Morettini on Management

General Management and Marketing Advice for Software and Tech Companies

Tag: VC

Health of the Tech Economy

I was reading an article recently about how the number of new tech startups in my local San Diego area has doubled, to 70 new companies, compared to the same quarter last year. More than half of those startups were in software, computer hardware or communications. The article included a number of other criteria useful in measuring the health of the local technology market.

The direction of these measuring criteria for technology market health was somewhat mixed: Local tech employment was up, patents up sharply and M&A activity was up as well. Total Venture Capital fundings, which is an extremely important factor in tech company formation, came in less than half the comparable quarter a year ago.

So are these results a good proxy for the state of the broader technology business overall? I think they represent a very good set of indicators. Let’s take a closer look at some of these factors in a broader geographic view, in addition to a couple of additional indicators that I’ve added to the mix:

TECH EMPLOYMENT

I’ve added tech employment as it’s obviously a very key indicator of the health of any sector. Challenger, Gray & Christmas stated that the number of planned layoffs in technology fields fell to just under 47,000 in 2010, the lowest yearly total for the sector since 2000. The firm says this signaled that technology is recovering more quickly from the economic downturn than employers in other sectors.

During the next 10 years, the tech sector is forecast to experience one of the fastest paces of job creation of any industry. There are many anecdotal reports of strong demand for tech talent, especially in the crucial Silicon Valley market. Nearly 150,000 tech jobs are expected to be added in the US in 2011, says Sophia Koropeckyj, an economist at Moody’s Analytics. In February, there were about 6.1 million tech jobs in the U.S., up 2.4 percent from a year ago.

Tech sector employment trends appear much more positive than in the overall economy.

VENTURE CAPITAL FUNDING

The estimated market value of venture capital-financed companies in the U.S. rose 19% in 2010’s fourth quarter and 23% for 2010, according to the Dow Jones U.S. Venture Capital Index. The bulk of this is technology, and past returns are a very good indicator of amount of VC capital that will be available going forward. When VC funds have good returns, more money pours into their new funds, creating greater amounts of capital available to new startups in the future.

CB Insights report on Venture Capital Fundings in Q1 2011 showed total invested capital rose to $7.5B, up from $6.5B in Q4 2010 and $5.9B in Q1 2010. While a bit choppy, the funding trend has been generally up since Q2 2009. Again, this is bullish for the tech sector, which relies more heavily than most industries sectors on VCs for capital formation. Venture capital is still harder to come by than before the recession. However, while still down significantly from the go-go days prior to the recession, Venture capital availability is still a positive indicator of the tech economy’s health going forward.

M&A

The best tech M&A data currently available is from the first quarter of this year, and it is very bullish indeed. Mergermarket’s report on global M&A activity, published in April 2011, paints a bullish picture for acquisition activity in the early part of this year. This report shows the total value of worldwide technology M&A deals rose to $27,872,000 in Q1 2011, up very strongly from $10,729,000 in Q1 2010, even though the total number of deals decreased by 3 in this period. The numbers for North America were comparable.

It should be noted that while Q1 2011 compared very well to the same quarter in 2010, in both North America and Worldwide the trend was down from Q4 2010. So while M&A activity has picked up very strongly since the recession officially ended, the short term trend of the last quarter wasn’t a positive indicator for the future. This means that M&A activity is a bit of a mixed bag with respect to measuring the health of the tech economy.

TECH CAPITAL SPENDING

Forrester Research predicts that IT spending will increase in 2011 by a healthy 7.5% in the US, and 7.1% worldwide.

InformationWeek conducted a survey which showed that 55% of information technology professionals said their companies will increase information technology spending in 2011, while only 19% expect it to fall and 26% expect it to remain unchanged.

“Technology executives clearly see a sustained recovery of relevant Products/Services and a strong appetite for technology-related purchases by U.S. companies and consumers, which helped raise the position of the U.S. market,” said Gary Matuszak, partner, global chair, and U.S. leader for KPMG’s technology practice. “Coupled with demand from emerging-market countries, this combined opportunity bodes well for the industry.”

