Don’t Batten Down The Hatches on a Shit Business

Posted on April 3, 2008
Filed Under VC Insanity |

As the realities of the current economic landscape become apparent to even the completely most uninitiated, more venture capitalists are recognizing that tougher times lie ahead.

While tough times are never good for the fairweather founders that usually flock to Silicon Valley when money is being handed out on Sand Hill Road like it’s going out of style, in a recent post on that tough times can create opportunity for smart, serious entrepreneurs.

In a post on his blog, venture capitalist Fred Wilson discussed the tough times ahead and commented:

If a company has lots of users and no real revenues, but keeps its burn rate low and can continue to ramp its user base cost effectively, I think the economic downturn isn’t necessarily bad news for them. After all, if you have no revenue, you have no revenue to lose when your customers stop placing orders.

That last bit was sort of tongue in cheek. I don’t want to downplay the importance of revenue and business models. But in my mind, the single most important thing is not revenue in a time like this. The most important thing is cost structure. Thomas Cole says “smart companies are battening down the hatches”. That’s right.

While I won’t jump on Fred’s case because he admitted that his “if you have no revenue…” comment was “sort of” tongue in cheek, I do think his view is “sort of” flawed.

Cost structure is very important during an economic downturn but revenue and business models are still extremely important as well.

Why? A company that lacks a business model and can’t generate sufficient revenue when times are good doesn’t accomplish anything by battening down the hatches when times are bad. It will enter the downturn as company that really isn’t going anywhere and it will exit the downturn as a company that really isn’t going anywhere.

The truth is that successful companies pay attention to cost structure at all times. Cost structure is not winter clothing that suddenly becomes fashionable when the economy gets cold.

A company that doesn’t have an ability to make money battens down the hatches to slow its probable demise (i.e. survive) while a company that does have an ability to make money battens down the hatches to remain competitive (i.e. thrive).

There’s a huge difference and if you’re an entrepreneur out to survive instead of thrive, you’re playing a losing game. Unfortunately, I suspect that most of the Internet startups currently battening down the hatches in Silicon Valley have lost the game but haven’t yet realized it.

The venture capitalists who are preparing to fund startups as they batten down the hatches might want to consider that bad startups will emerge with less money when the hatches fly open. And still most likely without a way to generate money of their own.

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4 Responses to “Don’t Batten Down The Hatches on a Shit Business”

  1. Paul on April 3rd, 2008 1:06 am

    “Cost structure is not winter clothing that suddenly becomes fashionable when the economy gets cold.”

    Love that - I will use it and properly attribute it as well :-)

    Notwithstanding, it’s not *always* true. in times of hypergrowth in a market it’s arguable that cost structure can be sacrificed in the short term to achieve market share (assuming a long term vision of profitability exists). That doesn’t mean that every 2.0 company pissing away money to build up eyeballs is justifiable; but it does mean that in certain circumstances, when the proper capital structure is in place, companies can ramp up their spend in order to get traction in the market during periods of high market growth when market share is more important than short term financial metrics.


  2. Drama 2.0 on April 3rd, 2008 1:18 am

    Paul: you do make a valid point but your qualification (the assumption of a long-term vision for profitability) is exactly what is lacking in Web 2.0 today.

    For most Web 2.0 startups, there is rarely any long-term vision at all - only a short-term vision to get bought out for a lot of money.

  3. Cyndy Aleo-Carreira on April 4th, 2008 9:44 pm

    But did you see Facebook grabbed one of the Google chefs? ;)

  4. SKMurphy » Recession Requires A Focus on Revenue on April 7th, 2008 5:12 am

    […] expense control at VC backed companies is going to be increasingly the focus at board meetings. But bootstrapping firms are born with […]

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