March 30th, 2001
got the money, hey
You know they got away...
Go on take the money and run "–
Steve Miller Band,
Take The Money And Run
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
· Are there any positive intangibles (change of
government, new IPOs locally, new R&D facilities)?
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.
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.
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.
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!
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
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.
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.
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.
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
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.
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.
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.
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.
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.
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
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