Technology capital spending trends, particularly in the US, provide a positive sign for the health of the tech economy.

TECH STOCK MARKET VALUES

The Dow Jones US Technology Index is up almost 20% over the last 12 month period. Stock values are very volatile and are affected by many factors other than the overall health of the sector, particularly in the short term. But over time they are a very good indicator of the health of the sector.

What Does It All Mean?

The indicators that we’ve taken a look at offer a mixed bag of conflicting signals up and down. While it appears more of the signals are pointing up than down, we are in an economy with a lot of uncertainty, and no definitive direction that can be predicted with any confidence. However, the software and technology sector appears to be in much better shape in the near term than both the US and worldwide economies overall. Farther out, the prospects for the tech sector appear to be much more bullish, especially when considering very long-term timeframes such as the next decade. Every company needs to draw their own conclusions about the economic impact on their market segment and individual company prospects. But in a larger sense, the arrow for the tech economy is more likely point up than down. If I’m the CEO of a software or tech company, the overall tech economy would be a positive factor in my decision matrix going forward.

So where do you personally think we’re at? Have we recovered, in the process of recovering, or is the tech business still treading water or going backwards? Post a comment and let us know where your own company’s situation stands with respect to recovery and future prospects.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

3 Comments by admin on July 17, 2011
filed in Corporate Strategy, Financing, General Management, Mergers & Acquisitions, market research
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Choosing an Advisory Board for your Tech Company

Advisory Boards have become a very chic addition to software and hardware companies over the last 5 or 10 years. So what are the key criteria you should use in putting together an advisory board? Well examine this issue below.

Prior to the 5-10 year period mentioned above, it was rare to hear of a company that had an advisory board. What’s driven this trend? For public companies, it’s mostly because desirable advisers who formerly would have served as on the Board of Directors may shy away, as a result of additional potential liability in that role. For private companies, I believe it was the recognition that those filling private company board seats primarily are there because of ownership (VCs, local angels, founders etc.), and may not have all key domain or technology expertise important to the company at the board level.

As a result, advisory boards are very much in vogue, sometimes to great effect–but often not. I’d compare this phenomenon to strategic partnerships. In strategic partnering, you’ll see everything from deals that greatly benefit both companies, to others which start and end with a vague press release. Similarly, many companies seem to put together an advisory board just because it’s the “thing to do”. This is just a waste of time, of course. Like most anything, if you put little thought and effort into it, very little usually comes back.

Let’s take a look at some criteria that could be useful in putting together your particular group of advisers:

Domain or technology expertise

This may appear obvious, but I see a lot of advisers on boards that are there just because they know someone, or maybe possess specific expertise that just isn’t core to the company’s success. I believe it is very important to use your advisory board to fill holes in your management team’s knowledge or experience.

Access to capital

This is a common reason that CEO’s will recruit an advisory board member, especially in early stage companies where capital needs are a critical strategic topic. But I’m not sure that this is always the best use of an advisory board seat; unless raising capital will be almost a constant need. I prefer to fill advisory boards with more scarce talents specific to the company’s market and technology.

Access to distribution channels

Distribution access is another common motivation in seeking advisory board members. I believe this is a very legitimate goal for your board, especially if the adviser truly has special access, or if distribution expertise is a real weakness within the company.

Honest and straightforward counsel

It’s very important to attract experts who aren’t afraid to challenge the management team’s view of the world and “common business sense”. Of course as advisers they need to be tactful in how they convey their viewpoints. But “Yes Man” panel that makes senior management feel good is of no real use, and can even be harmful by reinforcing a false sense of reality.

Available bandwidth

I believe this is a criterion that is very critical, and is often overlooked. I see companies rejoice when they are able to convince a high profile, “heavy hitter” to join their advisory board. While the name may look great on a company backgrounder or on your website, the reality is often that their time is spread too thin to be of real benefit to you. So make sure that you have a frank discussion, and reach agreement on what level of involvement they can actually have with your company.

