Web Entrepreneurs Beware

My friend Kavi Turnbull, co-founder of DriveAlternatives.com, just alerted me to an article on TechCrunch that highlights an e-mail from one of the Valley's most prolific angel investors, Ron Conway, to his portfolio companies.

The e-mail was ridden with advice for entrepreneurs facing a grim market outlook. Among this advice was the strong suggestion to decrease your burn rate to make your cash last an extra 3-6 months. Unfortunately, for many entrepreneurs this can only come about by firing staff.

Also, if you're in a funding stage, raise money--and as much money as possible--as soon as possible. Time is running out before private equity money is all dried up, especially the ever-important venture capital. Also, expect an unfavorable valuation. To get your necessary capital, you will probably have to give up more equity than your normally would. Times are tough, but your business still needs to survive.

Look for corporate partners for funding, and perhaps an all-out sale. According to Dan Howell of Mesirow Financial, who spoke to our class this week, the private equity market is soft and the leveraged buyout market is much weaker. (The overall market could still be good for his firm, as there could be many deals to be had for the next few years for equity buyers.) However, there are large tech companies out there with the ability to make cash purchases. Last time I checked, Apple had about $20 billion in the bank and Google had about $15 billion. Other heavy hitters with cash include HP, Microsoft, and EMC. In this market cash is king. Stock prices are depressed to such an extent that stock-based purchases aren't a viable option.

Notwithstanding this sound advice, the fact of the matter is that times are tough and many promising start-ups will find their hopes dashed by a weak equity market and a frozen-solid debt market. However, those companies that are lucky enough to have a full war chest can economize in the short- to mid-term and save some time before running out of cash or--better yet--before the economy turns around.