Wednesday, November 12, 2008

Budget slashing

It seems as if the first, and perhaps, last wave of systemic budget cutting brought on by the collapse of the financial services industry and pronouncements by stalwart venture firms, led by Sequoia are now behind us. Balancing the rush to preserve equity, often at the expense of equity creation, was a more balanced view expressed by Alan Patricoff.

In the venture business, there is always merit to surviving for another day. However, it's my experience that this is not the way to earn consistent returns for LP's, but a way to minimize capital exposure to under performing investments. Prudent companies, especially in our industry, led by folk who experienced the nuclear events of '01- '03, for the most part are not living way beyond their means today. One can always cut expenses, but our industry has consistently shown that creating equity value is most closely aligned with market share leadership. Moreover, the foundation for creating sustainable value, certainly in times of questionable exits, is by earning a volume of revenues, greater than your expenses.

Try as you may, but no young company, founded with a growth oriented DNA, that I remember, has ever slashed their expenses to victory. Many companies appropriately encouraged to slash budgets find themselves with now unproven markets, or a value proposition which has not yet resonated. Nevertheless, if a company has momentum, this environment presents an incredibly capital efficient time to garner market share as distribution, R&D and customer acquisition expenses are in a deep downward spiral.

The balance between growth objectives (often cash consuming) and balance sheet maintenance is what just shifted as the cost of capital soared by at least 30% in the past month. It takes a brave soul, full of passion and confidence to unabashedly continue with the leap into the unknown.

No doubt that some stakeholders will be massively rewarded for this confidence, it will take a few years to know just who...

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