Motivation

This is the most important criterion of all, in my opinion. Probably also the one on this list that is used the least in considering potential advisers. It’s easy to get excited about someone that fits perfectly what you need on paper. But you will find many folks that are interested strictly from a self-promotion viewpoint. It’s exposure for them, and looks good on their resume. There’s nothing wrong with this, as long as it’s not the sole or primary motivator. Others may think it will help them in getting to use their services in the future. Or they may have some more sinister reason for getting close to your company. So make sure that the candidate’s reasons for engaging are above board, and that your interests align. I’m not trying to create paranoia in anyone’s mind. But I believe that the adviser’s motivation is the single greatest indicator of success or failure in this role. Don’t ignore it.

So there’s some basic advice to consider when putting together your software or hardware company advisory board. Many of you have done this as well. Post your own advice, successes or horror stories in the comment section below so we can expand this discussion interactively.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

2 Comments by admin on December 7, 2010
filed in Corporate Strategy, Distribution Channels, Financing, General Management, Startup/Early Stage, hardware
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Starting and Growing a Software Company in a Difficult Fundraising Environment

Some would say that it’s ALWAYS a difficult time to raise funds for a startup company. In general, I’d agree. With the exception of a few brief moments, such as pre-Internet Bubble in the late 90’s where money was being thrown around like air, fundraising is hard. There are a few lucky folks that don’t sweat this startup task, like repeat entrepreneurs who hit it big the first time, or those with truly obvious ground-breaking IP. But for most it’s a grueling and soul-sucking necessity.

 Today fundraising for a startup company is tougher than every. The Venture Capital (VC) business is in disarray, with the number of active firms in the process of shrinking. The financial crisis and general economic malaise has made finding capital from nearly every source more difficult, from traditional banks to angel investors. So if you’re planning on starting a company today, it might be time to get creative.

 Most of the ideas presented here are applicable to any type of company. But for those smart about it, a software-based business is one that can be started and grown with minimal, or zero, outside capital. This has always been true in the software business, but a number of developments have made bootstrapping even a more realistic possibility today. You will need to accept upfront that it can be done, and structure everything you do with minimal financial resources in mind.

 Successfully bootstrapping is tough if you’re a first time entrepreneur, especially for those that have been working in large companies, with all the trapping that come with that. But embracing the proper attitude early on is essential if you’re going to have to bootstrap your company, at least in the beginning. Let’s examine some tactics that can increase the odds of startup success:

 Understand early-on the level of capital you’ll have available

This is crucial. Most get going on their business, moving ahead and worrying about funding once they have a business plan, prototype/beta, etc. Only then do they put together an investor pitch and think about how much money to raise. But it can be really helpful to have a realistic view as early as possible how much money will be available to you in the early days. No question this is hard to do and by definition the result will be inaccurate. In reality, a number of things will dictate how much money you’ll have available: Management team reputation and track record, investment contacts, dilution philosophy, local investment resources, business model, IP, etc. The key point here is to do your best to understand how much money you’ll realistically have available at startup and early on….

 Structure your business accordingly

….then design your business model to fit your prospective available funding. In reality, this rarely happens. Most design their business, and then try to raise money to fund it. As a result, for example, I see people start enterprise software companies, with complex products at high price points that demand a team of outside sales reps and field engineers with $150-250K comp plans. Most startups won’t be able to attract the funding to support this sales model. Or adopting a Software-as-a-Service (SaaS) approach, without planning for the added operational expenses required with a SaaS model, essentially taking on the role your clients IT department. If you can match your business model to your expected capital resources from the beginning, your chances of success go way up.

 Start while you’re still working

One of the best things a startup entrepreneur can do is to start working on your business while you still have a job. This is especially true of the technically-skilled software company founder. Many software companies have been started by a sole programmer, writing the initial product on his or her laptop while sitting at home in the kitchen. It’s one of the beauties of the software business; you can create a product with very little capital investment. Of course, care needs to be taken that you don’t use any of your employer’s resources or do anything on company time. Make sure that you aren’t violating any of agreements signed with your employer. But once you stop working to start up a new venture there’s no telling when your personal income will start flowing again. So do as much as you can, before cutting the cord with your steady income.

