The economic climate these days reminds me of the famous line about the weather at the “Crosby Clambake” golf tournament (now the AT&T Pebble Beach National Pro-Am) held each February on California’s Monterey peninsula, in unpredictable conditions that shift quickly from sun to cold and rain: “There’s plenty of it.”
So it seemed a good time to get out a barometer and ask what the &!#@* an entrepreneur/startup should do in today’s climate? Is the economy really on the rebound? If so, is it time to change strategy? Should companies, say, get more aggressive about hiring people or expanding? Maybe they should court a suitor or investors because deal terms are improving? Or maybe not—maybe you should just stay the course.
[The X Factor is a mostly weekly column featuring conversations with local innovators, entrepreneurs, and investors that mostly runs on Tuesdays. This is an exception.]
I put my queries to four Xconomists, all experienced and highly successful investors, entrepreneurs, and business executives. No one pretended to have figured out whether the economy is rebounding or not. As serial entrepreneur-turned-VC Carmichael Roberts, now of North Bridge Venture Partners, put it: “It is impossible to tell what the heck is going on right now and whether we’re starting to recover or not.” The market, he says, is “too sideways.”
But that didn’t mean Roberts et al didn’t have some valuable advice and insights about what entrepreneurs should do in the current weather. All felt that for the foreseeable future, the climate would be fundamentally different than in recent years—and so should a company’s business strategy. As Boston Scientific co-founder John Abele says: “If you think the same strategy that worked before the meltdown is going to work now, you’re not living on earth. This is a different world, probably similar to the what this was 30 to 40 years ago, and it requires a different mindset.”
Their advice and insights, laid out below, focused largely on how to change your mindset. The ideas run from being extremely flexible about business models to asking tough questions about your business and its value to customers—and about your customers and investors and their value to you. Much of their advice has to do with entrepreneurs raising money in this climate, but parts are also relevant to executives of established companies.
John Abele, co-founder and director, Boston Scientific:
Be willing to make hard assessments—and be flexible with your own models.
“You got to do some slicing and dicing,” says Abele. “Some things are going to be more valuable in a constrained environment,” he says of today’s climate. “A number of things are going to be less valuable.” This includes your own products and your customers, and you must be prepared to adapt your model and offerings to take advantage of what will be most valuable. “A lot of people get trapped in their model and seem to have difficulty moving beyond that,” he says.
For instance, Abele is the owner of the Kingbridge Conference Centre & Institute outside Toronto, which is focused on better ways to conduct meetings and conferences to facilitate collaboration and education, among other things. “So one of the categories we focused on was infrastructure, for example power companies, that will have to do a lot of education to accommodate changes in regulation and technology,” Abele says. “They will be even more valuable to us, particularly if we have special education packages.”
Similarly, a medical company might look at its customers and prospective customers to determine which will be best off in the current climate and then ask whether those customers will find benefit in its products or a new version of them. Says Abele, “Maybe re-aim your platform to a client category that is more likely to want that technology now.”
Or maybe you have a product aimed at the medical world, where the government approval process takes a long time. You might seek to adapt the product for an industrial application that wouldn’t offer the same long-term potential revenue but would give you some revenue earlier. Then, leverage that opportunity by working with that industrial customer to refine your product, if possible. That way, you make some money in the downturn that you wouldn’t normally have made, while also iterating your product to enable you to make more money when the climate improves for your core application.
It might be a good time to go back to deals that fell through before.
Intellectual property is one example Abele put forth. You might have identified a really good patent, say, but attempts to buy it or license it didn’t go anywhere because the parties had widely different ideas about what it was worth. “This is a good time for going back and talking to people,” he says. “They may be thinking differently now.”
Michael Greeley, general partner, Flybridge Capital Partners; chairman, New England Venture Capital Association:
“Recalibrate the amount of capital you need.”
