Advice for Startups in Gloomy Times: Outwit, Outplay, Outlast

The backstory wasn’t exactly auspicious as Red Herring publisher and tech conference organizer Alex Vieux convened the North America 100 in San Diego yesterday saying, “This is an economic crisis whose end is not near.”

In a bid to sound positive, Vieux added that a crisis also represents an opportunity “that is too good to waste.” The two-day conference was billed as a gathering of 350 CEOs, investors, and others, as well as a venue for announcing Red Herring’s list of the top 100 private companies in North America. Attendance was light yesterday morning, though, with only about 50 people in the audience at the U.S. Grant Hotel in downtown San Diego.

So if there was a theme among yesterday’s speakers, it was how entrepreneurs and their companies can “outwit, outplay, outlast” the real-life game of “Survivor” now playing out among the nation’s startups and their venture investors. The standard-bearer for this message was Don Dixon, a co-founder and managing director in the Palo Alto, CA, office of Trident Capital, who said the markets are currently staging a “false rally.” He expects things will get worse before they finally get better in the first half of 2010.

At Trident, which manages more than $1.6 billion invested primarily in information services and software technology, Dixon said Trident’s triage work began last September, at about the time Lehman Brothers filed for bankruptcy. “We thought if we act quickly, we might be able to preserve capital,” he said. In consulting with its portfolio companies, Dixon said Trident also was forthright about how much cash reserves would be available, and the firm has urged its CEOs to cut their costs. “We don’t leave our dead on the battlefield,” Dixon told the audience. “If we can save 30 jobs out of 60 at one of our portfolio companies, I’d rather see them do that than see all 60 lose their jobs by driving into the wall.”

As a result, Dixon said, “95 percent of the companies in our portfolio are either cash-flow positive, or they have enough cash reserves to go to July, 2010,” when he estimates the economic stranglehold will loosen its grip.

Under such circumstances, Dixon said it’s crucial for startup CEOs to realize that times have changed, and to work hard to adapt to survival mode. Like most VCs, Dixon has the power to tell his portfolio CEOs, “The tribe has spoken. It’s time for you to go.” So he offered a number of recommendations to help startup CEOs survive. To stay in the game, he advises:

—If you don’t already know, you should find out how much capital your venture investors have committed in reserve capital for your company. “If your VC firm is out trying to raise reserves right now,” Dixon said, “it means they’ve run out of money.”

—The financial capital of the world right now is Washington, D.C. The funding allocated through the federal stimulus package far exceeds any comparable outlay of federal spending, including government spending during World War II and the Marshall Plan. “We are in a sense of history right now,” Dixon said.

—Venture investors are listening closely to the CEOs of their portfolio companies and weighing whether they’re anticipating market downturns. “It’s better to cut your burn rate in advance of declining revenue instead of being in arrears,” Dixon said.

—Venture investors also are assessing how realistic their CEOs’ long-term strategy is. A CEO who continues to say the exit strategy is to go public through an IPO is not credible, Dixon said. Planning an M&A exit begins at inception. These days, Dixon added, “We view [mergers and acquisitions] as a game of musical chairs in which there are six chairs and 600 kids at the party. You want to be sure that you’re one of the ones who gets a chair.”

Bruce V. Bigelow was the editor of Xconomy San Diego from 2008 to 2018. Read more about his life and work here. Follow @bvbigelow

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