This Time Will Be Different

Will Price of Hummer Winblad has a good post on how to navigate the coming economic downturn.

He accurately describes what happened in 2001 and 2002:

Valuations seemed absurd in retrospect, companies with no sales were
sitting on $50m-100m post-money valuations, $30m of paid-in-capital,
and absolutely no chance of raising money; save a complete restart. A
collective "what were we thinking" rolled through the valley.

He goes on to tie what may be coming in 2008 and 2009 back to 2001 and 2002:

None of us can predict the markets or future valuations, we all,
however, can understand fundamentals. Businesses that solve real pain
points with disruptive technology, a huge value/price advantage, and a
scalable business model will work – the kiss of death, however, will be
getting the capital structure ahead of those very same fundamentals.
Failure is often a function of too much capital and too high prices
suddenly running into economic expectations that are materially reduced
with respect to market size, market growth, and trading multiples.

survive, one may indeed need capital. The trick is to stay lean and not
to overfund and overvalue companies where the investment only "works"
if it eventually trades at 8x revenue and never needs another round of

It way well be that Slide raising $55m from mutual fund
companies at $500m+ pre-money will be the "what were we thinking"
moment of the current cycle. I think, however, the investor who leads a
$4 on $4m Series A in a company with a differentiated technology and a
direct tie to hard ROI will feel calm in the storm.

I agree with Will that overfunding and overvaluing companies is a bad idea. But I think it will be different this time in a few important ways. I do not think the answer is to rush back to the safe world of enterprise software and infrastructure investments. I do not think we’ll see VCs closing their doors to consumer focused companies.

What I think we’ll see is a flight to quality. Dollars will flow to the established players. If there’s a lesson to be learned from the $55mm round in Slide at $500mm pre, it’s that money right now wants to be with the winners. I don’t think Slide is at all like the companies we were shutting down or recapping in 2001 and 2002. The companies we shut down either had not attracted a customer or user base or had economics that just didn’t work.

So it’s time to assess what is working and what is not working in your business or your portfolio. Focus on the basics. Keep your costs down. Finance your company (or companies) intelligently and most importantly with money that will be around when you are no longer the high flyer darling of Techcrunch.

But don’t look backward for the right model to follow. Look forward.

#VC & Technology

Comments (Archived):

  1. Andy Swan

    Good points and advice. Especially ” Focus on the basics. Keep your costs down. Finance your company (or companies) intelligently and most importantly with money that will be around when you are no longer the high flyer darling of Techcrunch.”I think a lot of us in startup-land diluted the value of revenues and profitability a little bit….but nothing close to what was happening in 99.

  2. Erik Peterson

    The Slide funding has to be the most ridiculous thing I’ve seen in the past few years. $500mm? Seriously? This will turn out to be a very, very bad deal.The difference between now and 2000 is that it is only $55mm in a private round and not $200mm in an IPO. Also, there are only a handful of awful deals going down, instead of the majority of deals being awful ones.

    1. fredwilson

      For whom? The company or the investors or both?fred

  3. vinnie mirchandani

    Fred, while you write from an investment perspective, even from a buying/selling perspective, any slowdown in 2008 will be very different from 2001-2…see below…cheershttp://dealarchitect.typepa…

  4. howardlindzon

    blocking and tackling baby. yesss.In the private wrld it generally comes down to what you paid. much easier to overpay for stocks because of liquidity

  5. Moishe

    aren’t most of these companies that were funded (overvauled or not) at least profitable or en route to profitability w/ seemingly sound business models? we aren’t talking about or other crazy 90s dot com bubble companies that would never make money. so perhaps the investor wont hit a 10x on a particular investment but the chances for at least a single or double are betting odds. /

  6. Uday Subbarayan

    Like everyone, i couldn’t able to understand $500M valuation and the business model to make money. I am very interested to hear about how Slide will make company?Uday.

    1. fredwilson

      The same way that most web properties make money ­ advertisingThey have a huge amount of traffic

  7. Jeremy Chone

    Good point, however, I do think we still have a little 2001 deja vu, at least for some of the eyeballs focused startups.