Words to the Wise When the Exits Are Closed

If you’re the CEO of a venture-backed company, what can you do when the exit doors remain closed for IPOs, and the collapse of capital markets has slowed mergers and acquisitions to a trickle?

That may be the question of the hour, or perhaps the year. But preserving your options, and creating new ones, was key to the answers that three venture investors and a San Francisco software company CEO offered yesterday at the Red Herring North America 100 conference in downtown San Diego. John Malloy of BlueRun Ventures in Menlo Park, CA, said he could think of two words that epitomize the situation for many startup ventures. One is constraint, and understanding this is a new world of constraints. The other is optionality. “Remember there are multiple ways to solve a problem,” Malloy said. “You certainly shouldn’t believe just what your bankers tell you.”

Just how startup CEOs can work to maintain their options and generate new ones, of course, was the hard part. But the participants in a panel discussion had a number of decent recommendations, along with some interesting observations. For example:

—It’s unclear whether the IPO market will open anytime soon, said Bob Ackerman, co-founder of Palo Alto, CA-based Allegis Capital. “We’re in a market where there’s a lot of chop, a lot of back and forth,” Ackerman said. But the burly venture investor added that mergers and acquisitions activity will likely resume sooner rather than later because “the big companies have pulled in their internal innovation,” as a way to cut their costs. “Now they are going to an external innovation model,” which means acquiring the startups that have been developing innovative technologies.

—Become extremely efficient. Cash-starved companies are better run, and keeping tight control of operations is crucial to survival. “We tell our companies to get to profitability and you can control your own destiny,” said Paul Ferris, a general partner with Azure Capital Partners, which has offices in San Francisco and Menlo Park, CA.

—“We’ve taken time to get a handle on our metrics,” said Brian Gentile, CEO of Jaspersoft, a San Francisco company that develops business intelligence software. “In the downturn, we saw an opportunity to take market share… It wouldn’t have been an opportunity, though, if we really hadn’t had a good handle on our operations and metrics. Get to ‘great’ on operational excellence, and from there you’ll have many more options.”

—Use smaller chunks of time as benchmarks, because shortening the business cycle provides more insight into your market dynamics, Gentile said. He runs Jaspersoft on a 30-day business cycle instead of the standard 90-day business period. “So if you go through two 30-day periods and you see no revenue growth for two consecutive periods, you can make adjustments before the end of the quarter,” Gentile said. “Otherwise you don’t see what’s happening until after the quarter has ended, and by then, you’re a month behind in terms of cutting your costs.”

—It’s better to reduce your burn rate than to try to raise capital. Every venture round is a distraction, said Alex Vieux, the Red Herring publisher and tech conference organizer. But the distractions multiply if you try to raise capital while there are contractions in valuations. You have to deal with prior investors who feel they’re being diluted or washed out.

—If you have to raise capital, be careful about choosing the other venture investors to be included in your syndicate. “You have to think these things through,” Malloy said. “You have to anticipate the worst before you take that first dollar of capital. The good news is that you don’t need to raise as much capital today. But you really have to think about how you put your syndicate together and who is going to be there with you further on.”

Ackerman agreed, and added, “When you syndicate, you are introducing new variables into the equation. And you are multiplying your problems. So if your syndicate partner has a problem—they’re out of capital, they’re dysfunctional—their problems become your problems, only magnified.”

—Listen to your customers. “The customer will help you prioritize,” Ackerman said. “The customer will tell you what they need.”

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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