Wednesday, April 23, 2008

Bracing for the Downturn in Silicon Valley

With stats released over the weekend on new VC investments being down for Q1, recent surveys also suggest executives in silicon valley are starting to get pessimistic about the economy. Here are some pretty reasonable suggestions from Penny Herscher based on how she managed her company through the first tech meltdown in 2001 - I think they're relevant for most businesses and not just tech (and also not just when you're worried about the economy):

  1. Build a detailed model of cash flow so you can test every decision against it and manage the business for cash conservation.
  2. Push out accounts payable as long as you can. This takes a tough CFO or controller.
  3. Structure deals to be paid up front. Resist payment terms as much as you can and negotiate discounts to get paid up front if you have to (we were very successful with this strategy with all but our largest customer).
  4. Don’t destroy your market but do some aggressive deals if you need to in order to keep the top line and your market share growing. If you slow down it’s a self fulfilling prophesy and you’ll run out of money – which leads to loss of control of your destiny.
  5. Spend in sales to keep growth up. Sales and R&D are the critical value creation points of a software business, focus on them and tighten your belt everywhere else
  6. Manage performance aggressively. If someone isn’t performing let them go quickly and only replace them if you absolutely have to (see prior point).
  7. Squeeze into your space. Put off taking on new rent obligations as long as you possibly can.
  8. Get a line of credit and draw it down before you need it. By the time you need it you won’t be able to get it, so get it while you can.
  9. Likewise if you need to raise venture capital do it well before you need it , and don’t get greedy on valuation. A successful company makes everyone money, don’t risk long term success for valuation or your percentage.
  10. If you have to, take the company through a pay cut. As CEO cut your pay first, cut all bonuses and consultants, cut executive pay and when you have no choice cut everyone’s pay to make it through. Believers will stick with you, and they are the ones you want."
All the while of course, I think a firm can't lose sight of the core value they provide to customers while continually trying to cut costs and add to that value. On a marginally related note, while economic cycles tend to be a fact of life, Bernard Moon seems to be worried that the US is becoming a nation of nontrepreneurs based on the school system and standards that have become too accommodating. I'm not so pessimistic. It's sort of funny but the the same characteristics that he seems to be concerned about are also different sides of the same coins of characteristics that USA Today considers to be driving entrepreneurship in greater numbers amongst Generation Y. As I noted on his blog, I would be far more concerned that governments reduce the barriers to entrepreneurs and businesses to generate wealth. Once the incentives are in place, entrepreneurs will come.

With wealth in large part the result of innovation, I'd be a bit more concerned about this: according to the US PTO Director believes that while applications for patents are up, quality is down. I say that I'd only "maybe" concerned just only because I wonder how one distinguishes between a high quality and low quality patent. Insofar as innovation goes, the US still leads and seems to have the knack for developing technologies far faster than anywhere else in the world from idea to financing to execution. Patent reform though will be something to watch in coming years and will have an impact far longer than what looks to be a recession coming up.

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