Are Venture Backed Companies Going Off a Cliff?

Leave it to Jason Calacanis to stir things up over the weekend.  In his latest email missive, Jason suggests the collapsing economy will cause 50-80% of all dot coms to go out of business over the next 18 months, and then went on to outline 10 recommendations for managing a business.  While the advice was generally valuable and straightforward (i.e., get the right talent on board, eliminate poor performers, find a revenue stream, execute better, etc),  Jason was skewered by a number of folks for: a) suggesting the cause of this "depression" will be the economy when in fact over 50% of start-ups fail anyway; and b) not recognizing that the bottom of the market (or even on the way down) is exactly the right time to be investing in companies (I actually think Jason agrees with this, but his note had a little panic element to it that seemed to rub people the wrong way).

This weekend's discussion has really been building over the past few weeks.  Benjamin Kuo of socalTech.com, recently blogged about additional risk in a post titled "Watch out for that Cliff".  Then, over the weekend Scott Sassa and the Uber team shuttered their social network.  In a posting on their website and an email to their subscribers, the team said: "We have some bad news. The crisis in the economy has claimed Uber as its latest victim".  Interestingly, Rafat Ali over at Paid Content isn't buying Uber's claim.  Instead he suggests: "Blaming the economy sounds like sour grapes here, if you ask me. While investors pulling out in a depressed economy is not uncommon, the fact is that the service was as me-too as any online social media/publishing service can ever be. That coupled with a tiny audience and no differentiated way to scale revenues did it in."

Like most things, I think one can look very practically at these times and observe the following: money will tighten as venture firms become more selective about their investments, it becomes increasingly important to focus on solving big problems / opportunities and as a business manager it is even more important to focus on the fundamentals (i.e., getting the right people on board, building the right partnerships, driving revenue as quickly as possible while managing costs, plus just about every other MBA 101 tactic).  If nothing else, tough economic times do not change the venture capital game, instead these times just reduce the margin of error.  You may be given less time to prove a model.  Your financial upside may be diluted by lower valuations.

Two final observations on this topic. One, I like Mark Evan's point of view.  Check out his post titled So, What's in it for Me?  Companies are more likely to fail for not solving his question (rather than economic times).  Second, just for fun I took a look at venture funding dollars over the past 10 years from the PWC MoneyTree report.  I wanted to remind myself of the last bubble, and the impact of last economic downturn.  As the chart shows, venture dollars did fall off a cliff in 2001, but they have remained relatively steady since then.  I don't expect another "big" drop in venture funding as we saw during the last recession, as funding levels are holding at relatively consistent levels (looking at 1998 and beyond with the exception of the bubble period).  And it appears that Calacanis, Howard and others do agree on this point - money is there for the right opportunities.

Comments

[Jin B]

Calacanis has a serious case of chicken little

[Ajay]

We are launching a new web 2.0 platform that will be launching soon off the Seybold Name which can be found at Seyboldinc. With the prediction that 80% of dot.com's going under that just means that we have to be one out of the 20% that survive. The question is can you sustain with no cash flow when no one around you is willing to buy or invest? Answer: Have multiple business to hedge your bets if 8 out of 10 fail it means that you have 2 that are surviving :) Just have to figure out the first 8 fast...