Downturns

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Downturns

The morning paper this morning is not a pretty picture.

New Orleans is flooded.

Large swaths of the southeast are down and out.

Energy prices are spiking.

The war in Iraq shows no sign of ending anytime soon.

Interest rates are headed up.

The housing boom is showing signs of ending (finally).

We have a federal budget defecit that makes my head ache every time I think of it.

And our trade defecit shows no signs of abating.

Ugly, ugly, ugly.

And yet we've had an abundant supply of capital for early stage businesses for the past several years that has led to the formation of many new companies.

What if that capital supply tightens?

What if we have a recession in 2006 like many economists are now predicting?

What if risk premiums return to normal levels?

These are the questions on my mind this morning.

Fortunately, I've lived through a few downturns in the venture business.

The worst by far was the 2001-2003 downturn which was brought on by the burst of the internet and telecom bubbles and made much worse by 9/11.

But I started in the business in the mid 80s in the midst of the post PC bubble downturn.

And I witnessed the bursting of the biotech bubble of the late 80s/early 90s and saw how hard it was to finance a biotech company in the early 90s.

And even during the Internet boom period from 1996 to 2000, we had a period after the russian debt crisis where capital supplies tightened significantly.

We are surely going to have another of these periods at some point, and given my read of this morning's paper, I am concerned that it might be just around the corner.

So what to do?

First, remember why you made your investments in the first place. Go back and read the investment memos. If your thesis remains sound, don't panic. If you had no thesis and were doing momentum investing, you'll probably have your head handed to you and you deserve it.

Second, talk to your companies. Make sure they have a plan B for their capital needs.

Third, talk to your co-investors. Make sure they still believe in the company and are going to be supportive.

If all of these factors are postive, then keep your head down and execute. Deals will take longer to close. People will become risk adverse. Plan accordingly. If you need to slim down, do that. If you need to put off that big 10 year lease, do that. In fact, do that no matter what the situation is!

Downturns can be a period of incredible opportunity.

I look at the Flatiron portfolio and the companies that hunkered down and built businesses in the 2001-2003 time period came out of that experience with some amazing businesses.

It takes tenacity, skill, experience, and facing up to hard decisions when the downturn hits.

It is probably a good time to take measure of your company, your team, and your plans to make sure you are prepared for the downturn. Because its going to come at some point.

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» Useful business & marketing links: August 2005 from Brian's Internet Business blog
I've been covering so many interesting business and marketing sites over the past couple of weeks that if I leave them only in my favourites folder, I'll simply forget about them. A few of the interest sites/pages I've encountered recently... [Read More]

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Posted August 31, 2005 in Venture Capital and Technology

Comments

One of the good things about being me, 'If you ain't got nothin', you got nothing to lose'.

Posted by: jackson | Aug 31, 2005 11:49:36 AM

Fred - remember this. Even in a down turn, there are economic opportunities.

Posted by: David | Aug 31, 2005 1:36:00 PM

Our prayers are with New Orleans. Such testing times for so many.

What a most important topic- getting through the hard times. Definetely worth a few more posts.

From my perspective, the two most important words are "margin of safety" and "negative correlation". Wait...that's not two words.

But, the obvious problem is just how difficult the whole thing is. From the etrepreneur perspective...of course risks have to be managed, but creating a margin of safety borrows from focus and diversification turns a startup in to a whole big mess.

There's gotta be a better way to do this. Entrepreneurship can't hang by the thread of the economic cycle.

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Posted by: Macuilxochitl | May 12, 2006 4:09:32 PM

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