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A Cash-Strapped Start-Up Odyssey
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
March 30th, 2001

By Brent Holliday
Greenstone Venture Partners

"They got the money, hey
You know they got away...
Go on take the money and run "
Steve Miller Band, Take The Money And Run

I have published the Early Stage Technology Index (ESTI) in this column every month or so. According to absolutely no known quantitative measures, I have tried to indicate the pulse of the early stage technology market in BC. I ask myself a few questions and then make up a number. The questions I ask to assess whether it's a good time to be in a start-up are:

· Is it a good time to raise money in this market now?
· Are there talented people ready and willing to take the plunge into a risky start-up?
· Is the overall technology market, or even selected sectors, expanding?
· Are there any positive intangibles (change of government, new IPOs locally, new R&D facilities)?

I'm sure you see where this is headed… the answers to the questions today are: No, probably not, you've got to be kidding and God, I hope so. The number to give out this month is therefore, 2 on a scale of 1 to 10. The only reason it is not 1 is that it just might get worse before it gets better. I need some wiggle room.

Let me spend some column space here recommending what you and your company can and should do in 2001. I'll be directing my thoughts towards CEOs and senior management of start-ups, but any employee at any level needs to understand the motivations for change in this brand new (old) business environment.

I don't know about you, but I'm tired of all the bad news. It just keeps coming from all sides. The amazing thing about this market meltdown and reaction is the velocity at which it occurred. Look at how fast we came down. October 24th is when Nortel made its first capitulation to the markets. In five months the technology world has been turned on its ear. Nothing seems tangible now and plans seem to be unreachable. Look at your own plans and budgets. How many of you have not re-written or adjusted your plan for 2001 in the past five months? The thing to keep in mind here is that the markets will not improve again at the speed at which they just crumbled.

What we need to do now is be realistic. Take a deep breath and look at what is possible in the newer economy (which looks a lot like the one from a few years ago). Some of you need to give your head a big shake and realize that no one, absolutely no one, is immune to these market conditions. So pay attention!

The absolutely number one priority over all other considerations is cash flow. It's not revenue, it's cash flow. Any accountant will tell you that you get cash from three sources: operations, financing and investment. For a start-up the third one is irrelevant. Most of you do not have investments to reap cash from. Managing cash from operations and financing is the CEO and CFO responsibility and everyone in your operation needs to understand today that going forward, cash is king again.

If you have no source of revenue, a very early start-up, your job is straightforward. Your financing cash is your only source and you have to be as tight as an Italian speedo in managing its outflow. Herman Miller chairs? Sell 'em to a law office and get some used plastic lawn furniture. Someone flew business class in your start-up? Never again. Do you have a mediocre performer with a large salary? Punt. There is enough talent around now in this downturn and they are hungry. Only pay the top dollar for the overperformers. Re-adjust your compensation plans around achievement and ratchet back salaries with new richer bonuses for performance. Chop lower priority contractors and demand better rates from your suppliers. You need to make the money stretch further. If your plan says that you have enough to get out 10 months, make the changes now that get you out 15 months. That's 50% longer than you thought and that means real change to your plans.

The last thing you want to do if you have no revenue in your 2001 plan is to run out of money this year. It is very, very bad out there now. You need to stretch things out until into 2002. Be creative and think of research partnerships or joint developments with larger players in order to get some cash. Remember IRAP and the Scientific Research Tax Credit programs and make sure that you file at the earliest possible time to get these funds. Financing is damn near impossible right now if you have no revenue, so take what you have and make it work longer. If you get money through some good luck then have a party and hire some new faces. But you have to assume that you won't and plan for a long stretch.

For those of you further along, you likely have some revenue. Good for you. Your milestone is a magical time called cash flow positive. It's when the burn burns out and you have more incoming cash every month than outgoing. Until you are there, you have some slashing to do as well. In some ways you have a more complicated job convincing yourself and your co-workers that you need to cut deep right now. You have customers and revenue and a plan to get increasingly more of both. As much as you believe in your abilities and your product, you have to swallow hard and plan for no increase in revenues. Zero growth for 2001 is a safe bet. Fire up the spreadsheet and look at what happens to your cash if you continue to make just as much revenue each month for the rest of the year. You have to assume that the revenue hockey stick is as broken as Markus Naslund's leg.