If, for instance, you feel you need $10 million in financing, you set out to raise $4 million initially, and then work with investors to set up milestones needed to secure additional investments. That way, investors mitigate their risk by giving them the opportunity to “turn another card” in a year or so if things go well. And while for entrepreneurs “it does admittedly introduce some element of fundraising risk” by forcing them to raise new money sooner than they might like, Greeley says that can be mitigated by structuring additional financing terms more carefully. “You have to be more creative in how you tranche the investment,” he says.
Cultivate potential investors more carefully and over longer time periods.
Rather than speaking with 15, 20, or 30 potential investors in parallel, concentrate on the best five. Target specific partners and let them know six months or so ahead of when you will be raising another round. Seek a short meeting to fill them in on what you are doing, and ask them how they can add value—pre-qualify them while also pre-qualifying yourself. Come back for another short meeting three months later, learn more about their concerns and insights, and then return three months after that with a well-crafted proposal. “Engage them,” Greeley says. “Try and create a product [ie business plan] that they want to buy, rather than a product that you think can sell broadly.”
Consider upgrading your team.
A lot more talented people are out of work than usual these days. “This is a good time to press pause, evaluate talent, and selectively upgrade,” Greeley says. He has a portfolio company that was able to significantly improve much of its engineering team with no change in cost. “It was remarkable,” he says.
John Landry, software innovator, entrepreneur, and founder and managing director, Lead Dog Ventures:
“Take as little money as you can and get ideas of large exits out of your head.”
Valuations are being pushed down, both for startups raising funds and for companies being acquired. Accept it—and adapt, Landry says. “At the end of the day, companies are not going to be acquired for the price that they used to be acquired for. And so you have to build a business that is based on a high level of capital efficiency and a minimal amount of investment.”
“My sense is you should set your sights on a 5x [return] and be damn happy with it.”
Take money from angels and small funds, not large VCs.
“The biggest problem,” says Landry, “is to resist venture guys who want to put too much money into your business because they have to” in order to make enough money to move the needle on their large funds. Taking a lot of investment money, especially in these times, sets up investors and the company for lousy returns if there is an exit—and it means companies will be vulnerable to being cut loose by their investors if it becomes apparent a large return won’t happen. “You don’t want to be at the mercy of their triage system.”
The best sources of modest amounts of capital, in Landry’s opinion, are boutique venture funds and angel groups. “You can still do returns on a percentage basis that are ‘venture capital’ returns, but on smaller deals,” he says.
Carmichael Roberts, serial entrepreneur, general partner, North Bridge Venture Partners:
“This is an awesome time to start a company.”
Roberts cites a basic reason for the above statement: “The amount of attention that all interested parties are paying to really making sure you have a solid business, not whether or not the market will jump and overpay you for something, is extraordinary.”
From entrepreneurs to investors and basically anyone involved in starting a new venture, Roberts says, there is a widespread feeling “that they have to go to the extra level, extra effort to really define the business that they‘ve got.” This means carefully thinking through the business model, the technology, milestones, and so on. People have always done this when starting a company. But, says Roberts, the magnitude of the focus today is unusual.
A student of the history of entrepreneurship, Roberts points out that the bulk of companies formed in the last 200 years weren’t built on venture capital. Instead, they were also formed at a time when access to capital was limited, so they focused on the details of getting to profitability on limited funds. “I’m not saying we should go back” to those days, he says. “I’m saying there’s a nice blend of the two” that is possible today.
Focus on the value investors add.
One of the biggest complaints from entrepreneurs is that their investors don’t add value to the business beyond the funding they provide. In boom times, when money is plentiful, you might raise capital on far more favorable terms from one investor than another—so you might chose the investor based on terms. Now, though, Roberts says, “the delta in the cost of capital between one investor and another has shrunk considerably.” Everyone is tight and careful. Therefore, he says, the difference between investors lies much less in how much money they can provide or the funding terms. “The true differentiation between investors is what kind of value they bring.”
He advises, “Take the time to find those stakeholders who when you look at them, there is something about their experience and their intuition and their track record that gives you a very good sense that this person is going to help me build this business. More than ever that’s important right now.”
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