 Do it yourself and don’t be wasteful

Entrepreneurs often find that they can actually do things they never dreamed they could. When dealing with scarce capital, it’s critical to make sure that you actually NEED to pay someone else to accomplish a particular task before parting with your cash. This will lead to personally doing a lot of mundane activities that you don’t really want to do. But it’s important to take those duties on early on to conserve cash. Also try not to waste money on ANYTHING, not just labor. Count those paperclips! The corollary to this is when you really do need outside help, DON’T SKIMP and just do an unacceptable job internally. Bad marketing is an example of this for the technically-oriented founder. This can be truly penny wise and pound foolish, and can cost you much more money in the long run than you save in the short term. Recognize what skills you just don’t have that are absolutely critical to the business, and save money elsewhere so you can afford outside assistance in those crucial areas.

 Don’t reinvent the wheel

I referred earlier to it being easier than ever to build a software company with minimal capital. Development tools have matured to make development quicker than ever. Many target platforms have much less memory constraints, reducing the time needed to produce code that is extremely memory-efficient. There are many pre-built modules for standard functions available for a modest cost. Ten years ago it might have taken a half million dollars to build a quality website that you now can replicate for a few thousand dollars. As a software startup, make sure that you scour all pre-existing resources for things that you can use, before you build them yourself.

 Outsource and off-shore, if appropriate

Another area responsible for much lower costs in starting a software business is the potential for outsourcing/offshoring. This isn’t for every company or every situation, but where it makes sense, it can both reduce your costs significantly and expand the availability of critical development resources. While everyone would prefer the developers under their own roof, in many cases there just isn’t the right talent where the company is located–or the budget to fully staff with full-time, onsite employees.

 Don’t ignore international markets

A big area which most software companies ignore initially for their products is international sales. It’s natural to want to focus on your domestic market first. But doing this exclusively can cost you some excellent growth opportunities, even from the very beginning. This is particularly true for US-based companies. The US is the toughest market in the world. It’s the biggest, and the bulk of the software industry is located there (all looking at the US market first….). As a result, the competition is almost always less in non-US markets. So there is low hanging fruit to be had, plus you can partner in many markets with distribution partners whom have existing market presence, and can take on much of the marketing investment required to gain traction. All of this can mean an excellent return on a modest investment. Once you’ve invested so much to create valuable product IP (which is very “perishable”, by the way), don’t limit your return on that investment by focusing on a narrow geography, if at all possible.

 Don’t give up and enjoy the journey

Don’t ever give up prematurely. The most important thing is to keep grinding until you start to gain traction. Starting up and growing a software company is an exciting–and difficult–endeavor. Above all, I believe you need to be able to enjoy the journey, in addition to having your eye on the end prize–success. There will be difficult times where you need the willpower and stubbornness to push through. Often startup success is found by staying alive long enough for good fortune to find you.

 That’s my advice on starting up a software company and growing it in relatively tough times. Post a comment if you have your own experiences to add.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, LinkedIn, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil directly at info@pjmconsult.com

3 Comments by admin on August 8, 2010
filed in Business Models, Corporate Strategy, General Management, Startup/Early Stage, enterprise software
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Is The Tech Recovery Upon Us?

Let’s face it, things still aren’t great economically: unemployment is over 10% nationally in the US, credit is tight for small businesses as well as reduced access to investment capital, and consumer’s moods, while improving are still not positive.

However, while I don’t want to overstate the case, but I do believe we are on the way to recovery. This has strategic implications for software and tech companies.

A look at the positives:

Stock markets on the rise–The Dow Jones Industrial average is up nearly 65% in the last nine months. Tech stocks in particular have been strong: the benchmark NYSE Arca Computer Technology Index is up nearly 95% in the same period. This is from a very deep bottom, of course. But it adds considerable wealth increases optimism, which usually leads to positive momentum.