If you assume that you will not increase your revenue, then you are looking at a serious shortfall of cash from your previous 2001 plan. Now you need to do something that is even harder than re-adjusting your forecasted revenue. You have to cut back, which almost ensures that you won't get to your revenue targets. It's like killing the golden goose and that why most of you probably won't do it. "What? Holliday is crazy. If I cut deep now, just to save cash, then it is a self-fulfilling prophecy and I will miss my opportunity to grab market share!" Here is my answer to that concern: Your competitors are exactly where you are. In fact, if they are in the US, they are worse off than you because their market for financing is Death Valley. Cut now and live to see another day or ignore me and see in 9 months who is right.

Remember that velocity thing about today's markets? Customers can dry up in an instant. If the industry is in a slump, start-ups get creamed even more than large incumbents because the customer goes to old reliable brands. Want even further proof that cutting now is a good idea? Think of the poor buggers trying to build a better mousetrap than PMC-Sierra or JDS Uniphase or Nortel or Cisco. The huge incumbent companies with massive sales forces and incredible support services are giving away their stuff. Giving it away. They have so much inventory, they are creating a massive dump to the market. Please try and beat this argument, I dare you: Do you honestly think that you will sell something (let's say for instance) 40-50% better in performance than the incumbent at or near the price that you have in your plan today when they are giving away their product? Think about it. Your customer can buy from Mr. Reliable for near zero or from Mr. Whoever The Hell You Are Startup for a premium. Not gonna happen.

Convinced to start cutting? No? Think that your idea is so ground-breaking and your team so complete that you will raise money and get enough cash to get through the slump? You probably can raise the money if you have an exceptional opportunity, but at what price? Given everything I have laid out here and the fact that the VC market is not closed up and on vacation in Canada (as it appears to be in the US), you could probably get the dough. But you might want to wait until the market is better if you can afford to do so. Make sure you can afford to wait by making the cuts and stretching the money. Any way you look at it, however hot that you think you are, you need to conserve cash now. The panic to get to the market, the fear of a closing window of opportunity… all of it is affected by the current market. Your opportunity is still there and its not going anywhere. For the first time in a long time you may have a few months extra to get to market. If you had all the cash in the world, you still can't force customers to buy when they don't want to.

I've already spent column space in the past month talking about when the markets will improve. I still believe that the underlying economy is healthy. I think tech stocks will improve when the inventory glut has worked its way through the system. Might be a year, instead of another 6 months. Certainly it will be even longer before the IPO market improves. Companies will not go public in 2002 in any meaningful numbers because they are too young. The markets will demand real businesses. That means profits, multiple products and big-time senior management. Since we spent so much time taking immature companies public in 1999 and 2000, the cycle will have to catch up and the companies that are growing now will not grow at supercharged speeds for a while.

To sum up, you will have to act more like a classic entrepreneur in 2001 and less like a privileged kid with manicured hands and nice shoes. You have to really buckle down and create a business by scaling back the luxuries of big businesses and focusing on what matters. For all of you in a start-up that like nice shoes and fat salaries, get out. You don't stand a chance in the new (old) start-up game where cash is king.

Letters From Last Time – Brent, I recently received an email from Career Services at SFU- my alma mater. The email advertises a seminar on "Living and Working in the US", to be held this afternoon. It encourages me to "Get all the details you need on visas, employment authorization, green cards, and more."

I was surprised to see SFU promoting the brain drain. In fact, the top link for a quick search of "brain drain" on SFU's website brings up a page that says "any discussion of the brain drain cannot ignore the need to adequately fund Canadian universities."

It's mighty hard to fight the brain drain when the universities are promoting it.

Andréa Coutu

Seems hypocritical, yes. I was part of a TV show on Brain Drain a couple of years ago and one of the prominent speakers was an SFU professor. He was lamenting the brain drain while at the same time being sympathetic to the individual that was looking for opportunities and wealth elsewhere. While there is something to be said for offering market-driven services (if they all want to leave, then we might as well help them), I think most of us would like energy spent on what would make them stay or come back to Canada once they are down there. Thanks for the great heads up.

What Do You Think? Talk Back To Brent Holliday


Something Ventured
is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks).

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