It is hard to want to be aggressive in a scary market. I was reminded of this during a recent internal meeting where we gathered our partners and discussed our portfolio companies. A number of technology companies continue to grow very well despite the nasty economic environment. These companies are typically doing something quite unique, with a clear value proposition to their customers. I’m not talking about marginally improved solutions over existing solutions. Instead, these companies are real game changers, offering something that is a break with how their customers solved the problem in the past. As a venture investor, you want to encourage these startups to hit the gas and grow aggressively through this tough economy.
How does a venture investor encourage a CEO to continue to think big in a rough market? Should a venture capitalist push a CEO who has a startup that is performing well to go for the brass ring in this environment, even if it greatly increases the risk profile of the business? Does “slow but steady” win the race in difficult times or does the team that bets it all end up winning?
I guess that there isn’t a grand theory to apply to every single startup. Each company should be take in a case by case basis. But it is important for entrepreneurs with venture backing to realize that your VC may be highly inclined to take that bet and push you to get aggressive despite the environment. This is just the nature of the beast, and you need to be aware of it. I’m not really able to offer great advice on how you deal with it, but below are a couple of ideas I’ve heard recently on when to be aggressive and when to be more careful with cash burn.
Aggressive falls into several buckets.
One is sales. In a nasty market environment, how big do you grow your sales team? I have a woefully under formed opinion here, so welcome any advice. What I am hearing from the partnership is that the “right” level of aggressiveness in your sales hiring/expenses (from a VC’s perspective) is based on the health of your end market and the ROI of your current sales team. You should think about growing the sales team, even if this burns cash in the near term, if: 1) customers will have the cash and resources to buy your solution, and if they are really getting positive returns from it 2) your current sales people continue to be ROI positive and closing new opportunities or growing the bookings pipeline with legitimate potential deals then you probably want to keep hiring.
Around R&D spend, I think the real question to ask is one that I heard from a board member of one of our portfolio companies. This board member was CEO of a company that recently sold company for $1 billion+, and has offered some excellent advice from his board position in the past. His take was: “who is chasing you right now?” If there is someone in the rear view mirror nipping at your heels then this is the time to be aggressive. However, if the market conditions has taken the wind out of your competitors sales, then you can be smart on how you spend your development money and conserve cash. I thought this was really good advice.
General infrastructure or processes. This may be the time to under build. I realize that you may end up getting bitten in the butt if your startup isn’t yet totally scalable when the turn around happens, but if you can get by now with less and avoid building in advance of demand then you may be better positioned to weather this storm. I know Prasad has some opinions on this point.
Obviously my generalizations above don’t apply to every company. They were more just reactions to things I’ve heard recently. I welcome any comments!