Search firms are adding their own staff– ExecuNet’s benchmark Search Firm Hiring Index has increased the last two quarters, after many quarters of decrease. This is a nice indicator of expected increased hiring by businesses overall.

Worldwide employment on the rise — Manpower, Inc.’s Global Employment Outlook Survey for Q1 2010 states that the employment outlook is mostly positive in the Americas and Asia-Pacific, while still somewhat mixed in EMEA. Labor market strength in Asia-Pacific, which is becoming increasingly important as a consumer market, is expected to return to levels similar to before the global downturn.

VCs still have lots of money to invest — After sitting on the sidelines in fear (like everyone else with money in their pockets) during this great recession, Venture Capitalists are starting to poke their heads out among the economic green shoots. They were sitting on huge amounts of capital that was raised in the pre-recession bubble environment, much of which is still not invested-but still accruing management fees. I have heard that there are now many limited partners filing lawsuits as a result of their funds lying fallow, which may stimulate an acceleration of VC investments in the coming year.

IT spending is forecast to rise — After several down years and a very bad 2009, Garner is projecting an increase in excess of a 3% in IT spending worldwide in 2010. This is very important, and a bullish signal for the tech sector heading into the New Year.

The IPO market window appears to be opening — Security software company Fortinet had a very successful offering in November. Meru Networks, a supplier of wireless LAN solutions, announced today it planned to raise $86M in an initial public offering. IPOs tend to drive increased capital access up and down the food chain, and that window has been closed for some time. If it opens significantly, that bodes well for growth in the software and tech sector.

No more bubbles – at least anytime soon

We’re not heading toward another bubble anytime soon. It appears we’re headed for moderate, but hopefully sustainable growth as a result of our two catastrophic burst bubble in the last decade. Government debt, commercial real estate and inflation potential are concerns in the long run, but appear to be manageable in the near term.

What should tech companies do?

First of all, don’t be stupid and increase spending if your situation doesn’t support it — credit is still very tight, and access to investment capital still remains below typical levels of the last decade. So make sure your plans are supported by cash flow, or in the case of early stage companies, at least access to reasonable levels of debt financing or investment capital.

If you are able to spend, it’s a great time to grow fast or take share from competitors — when the economy is just starting to take off and buying is accelerating, act before your cautious competitors have come out of their shells.

In general, companies tend to be too conservative in their investment and hiring plans — Take note that hiring tends to peak at the apex of an economic cycle, just before growth slows or turns negative. In fact, many experts consider strong hiring a leading indicator of an economy that’s lost its momentum. I’ve never been a fan of hiring just because you have the money and growth rate to support it. This is a leading cause of bloated cost structures and bureaucratic, slow moving organizations. But most companies are pretty lean in staff after several years of recession. So if you really do need people, it’s more productive to hire them now as we begin an up cycle, instead of waiting until the very end of it as so often happens.

That’s my forecast and advice for the software and technology business sector as we enter 2010. What’s your forecast? I’d love to hear it. Post a comment or shoot me an email to add your own spin to this discussion.

Follow Phil Morettini and Morettini on Management via Twitter, Facebook, RSS, or the PJM Consulting Quarterly Newsletter. Contact Phil via email at info@pjmconsult.com.

No Comments by admin on December 21, 2009
filed in Corporate Strategy, General Management
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The Future of Venture Capital Funding in High Tech

Like almost every aspect of the current economy, Venture Capital Fundings of High Tech and Software startups are way down.

There is pressure on virtually every segment of our economy, and the worldwide financial system is in by far the greatest disarray of our lifetime. The preferred exit strategy for Venture Capitalists, the IPO, pretty much shut down quite a while back. Financial returns at Venture funds have taken a hit like everything else financial, and VCs are definitely not in good position to attract new capital in the near term–given the current frantic flight to quality by investors. Things look dire in the VC business. There are even suggestions by many people, including some prominent VCs, that the long running and revered Venture Capital business model is “broken”, and that it will cease to exist as we now know it.

