Lessons from the BUST

Much has been said about the US recession and its effect on the growing economies around the world and especially the outsourcing industry in India. The financial crunch that accompanies such hard economic times also undoubtedly leads way for tough decisions regarding money…a decision very significant to venture capitals around the world and their counterparts – startups. The biggest question at such times is whether or not to start a company.

But first how does the recession affect VC financings?  A recession is generally a difficult time for companies that are trying to raise venture capital because VCs are less likely to fund companies when the economy is suffering. For this reason, a recession is not an ideal time to start a company that requires a lot of start-up capital to get off the ground. If one could go back a little into history it would become clear that VCs will put less money into funding companies, converse cash and wait until the acquisition and public markets open up a bit.  With grey clouds over possibilities of a good exit a VC would not want to invest in a company…it is against the basic principle of venture funding. But if we limit investments to early-stage small companies - possibilities are that we might be looking at a brighter picture. So some of the reasons why I think a recession is in fact a good time to start and incubate a small startup.

• Having limited capital leads to creative thinking, healthy deliberation about expenditures, and the need for founders to pay very close attention to cash flow, budgets and balance sheets.
• Sometimes a lot of ready money can create a misleading picture of success, but in the long run, a business built on weak idea will end up standing on shaky legs. During a recession, entrepreneurs are forced to look long and hard at their business ideas before jumping in.
• As a startup one gets a head start. Somebody with a great idea and planning to start his or her own company will get a lead over the competition if they start now. I say now because once the economy comes out of recession, your business will be that much further along, and that much closer to being ready to raise capital.

As far as VCs are concerned there are some quick lessons that they might also need to take with the US economy heading downwards. Here are some lessons from the last time we went through something similar:

• Cash is king - raise money if you can; don’t vacillate on valuations
• Put your blinders on, and build the business - avoid distractions
• Focus on the customer - build what you can sell in near term
• Building brands can get cheaper - but will still take cash
• Enterprise sales (software or services)? Count on longer sales cycles
• Beware of old receivables - a lot will evaporate

If we do get to a full bust, I will come back with some more. Remember, the great companies of today were built on surviving the last bust. Here’s your chance.

Portfolio News

Xirrus, Inc., the only Wi-Fi “Power-Play” that can replace Ethernet workgroup switches with Wi-Fi as the primary network connection for end users, has recently closed a third round of funding, securing an additional $26 million in equity financing. The round was led by Canaan Partners, with additional participation by all existing investors. The investment will be used to fuel further acceleration of customer acquisition and international expansion. Eric Young, General Partner, Canaan Partners has also joined the Xirrus Board of Directors.

iYogi, a next generation remote technical support company recently announced the expansion of its small business services to include support for Microsoft Windows 2003 Server, enabling business owners to efficiently maintain their network without maintaining an IT department. iYogi’s Remote Service for Windows 2003 Server along with all of its services, is available to customers in the United States, Canada and United Kingdom. With a resolution rate of 86% and customer satisfaction rating of 93%, iYogi provides customers with an inexpensive and consistent option for their technical support needs. Customers will be able to select from the following pricing plans, paying a flat rate per incident or purchasing an annual subscription.
—Single Incident $ 189.99
—One year, unlimited access to technical support $ 999.99

Cellcast Group, a global interactive digital broadcaster recently agreed for an exchange of its two channels for one on the Sky Digital platform for 1.4 million stg. The net book value of the two channels being exchanged is 304,936 stg. The net proceeds will be used to provide general working capital and to repay the 500,000 stg outstanding under the existing facility provided by Headstart.

At Canaan Partners

Seth A. Rudnick, Venture Partner at Canaan Partners and M.D at Liquidia Technologies, a nanotechnology company focused on development of engineered particle-based therapeutics and featured optical films has been appointed as the Chairman of Board of Directors at Liquidia Technologies. Dr. Rudnick has been an adjunct clinical professor of medicine at The University of North Carolina-Chapel Hill.

Events

BarCamp Mumbai 3 was recently held on March 29, 2008 at the School of Management at IIT Mumbai. In the true spirit of BarCamp it’s provided an open platform which anybody could make their own. For the event this time the infrastructure was extended in view of the overwhelming participation at BarCamp Mumbai 2. This edition also hosted a BlogCamp which had people talking about blogs and also other aspects of social media and marketing. The ‘FireTalk’ like minded people were brought together to discuss interesting ideas that could evolve into full scale business plan.