If the only thing to fear is fear itself, then VCs need to snap out of it because they are cowering in their wine cellars. If you haven’t already seen it, a slide show called “R.I.P. Good Times” presented this past fall by Sequoia Capital to CEOs of its portfolio companies shows just how morose the mood among VCs has become. The slide ‘de resistance’ shows a spiral with a skull at its center warning portfolio companies to put themselves in an indefinite state of suspended cash flow animation or die an agonizing death–and the final slide blares GET REAL OR GO HOME.
The bipolar nature of VCs has shown itself during the last decade. In the roaring 90s they caught the worst cases of dotcom euphoria and spent money profligately, and now they are positively suicidal and tight fisted. Get a grip! The problem is that when VCs are convinced the sky is falling, they are likely to make the sky drop on the very companies they yearn to succeed.
Sequoia’s implied message to its CEOs is: you are not going to see any more money from us for a while, so make what you have stretch. This is predictable VC behavior during a rough patch, and it has worked before. It’s like teaching kids to swim by throwing them into the deep end of the pool. Some will make it to the shallow end on their own; some will be fished out by being bought (a.k.a. an exit strategy); and some will drown. But these are not normal times. Pursuing this behavior now is like shoving startups into the North Sea during a storm. This is not just a rough patch, it’s a depression–and not even the fit will survive that treatment.
None of the partners at Sequoia Capital are old enough to have managed a VC fund through an event as serious as a depression. The accumulated wisdom that saw VCs through the last 50 years simply does not apply now. It is a new game and they need new solutions. We suggest that VCs start throwing lifeboats to some of their startups or they are all doomed.
We follow the application performance management market closely, and we see this as a time of great opportunity for market cultivation and growth. As we said in a posting earlier this week, 2009 is a “do more with less” year for most enterprises, and application performance technologies support that–so now’s the time to go for it. But just today we learned of major VC-induced cutbacks at a startup we believe has great prospects if it invests in marketing and sales NOW. With budgets slashed, we predict the window of opportunity for this startup will close forever. How sad.
In days of yore investors exercised more patience. They wanted each startup to succeed, “go” IPO, and continue life as an independent entity–a force to be reckoned with. That’s how companies like Intel, Cisco, Oracle and Google came to be.
Today’s VCs are not funding companies–they are funding departments to be vacuumed up and annexed by big companies that started life the old fashioned way. Maybe some of the “department” startups in the current litter will be sucked out of the stormy seas before they drown. But a startup with standalone potential needs investment–especially during a depression. Perhaps Sequoia doesn’t see that kind of potential among its portfolio companies and feels it has a crop of duds it wants to cut loose.
Don’t get us wrong–caution is a virtue, but there are times in some startups’ lives when VCs must be brave, take risks and invest to succeed–even when the going gets scary. So buck up. You can keep up your lily livered ways and drop the sky on promising portfolio companies, killing them and your own interests in the process–or you can find the fortitude and faith to invest in growing good ideas when the time is right, even if it makes you squirm. If it’s too uncomfortable, perhaps you should take Sequoia Capital’s own advice and GET REAL OR GO HOME–or become a banker rather than a VC. Perhaps then you can stand in line for a bailout.