So what really is going to happen? Is the end of the world near? (well…maybe, based on the news headlines every day). Will a software or technology entrepreneur be able to fund their company via the VC route in the future? Let’s take a look at some of the things I expect to see happen.

SHORT TERM AND LONG TERM IMPLICATIONS
First of all, I don’t believe the end of the world is near. Nor do I think that the Venture Capital business is going away. There is a fair bit of pain left to go in this very down economic cycle, and the VC business will be no exception. So in the short term, new VC funds will have a difficult time raising money, startup capital will remain very tight, valuations will be lower and the whole experience of raising money will be even more painful than normal (and it’s always painful). Many VC-backed startups which haven’t gotten sufficient traction have been told if they don’t have 12-18 months of cash in the bank, additional funds won’t be forthcoming. But make no mistake, there are software and tech companies closing funding rounds every day. VCs still have not deployed a very large amount funds they raised in better times–that money needs to be put to work. There is still money out there in the short term for deserving business plans. And in the long run, the economy will rebound and things will go back to “normal”. I do believe that the Venture Capital business needs to make some adjustments, however–so it will probably be a “new normal”.

HOME RUNS VS. SOLID SINGLES AND DOUBLES
One of the staples of the VC business model has been finding “home runs”, meaning those companies that can grow large enough for an IPO. These are few and far between. VCs have always said they would gladly invest in 5 to 10 failures to find that one big hit. The IPO market has essentially gone away for the time being, which puts a lot of pressure on the basic premise of how to make money as a VC. I’ve always thought the “big hit” model was lunacy, and akin to throwing darts at a board–it’s so hard trying to pick out who the huge winners are going to be a startup stage. There’s a lot of luck involved in a company getting to an IPO, and even more luck involved in picking them out at birth. This strategy seemed to work fine when the markets were consistently heading up and to the right, and quite a few companies could do an IPO and get a billion dollar market cap. But I’ve always thought the very basis of investing and company building is in finding those companies that can give you a return on your money, skillfully balancing risk and reward. Considering those companies that have truly developed a strategic advantage and a sound business plan, some of them may get very big, others not so much–depending upon the specifics of their target market and business. But VCs for years have been basing investment decisions almost solely upon huge markets and the potential for the big hit. I think it was lazy investing, and that part of the VC business model may need some adjustment.

VC COMPENSATION MODELS
As VC fund size and limited partner returns increased during this golden era of VC funds, so too did the compensation to the General Partners of the fund. When funds and returns were outsized, limited partners swallowed hard or looked the other way. It’s analgous to a mutual fund with a hefty management fee–when the returns are great, it’s no problem. But in times like today, the small fees associated with an index fund look pretty good compared to that underperform mutual fund with active, expensive management. VC fund Annual Management Fees which have typically been in the 2-3% range will likely be reduced, or maybe even go away entirely. The 20% carry standard will probably hold, and may even go up and bit if there is heavy pressure to reduce the management fees. LPs won’t mind the carry if they are realizing good returns. What does this mean for the software/tech entrepreneur? It may not mean much, on the surface. But I do think it will require VCs to do more homework on their potential investments, which possibly gives an edge to those entrepreneurs will less dramatic, smaller business plans, but better risk profiles.

THE OXYMORON OF “LATE STAGE VENTURE CAPITAL”
I’ve always thought that the idea of “late stage” venture capital was kind of a joke. However, the Venture Capital business has been moving this direction for quite a while. Part of the reason is that VC funds have gotten so big that it’s hard to deploy all of the money with “real” startup investing. And also it’s a less risky way to get to that big IPO payoff. But really, these late stage funds have gotten pretty similar to Private Equity firms, except their time horizon may be shorter. So maybe these investors should really just be re-classified–in many ways they don’t look anything like their early stage brethren. At this stage, there are usually many other potential sources of capital. I believe that this late stage segment of the venture capital business is one that is due to shrink the most in the near term.

