Monday, October 13, 2008

The worst of times...the best of times?

As I write, the global financial market has seized up, stock markets worldwide have plunged, investor panic is everywhere, and the global economy is fast sliding into recession, with the spectre of Depression 2.0 looming large indeed.

The chill had already frozen the venture capital investing market, with major VC funds holding back new investments. The mood is probably best captured in a presentation made at a recent partners' meeting of Sequoia Capital, one of the leading VC in Silicon Valley. The title of the presentation slides said it all -- "RIP: Good Times" -- you can view it at (click here).

On a personal note, one of my investee companies (through my angel fund (BAF Spectrum)) had witnessed first-hand the chilling effect of this global financial meltdown -- it received a termsheet from an Asian regional office of a blue-chip, Silicon Valley-based VC firm about 3 months ago, and despite the fact that it cleared all their due diligence checking, the VC firm recently walked away from the deal. We found out later that their US headquarter had told them to hold all investment indefinitely, period. I have similarly learned from a friend who is a general partner of a VC fund that his institutional investors are asking him to put a hold on investing for the time being.

While there may still be a chance that some semblance of calm may return to the global financial market in response to the latest efforts by the governments of G7 and other nations to use tax-payers' money to shore up ailing banks and inject liquidity into the financial system, it is clear that, even in the best case scenario, this workout is going to take some time, and that the real world economy is already heading into a recession that is unlikely to be reversed within the next 12 months, even if we are lucky to avoid a severe and much longer period of negative growth.

In this worst of times, my best advice to entrepreneurial start-ups that have received seed-funding in the last 1-3 years, but have not yet reached steady cash-flow positive mode, is to move quickly towards a cash conservation mode with whatever cash you still have, for it will be extremely challenging to tap the venture capital market for your next round of funding over the next 6-12 months, if not longer. Find ways to reduce expenditure and explore interim sources of revenue to generate cash, and if it is possible, try to apply for some form of government grant for innovation to help stretch your run-way. It may be painful, but letting some people go may be the only realistic alternative to survive for some.

Thankfully, in Singapore, a number of government agencies like SPRING and MDA have recently launched new innovation grant schemes (e.g. the the first batch of POC and POV grant awards were awarded by SPRING this month) , so I would encourage our existing start-ups to apply for these. I also hope that the five new early-stage VC funds recently co-funded by the National Research Foundation (NRF) of Singapore will start their operations by early next year.

For would be entrepreneurs who are thinking of starting up your ventures, while the coming 6-12 months may seem to be the worst of times to do so, it could also possibly be the best of times, especially if you are convinced that you really have a great business idea, and your initial need for capital over the next 12 months is modest or you can self-fund/bootstrap a large part of it. When an economy is in recession, the cost of starting a business is lower than in normal times -- rent is down, input costs are lower, and the job market is soft, so attracting people to work for you becomes easier. It is true that venture investors will be extremely tight-fist and valuation is likely to be low, but hopefully you don't need to raise that much (yet), there is also less competition, and the entrepreneurs who are prepared to start-up at such a difficult time may get better noticed for their passion and tenacity. History has indeed shown that some of the most successful companies got going at or near the bottom of venture investing cycles -- both Cisco and Facebook got their first funding during the downturns of Silicon Valley. The ideal timing is that, by the time your product is developed and ready to go-to-market, the economy is turning up and the market starts to roar again. Better still, if your start-up idea involves substantial cost innovation, your product or service can still find a market in a recession itself -- by helping people or enterprises to survive recession better through cost savings.

The worst of times can still present opportunities, and thus becomes the best of times to start-up -- for the entrepreneurs who discover the right opportunities and are bold enough to act. As an early-stage angel investor, I'm still prepared to make seed investment in this period of gloom -- for the reasons stated above -- if the right start-up comes along.


Kris Childress said...

Prof Wong:

Much good insight and sound advice here. As you mention towards your close, I have been advising companies I work with to highlight, if possible, the cost-savings that flow from their innovation, much as we showcased "green" benefits in the past. In addition, I recommend reviewing at the sales cycle for products again, realizing that it may - at best - slow down considerably. Kris Childress

wong keat wai said...

It is necessary to be lean and mean during times like these, even especially more during start-up phase. Think Big but start small should be the correct strategy. I remembered the days of the dotcom booms back in the late 90s, where a large number of startups went bust because they failed to be lean at that critical stage.

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