Our subprime mess is very much underway and the economy is suffering from that and a host of other issues. When consumers feel the pinch, that means they buy less, and companies don’t make as much money, and then they spend less on advertising and also on acquisitions. This is important to both startups and us investors: consumers spend less, so they are less willing to buy products and services from a company. Companies spend less and then they slowdown their advertising spend. Stats show that advertisers will maintain their online ad budgets when compared to offline budgets (woe to offline operations who are heavily dependent on advertising for revenue), but I can’t help but wonder how much online advertising could have grown MORE if our economy wasn’t so bad. Last as companies pull back and preserve cash, they will be less likely to acquire all these nice startups that we’re working on now. Granted, the wiser and the more resourced companies will actually go on a buying spree, but they’ll be after the startups at super cheap prices since they’ll be lower performing towards the end of the year as revenues become tougher. Beware the corporate development folks who seem to slow down a bit; they’re just waiting for you to go through your cash reserves and get to a more desperate place by end of year and snap you up at a discount!
When I meet startups, I am now telling them to raise more than they were thinking. I try to get them to run the numbers and to figure out how to survive until at least the second half of 2009, or further if possible. I want them to survive through the economic downturn and not be dependent on additional money until then. I tell them to expect that any revenue projections will be missed towards the end of this year, and advise them that if they try to raise money on poor metrics AND they have run out of money, they will have an extremely hard time doing it.
A lot of entrepreneurs are still coming to me with raising $100k-$300k in their plans. Then I try to convince them of the economic issues and that unless you can survive for 1.5 years on $300k, you’d better change the plan. Not all of them listen though. It will be interesting to see if I am right. To me, you should be at least $500k, even better upwards of $1-1.5MM, whereas in a decent economy, you could get by with $300k-$1MM.
Some of them only want to survive 6-9 months to get a prototype up and raise money on that. In a better economy, I would say that this is not a bad scenario. However, in today’s world, I tell them that if they are getting traction on an idea in investors’ eyes, that they should leverage that inertia and get more money now. If they build a prototype and are not gaining traction in a down economy, it’s only going to show that you could not gain traction and investors be much less likely to participate as they look for positive metrics. It’s much better to raise money on a beta and/or the idea and get as much money as you can now, and to plan on survival on minimal or no revenues for 1.5 years.
Another issue with the 6-9 month plan: August and the holidays. Running out of money by August really sucks for fund raising. This is because the venture community goes on summer vacation and it’s nearly impossible to find someone to get a meeting. You have to wait until they all get back in September. Then you have about a two month window everyone gets distracted once again because it’s Thanksgiving and then Christmas. From about mid-November to first/second week of January, the venture community goes on vacation, peoples’ minds are on the holidays and families and not on funding you.
If you’re an entrepreneur reading this now: raise more cash than you think, expect that any revenue projections you have will be missed, and try to plan to survive on minimal or no revenues until at least the latter half of 2009, and raise all that money now while you have investor inertia.