An Open Letter to my CEOs and Portfolio Companies on The US Financial Crisis

The last open letter I penned on this blog was on January 15th of this year advising on the falling value of the dollar and its impact on Israeli start ups. That post was meant to focus CEOs and the venture industry on the cost side of our businesses. Unfortunately, we are still on the wrong side of the dollar/shekel rate and It is now time to focus attention on the market side, and fast.

I am writing this post from California and based on my reading of the Israeli online sites, I do not think the full effect of this crisis is well understood in our Holy Land. The situation looks dire from California. In New York it is dire. Just to put this in perspective, large financial institutions to whom many Israeli start ups sell their wares have closed their doors, the few who are surviving will be cutting budgets to stay afloat. Financial institutions as a market are gone for a while. And if you remember back to 2000/2001, you will recall that it is like a bouncing ball. First dot.com, then telecom, then software......I fear we will see the same thing here, first financial institutions, then telecom, then......Dell is already feeling the pinch.  

Watch the pictures of people walking out of Lehman and now HP with their boxes. That will reduce consumer spending which is what drives the US economy. It is bad out there, really bad.  And if you think Europe is an escape, think again. They are just six months behind the US's dropping knife.   

Why am I broadcasting all of this gloom and doom? Because the sooner you get in touch with this and realize that this is not a passing storm, the sooner you will get your business in touch with these realities. Too many companies hung on too long to 4:1 shekel to dollar exchange rate and it hurt. The sooner you realize that your market has vaporized, the sooner you can right-size your company for the near term opportunity. It is worth reposting a section from my last Open Letter that was from a Fred Wilson post.

So why do venture investments fail? Well if I look at the ones I’ve been involved in (including deals my partners led but where I shared the pain of loss) there are two primary reasons.

1) It was a dumb idea and we realized it early on and killed the investment. I’ve only been involved in one investment in this category personally although I’ve lived through a bunch like this over the years in the partnerships I’ve been in.
2) It was a decent idea but directionally incorrect, it was hugely overfunded, the burn rate was taken to levels way beyond reason, and it became impossible to adapt the business in a financially viable manner.

Four of the five failures I’ve been involved in fit into this second category and probably 2/3 of all the failures I’ve seen “up close ad personal” fit into this category. I don’t blame the entrepreneurs and managers entirely for these failures. The investors and the boards of these companies (ie me) are responsible for failures like this. Entrepreneurs may not have the experience to know the folly of taking burn rates to levels which make “figuring it out” impossible. But we as investors know how high burn rates kill companies and we have a responsibility to fight them at every turn."

I beg of you to right size your business. Cut expenses and hunker down. Focus your attention and resources on what is working and make sure you are successful at that. Focus and remember Jim Collins' Hedgehog. 

Funding rounds will be painful in the near future so try to get by without fundraising. Low burn rate models will have a major advantage in this environment. Please get in touch with this reality, it is critical to your companies' survival and success. Take the hard decisions now so that they are not taken for you in 6 months.

I will end with a positive note: Financial meltdowns are also a time of great opportunity. Keep your eyes peeled for that next Google opportunity. It is lurking in this mess.

Shana Tova to all of us.