“Survival Matrix” a Great Post by Fred Wilson

On Monday Fred Wilson of Union Square Ventures had a great post the Survival Matrix. Given the current financial conditions that we have, every company in their early stages of development or in between rounds should go through the process and see where they stand.

I have always liked simple charts and processes like this that helps you quickly raise an issue up to a very high level and then allows you to drill down once you have a better grasp of the problem. McKinsey and Co. are known for using this type of tool.

Should be easy enough to for anyone to quickly do and find out about your survival prospects.

Thanks for another great post Fred.

What if I am In the Middle of a Small Round to a Larger Round Later?

Many early stage companies are in exactly this place. This is especially true for companies that had initial financing needs that fell into the >$1.5M but <$4M. Many followed the recommendation to carve out a small round to achieve some milestones and then go after the larger equity round.

If this is you, the first thing I would recommend is to not panic. Panic usually implies “out of control” and you certainly won’t begin to solve the problem until you understand the options available to maintain control. It is time to re-look at your business, the tactics that you are executing, your anticipated results and your actual results.

You are going to hear the words “Cash is King” a lot for the next few quarters. So you need to get a hold on your financials and meticulously track them. Two critical elements to understand are “Burn Rate”; how much you are currently spending each month; and “Runway”; how many months worth of cash you have on hand or expect from other than investments. These are the starting points for control.

If you are planning to get an infusion of investor money in mid 2009, does this imply that you have sufficient capital in the bank to get you there? Are any of your expectations based on sales? If so, how do you think the economy will affect your customers’ purchase of your products/services? Make any adjustments in your planning rationale and then re-look at your Runway.

I think it is prudent to assume that finding follow on investment might take a year longer than you anticipated. So, the next area to take a hard look at is reducing your burn rate. Your really need to take a hard look at all your expenses and identify which are critical and which can be reduced or eliminated and under what circumstances. Everything should be on the table.

There are a couple of good slides that Sequoia used in their presentation:

and,

You can see from these the perspective Sequoia is giving their portfolio companies. I think there are a couple of others I would add. One is to look at your cost of goods for products and see if there are ways to reduce or defer these costs.

Another is you might want to talk with your suppliers and see that they can do. Remember, they are planning on you contributing to their financial position. If you go out of business, it hurts them too. I have heard of a few instances where suppliers became investors to keep the business.

Overall, begin to think and breathe “Bootstrapping”. There are going to be lots of companies using this technique so you won’t be alone. You can bet that there will be lots of articles, conferences, and seminars on the topic.

My Plan is a Small Bridge to a Larger Round Next Year

This is the track for a lot of startups. Going after a small investment to accomplish some key milestones allows entrepreneurs to build some value in the company and positively affect the overallvaluation. In the past, this was a great concept and, even in the current economy, may be a great strategy. It also helps when the amount of money required is at a level that is difficult to attract.

For example, prior to a couple of weeks ago, the upper end of where Angels would tread was about $1.5M and the smallest amount most VC’s were interested was $5M although I did hear that is was around $7M in Silicon Valley. Companies needing $2.5M or $3M were having a difficult time. One of the recommendations was to re-look at the requirements to see if there was a way to raise $500K – $750K and get some traction and plan for a higher institutional raise in the future.

For many, this was a great plan. However in today’s environment, you just can’t plan that the next round will be available when you need it. The current economy suggests real financial creativity where you plan on a smaller round and then combine it with a “Bootstrapping” mentality to get to self sustainability.  

Here’s another slide from Sequoia that makes a lot of sense:

Now it seems to me that these make good business sense in good or bad times.

I am Starting a New Social Network or Community Site

If your business startup is a new social network or community site, then there are a couple of things that you should be aware of if you plan on using other people’s money. Most of the business plans I have seen in this space have Advertising Revenue as a main component of their business model. If this is your plan, I recommend you re-think it and find a way to generate revenue from some types of user paid services.

Here is one of the slides used in the infamous Sequoia presentation that shows both overall Ad Revenues and Internet Revenues going down.

 In fact, when you look closely, Internet Ad Revenues (the top line on the chart) are expected to drop by 50%. This is a big cut and those who control these purse strings will look closely at how these dollars are spent. It is going to be hard to get investors interested in your deal if the primary revenue source is ad dollars.

So, spend some time and think through your business model and make sure that the bulk of revenues are not associated with advertising or you’ll have a difficult time convincing investors to invest.

So Now What?

Well unless you are just returning from a month long trip to Mars or Jupiter, you have probably been following what’s happening in the financial markets. If you are in the process of creating or thinking about starting a new business, you are probably wondering “What’s Next?”

For those of you who want a one-stop place to see all the comments that have been flying around, Brad Feld, Managing Director at The Foundry Group, put up a great post a couple of weeks ago and seems to be updating it over time. If you haven’t kept up on all the stories, take the time to catch up and see what all the noise is about.

I have been asked numerous times about what is going on with investing and what does this all mean to the the early stage entrepreneur? Rather than attempt to answer this in one large post, I thought I would write about a couple of big issues that I think entrepreneurs need to understand and take into consideration as they are creating their business plans or investor presentations.

The first big question that I will address here is whether I think this is a good time to start a business? I am not sure that there is a bad time to start a business. Some times are tougher on specific businesses or industries, but overall, you can look back at other down economies and find great companies that were started during that time.

That doesn’t mean that it might be much tougher or that certain industries might be more difficult to startup in than others. What seems like it might be tough to start? If you are thinking about starting a new restaurant, I would re-think that idea for the time being. Past history shows that people pull back on eating out in tough economic times. Now there are some exceptions.

I recently had a conversation with Nolan Bushnell, the godfather of tech gaming who created Pong and started Atari a number of years ago and then created Chuck E. Cheese. Nolan is creating a new restuarant venue called uWinkthat combines food, drinks and media and has lots of technology as part of the experience. He is also helping his two sons with a startup they are creating and I asked him how he thought the changes in the economy would affect the business. He said that during bad economic times, people will still spend money to be entertained. As an example, he mentioned how the motion picture industry grew and flourished during the great depression. I agree and think that he will probably do just fine in the current economy.

It is probably not a good time to open a car dealership or residential real estate brokerage/mortgage business unless you have some hook that is really different and complements the current problems in the space.

I know some folks who were active in the mortgage space writing loans. That industry cratered. They have changed their focus and are working with their clients who are having problems making payments and in or close to foreclosure to negotiate changes with the lenders. When they are successful, it becomes a win for the lender and a win for the homeowner. There is also a win for the negotiators since they can continue to make a living in the mortgage space.

So my bottom line is that the economic outlook is looking as if it will be tough for the foreseeable future, but that doesn’t mean that the door will be closed to all entrepreneurs. It is a time for every startup and early stage company to take a fresh look at their plans, operations, and financial requirements and decide what changes they should make to adapt to the economy.