Surviving the Downturn: Advice from Seattle-Area Firms Atlas Accelerator, Geospiza, and Mercent

11/24/08Follow @gthuang

Updated Nov. 24 with corrections from Mike Crill: Last Thursday, the Seattle-based Alliance of Angels hosted a panel discussion on “managing through an economic downturn,” otherwise known as “Downturnapalooza.” The panelists were Eric Best of Seattle-based e-commerce firm Mercent, Mike Crill of Bellevue, WA-based consulting company Atlas Accelerator, and Rob Arnold of Seattle-based bio-software firm Geospiza. Moderating the panel was our very own David Caffey, Xconomy’s West Coast head of business development.

Just a few highlights here, courtesy of Rebecca Lovell and Vandan Parikh from Alliance of Angels. I’m mostly paraphrasing the speakers, as I wasn’t present:

—Web 2.0 startups must adapt: Crill said that, of the four Web 2.0 companies Atlas Accelerator has in the hopper (out of more than 50 investments from the past three years), two changed to business-to-business models and are doing well. Another is struggling, and only one might survive with its initial strategy.

—Economic reality check: Arnold said that if you had a good business model before the downturn, you’ll still have a good model after, though it might take longer. The flip side, as Crill pointed out, is that “if you sucked before, you’re going to suck after.”

—Why Silicon Valley seems gloomier than Seattle: Crill said that Bay Area VCs had to tell their portfolio companies that the good times are over, whereas for angel-backed startups such as those in Seattle, there was always a different attitude, one of less exuberance.

—On funding expectations: Unless you’re building a $50 million-plus business, don’t bother with VCs, said Crill. The other panelists put the figure at $100 million.

—Advice to entrepreneurs: Best said you shouldn’t raise money on just a business plan, you have to have a product; also, look out for the competition’s customers, as the downturn might be an opportunity to grab some new business. Crill emphasized focusing on getting to cashflow break-even—don’t build your business on just getting to the next day. And don’t spend money now on new product development, “sell the crap out of what’s in the market already.” Arnold advised over-communicating with your investors, and not to think the downturn is going away anytime soon.

On Friday, Rebecca Lovell gave me a bit of angel-investor perspective on the current climate. “Experienced angels and VCs are focusing on the horses they’ve already backed,” she says. “We all recognize exits are taking longer, and people are buckling down in the next year. More and more attention and money are being sifted towards companies already in our portfolio. There’s a higher bar for a brand new opportunity…VCs aren’t even going to look at you unless you’ve got $5 million in revenue.”

For investors, this could mean special opportunities to get in on attractive deals. “We’re seeing deals this month we never would have seen before,” says Lovell. “Companies are coming to us with much more attractive valuations—they’re much further along than we used to see. Also, companies with revenues or intellectual property are not getting debt financed…We’re getting a crack at those deals we might not get in a different environment.”

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and the Editor of Xconomy Boston. You can e-mail him at gthuang@xconomy.com or call him at 617-252-7323. Follow @gthuang

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  • http://www.atlasaccelerator.com RM Crill

    Thanks, just a few clarifications –
    We made four Web 2.0 investments of our total 50+ from the past three years. Two changed to B2B and are doing well, one is struggling and only one might survive with their initial Web 2.0 strategy. We focus on enterprise software and material science.

    The difference between the prevailing sentiment in the bay area versus here is that the bay area is more heavily influenced by the dominant VC presence. Companies with tier one venture money need a wake-up call; angel companies never had the “good times” that Sequoia says are over. It’s not got anything to do with Seattle, per se.

    We typically find that venture’s lower threshold is about $50MM although the other panelists suggested $100MM.

  • http://www.ovp.com Gerry Langeler

    I’m always disappointed when I see folks from the angel community trying to reposition VCs out of the minds of entrepreneurs. We both have a place in start-up financing, and those places often overlap. That’s OK. Some days we compete, other days we collaborate. Bashing (particularly inaccurate bashing) is not constructive. Entrepreneurs need us both.

    For the record, our PNW VC firm has done more new deals this year (9) than we have before in our 25 year history. So much for a slow down.

    None of those 9 new deals had the postulated “minimum $5M in revenues.” In fact, 7 had zero revenues – and most of those still will 6-12 months from now. So much for a VC retreat from early-stage.

    Facts are stubborn things. Let’s all stick to those. These are tough times, but not impossible times. Let’s roll up our sleeves and get to work.

  • Reality Check

    VCs have underperformed the market in the past 10 years–actually providing negative returns as a group.

    There is no reason to believe they know what they are doing…any more than all those financial planners out there who, last year, said “don’t sell”.

    Choosing to listen to VCs at this time is, well, dumb. Just like listening to financial planners (ever wonder why if they’re so good at predicting thigns, they dont’ just invest themselves instead of selling their service?) Same with VCs. They sell other people’s money and take a fee. The results (LOUSY) speak for themselves.

    Entrepreneur beware — avoid VCs and you’ll do yourself a huge favor.

  • http://m2e-freelunch.blogspot.com/ Krassen Dimitrov

    Reality Check is generally correct, however, generalizations are dangerous.

    First, while the VC industry may be losing money as a whole, there is a select group of VC firms that outperform not only the industry, but most other asset classes as well, helping many entrepreneurs to fulfill their dreams.

    Second, the “loser” VCs still control a lot of money; shunning them off would close off entrepreneurs to massive amounts of funding. What entrepreneurs should strive to do is to take the money and then protect the business from the damaging influence of the “loser” VC (such as OVP, where the previous commenter works). It is not easy but it can be done.

    Demonizing the whole VC industry is counterproductive, it can lead to drying up of this important for the economy “innovation capital”. Now is not the time to generalize, it is the time to be specific, name names, and expose the incompetent and the lazy. If venture capital management is put in the hands of knowledgeable, thinking and responsible people, everyone will win.

  • RC 2

    Krassen is right about VCs losing money. Here’s a quote from his blog about one:’

    “OVP Venture Partners are the lead investors in M2E Power. Here’s OVP’s record for the past decade:

    OVP V has lost 20% per year for 11 years
    OVP VI has lost 10% per year for seven years
    OVP VII has lost 25% per year for two years”