CAPITAL-EFFICIENT BUSINESSES VS. KISSING FROGS TO FIND THE “BIG ONE”
I think that the Venture business will trend back to true startup investing, and will reduce it’s reliance on the long home run as its basic method of making money. This is where they really add value to the “business-creation value chain”. What I expect to see is a renewed search for businesses which are “capital efficient”. What I mean by this are companies that will turn an invested dollar into a high multiple of that investment, in terms of revenue, profits and valuation. You might say this has always been true. But the key difference, I believe, is that that venture funds will be smaller, and as a result will feel less pressure to fund high risk, high ceiling businesses where a lot of capital needs to be deployed. As I stated earlier, VCs with large funds have previously felt that the economics of their business demanded this approach. With smaller funds, I believe that capital efficient businesses in smaller markets will no longer be ignored. Solid singles and doubles may come back in vogue (for those of you that understand baseball analogies!).

IS MONEY REALLY “SMART’? OPERATIONAL EXPERTISE VS. FINANCIAL GUYS
I’ve always felt that the idea of “smart money” has always been a fallacy, or least one that was greatly overblown in the Venture Capital business. I know that there are A LOT of people that will disagree with me on this point. A lot of startup advisors will tell you that it’s imperative to raise money from investors who will provide much more than cash. I think it’s a bunch of malarkey. No doubt that there are some experienced, skilled and very well-connected VCs that can provide a strategic advantage to entrepreneurs, who are fortunate enough to attract them as investors. But with money being a commodity, this is mostly about a VC firm trying to differentiate and provide a value-add. Fundamentally, the need for capital and the need for advice and other business assistance aren’t tied at the hip. Both are o
ften needed, but they don’t need to come from the same place–they are important, but separate ingredients to the successful startup recipe. If you can get both in one package, that’s great. But too many VCs present themselves as experts in areas where they’ve really just been investors. This is especially true for those many VCs that come from a financial background, rather than from a high tech startup management background. Frankly, entrepreneurs need to be careful of utilizing faulty advice, regardless of whether it comes from someone who has put money in their company or not. Having money in a pocket should not be confused with operational knowledge or expertise. I’m not sure whether it will happen or not, but I’d like to see the Venture Capital business present a more realistic view of the value that they are adding–it’s not the same in all cases.

SUMMARY: WILL VC FUNDING GO AWAY?
The short answer is “definitely not”. I do think that the bubble excesses have highlighted some weaknesses in the Venture Capital model. There will be adjustments to it–just like there will be adjustments in many other businesses, as a result of our economic duress. I’ve offered some ideas to get everyone thinking–please feel free to disagree, or otherwise add to the discussion. I’d welcome everyone to post a comment, if you have an additional take on this always interesting topic.

Phil Morettini
PJM Consulting
www.pjmconsult.com

No Comments by admin on March 2, 2009
filed in Financing, Startup/Early Stage
tagged , , , , , , , , , , ,

Strategies for a Technology Market Slowdown

Is the world economy slowing down? What are the implications for technology companies?

Recently, technology stocks (along with the stock market in general) have tanked. There is a credit crunch that shows no signs of abating, and inflation is rearing its ugly head in some markets, and political gridlock seems to be the order of the day.  Is the economy headed for a “double dip” recession–taking technology businesses down the drain with it?

I don’t think so, but I’m not in the business of forecasting such things. Tech stocks are often affected more severely than average in an economic downturn, which affects technology industry investment and ultimately tech growth rates.

So what should you do if you’re the CEO of a software or hardware tech business?

Be Prudent, But Don’t Panic
Now’s certainly not the time to stick you head in the sand, and hope the economy doesn’t get any worse. It almost certainly will; but more importantly, how will it affect your company? That’s what you need to ponder. Is your product a “must have” or a “very nice to have”? Obviously the “nice-to-haves” will have a tougher time in a declining economy, and should plan accordingly. So take the time to analyze you situation, and make a forecast for your own business, based up the unique circumstances of your market and company. Remember, hope is not a strategy.

