companies.

What if that capital supply tightens?

What if we have a recession in 2006 like many economists are now predicting?

What if risk premiums return to normal levels?

These are the questions on my mind this morning.

Fortunately, I’ve lived through a few downturns in the venture business.

The worst by far was the 2001-2003 downturn which was brought on by the burst of the internet and telecom bubbles and made much worse by 9/11.

But I started in the business in the mid 80s in the midst of the post PC bubble downturn.

And I witnessed the bursting of the biotech bubble of the late 80s/early 90s and saw how hard it was to finance a biotech company in the early 90s.

And even during the Internet boom period from 1996 to 2000, we had a period after the russian debt crisis where capital supplies tightened significantly.

We are surely going to have another of these periods at some point, and given my read of this morning’s paper, I am concerned that it might be just around the corner.

So what to do?

First, remember why you made your investments in the first place.  Go back and read the investment memos.  If your thesis remains sound, don’t panic.  If you had no thesis and were doing momentum investing, you’ll probably have your head handed to you and you deserve it.

Second, talk to your companies. Make sure they have a plan B for their capital needs. 

Third, talk to your co-investors.  Make sure they still believe in the company and are going to be supportive.

If all of these factors are postive, then keep your head down and execute.  Deals will take longer to close.  People will become risk adverse.  Plan accordingly.  If you need to slim down, do that.  If you need to put off that big 10 year lease, do that.  In fact, do that no matter what the situation is!

Downturns can be a period of incredible opportunity. 

I look at the Flatiron portfolio and the companies that hunkered down and built businesses in the 2001-2003 time period came out of that experience with some amazing businesses.

It takes tenacity, skill, experience, and facing up to hard decisions when the downturn hits.

It is probably a good time to take measure of your company, your team, and your plans to make sure you are prepared for the downturn.  Because its going to come at some point.