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It Depends

October 13, 2008

vcmike

I’ve spent a lot of time over the last week or so trying to figure out the best way for each of my portfolio companies to respond to the financial meltdown; and, less time, though still a fair amount, reading the blogosphere’s commentary on how to survive the meltdown.

Looking back on the week, what stands our to me is that different situations call for different approaches.  Sure, preserving capital, focusing on the things you can control, etc. etc., make sense across the board, but such high level abstractions hardly amount to good, actionable advice.

Here is an example: last week I read two thoughtful but contradictory posts by Roger Ehrenberg and Fred Wilson.  Roger writes that in these times he is going to focus on B2B opportunities whose revenue models are clear from the start, while Fred counters that he still is going to look for consumer facing plays that follow the “freemium” model of giving away the intial product/service for free, scaling the user base, then going back to that user base with paid upgrades.

Which approach is “right” for my portfolio?  Well, it depends.

Here is an instructive study in contrast: I’ve got two companies in the web 2.0/social media space, both of whom enable the creation of social apps, both of whom raised their first round of funding during the first half of 2008, and both of whom put their offering out into the wild this spring.

One of them saw tremendous take up from consumers themselves and quickly built a very large user base that monetized well enough to cover what is a pretty modest expense base. For these guys, it seems to me and the rest of the board that they should stay the course, focusing on what has been working thus far, and continuing to push forward on the couple of major strategic initiatives we already had identified, even if this is going to require some losses and investment to get there.  We can and should take some calculated risks as long as we know that the combination of cash in the bank plus revenue generation will keep the company funded for a good 24 months or so.  In other words: yes we are in a financial crisis, but, for this company, with its own combination of early product success, low burn, and fresh capital in the bank, the right answer is NOT to pull back on all spending initiatives, but rather to continue down the path already before it, even though this includes a slower revenue ramp and some new hires.

Company number two is situated somewhat differently.  They have a slightly higher burn rate; and, saw a different response from the marketplace after launch.  The product was a little too complicated for your average user, but was extremely popular with “prosumers” and some professionals.  Up until very recently, we were pushing on two different fronts, looking to get some good validation/use cases with enterprise professionals, while also reworking the product to be more consumer friendly.  We’ve been hypothesizing that there should be a very nice positive feedback cycle to having success both in the professional and consumer markets.  In light of market conditions, though, we are taking a page out of the Ehrenberg playbook, and focusing for now on the professional market, with the hope that early success there will allow us to build a nice revenue stream in the immediate term, extending our runway, and putting off investment in the consumer market until we are financially positioned to do so.

Two different situations, two different paths forward. Check back in a year or so to see how things panned out…

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