Look For Opportunities to Outflank Weaker Competitors
For strong players, declining economies can be a great time to pick up market share from weaker competitors. If you have the resources and can do it safely, now might be the time to run a promotion, or selectively increase your marketing. It’s counter-intuitive to most managers’ instincts. But weakening the competition during a downturn can lead to stronger growth when things turn back upward.

Slow Near-Term Expense Growth, But Don’t Compromise Long-Term Initiatives
In most cases, companies will want to carefully monitor, and possibly cut back on their spending. You want to make sure that you don’t put your company in jeopardy, by have expenses out of sync with flat or declining revenues. But try your best to keep intact the initiatives that are critical to long-term growth. You must continue to think long-term as well as short term, assuming you don’t get in a situation where your survival is at stake. Cut back on advertising and office space if you’re seeing a slowdown–but make sure you don’t cut the product development project which will lead to growth 18 months hence. These can be tough decisions, but they really separate the long-term successful CEOs from the flash-in-the-pans. Almost anyone can manage when times are good.

Limit The Growth Of Your Staff
While prudent spending can be wise during a downturn, aggressively increasing the size of you staff usually isn’t. There are always exceptions, of course, but adding too much staff can really bloat your fixed cost structure, in a manner that limits your management flexibility. Unfortunately, many companies are often most aggressively adding staff at the end of a growth cycle–just in time for the downturn. If this leads to layoffs, it can have a devastating effect on your company’s morale.

Although layoffs are sometimes necessary, they are always painful and hurtful to the company culture–unless the company culture is already of the “Attila the Hun”, cutthroat variety. The founders of one of my former employers, Bill Hewlett and David Packard, ran HP for many years with a rule of thumb that limited staff increases to 25% of revenue growth. This helped them avoid the natural inclination to hire someone new every time a new task was identified. I believe was an important factor in many years of smooth growth–without layoffs. This particular metric might not be right for your company, but something similar could prove to be a useful damper on excessive hiring.

Make Sure That You Have Money For A Rainy Day
While it’s no time to panic, it IS time to make sure that you have the financial resources necessary to comfortably cruise through a downturn.  Availability of funds and terms will only get worse if the  stock market heads down further and the credit crunch continues. Also, make sure that you have available the largest line of credit possible with your bank. It may cost you an extra few thousand dollars a year, but its excellent insurance, if you are surprised on the downside. If you’re in startup mode and financing yourself on credit cards and home equity lines–maximize your future access to these as well! Whatever your sources of funds, make sure now that you’re financially well prepared for whatever the future holds.

Be Poised For The Next Upturn, Whenever It Happens
I mentioned earlier that you should try your best to keep long-term initiatives alive. In that same vein, your thought processes should CONSTANTLY be focused on the next upturn, in all of your decision-making. Again, this assumes that your survival isn’t in question. For example, while massive hiring isn’t usually wise during a downturn, you want to always be open to unique opportunities that may not come along often. Say there is a talented executive available, only because of the downturn. If you can safely afford him or her, snap them up now, before a competitor grabs them. Or retain a talented consultant to position yourself with a new technology direction or market segment when growth inevitably climbs. Downturns often present opportunities to improve your business when the next growth cycle occurs. But you need to be “looking ahead” and making good decisions now, to take full advantage of the upturn when it finally does.

Summary
Once again, now is not the time to panic. But it is an important time to plan. Anyone that can predict what will happen with an economy should go to the nearest casino–no need to waste your time with a software or technology company! So I suggest that it might be wise to do a “best-most likely–worst” 2 year forecast now, and try to plan as best you can for the two extreme cases. Post a comment and let me know your thoughts on how the economy and the tech industry will fare in the coming months.

Phil Morettini
PJM Consulting
www.pjmconsult.com

1 Comment by admin on January 14, 2008
filed in Business Development, Corporate Strategy, Financing, General Management, Mergers & Acquisitions, Software/Product Development, Startup/Early Stage
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