Page last updated at 10:55 GMT, Friday, 31 October 2008

No downturn for Silicon Valley

By Maggie Shiels
Technology Reporter, BBC News, Silicon Valley

Dollar bills
Companies were told to 'hunker down' and save cash

Silicon Valley is still open for business but entrepreneurs who want to survive the economic downturn face some tough choices.

So said venture capitalists attending a round table event to dole out advice to about 100 start-ups.

"It's not going to be business as usual that's for sure," said Kittu Kolluri, a partner at New Enterprise Associates. "But our business is still open and will continue to be open."

He told the BBC: "Companies are going to have to be surgical about how they put their money to work. They are going to have to be more proactive about raising capital."

This meant every company would have to look at how much cash it had in the bank, slash expenses where it can and even lay off staff.

Having done that companies should go back to founding investors and ask for more cash to ride out the storm, said the VCs attending the forum - organised by the VC blog VentureBeat.

Don't Panic

The big problem with the financial crisis is how long it will last, said John Doerr of Kleiner Perkins Caufield & Byers.

"There's been a really big change in the world and I don't quite understand it," said Mr Doerr, who is something of a rock star in the VC world having invested in companies such as Google, Amazon and Netscape.

"There's something going on here other than subprime mortgages," he said. .

Protect the vital core of the company. Use a scalpel instead of an axe. Be surgical.
Maggie Shiels
BBC technology reporter

"We've not only got a debt crisis, but a crisis of confidence. With the current level of uncertainty, it's really hard to forecast what's going to happen going forward."

That, he told the BBC, made it all the more vital for all businesses to take a hard look at the long term and plan conservatively.

"This is a time for businesses to make smart focused decisions on how to strengthen their business and deal with an uncertain world."

But amid all the talk of belt-tightening and layoffs, Matt Cohler, a former Facebook executive and now a partner at Benchmark Capital, warned against being too gloomy.

"Being conservative makes a lot of sense but you shouldn't panic. That doesn't mean this isn't a very very serious situation but it doesn't serve entrepreneurs and executives well to panic."

Burn rate

The forum also compared events in 2008 with the dotcom crash of 2000-2001.

At that time angel investor Ron Conway had 224 companies in his portfolio. Of those, 70% or 164 went out of business. The successes included Google, PayPal and Ask Jeeves.

ron conway angel investor
"It's a new reality but we are still doing deals," said Ron Conway

"We were in the centre of the storm. We were highly leveraged and all of us have to admit we shut down.

"Everyone stopped investing in 2000. The average burn rate on all our companies was about $500,000 - $750,000 (308,000 - 461,000) a month," he said.

Today that burn rate has dropped to around $250,000 (153,000) a month.

Because of that, Mr Conway believes Silicon Valley will be able to ride things out.

"We are not the epicentre of this storm and therefore the really great thing is innovation in Silicon Valley is continuing unabated," he explained.

"Today I see five new deals every day in the middle of this crisis and I saw five deals a day from start-ups and entrepreneurs six months ago. That is very encouraging to me."

"Go big"

But not all the entrepreneurs at the conference had faith in the VC community's claim it would still be doing deals.

"The VC's are lying when they say they're open for business," said Jason Calacanis, founder of the Mahalo search engine.

"It's a hit-based business," he said. "They're going to focus on the winners."

Advice from one of those winners was provided by Max Levchin a former co-founder of PayPal and founder of Slide, a publisher of social entertainment applications.

In contrast to the caution Mr Levchin advocated shooting for the moon.

"Go big or go home," he declared.

"It's advice that is not necessarily for everyone," he said. "But it's crucial not to allow yourself to believe the world is crashing down around you and realise that start-ups are supposed to fail a lot. 85% fail in their first year."

Others were more measured.

"Running a lean company should be a mindset," said Nirav Tolia of Epinions. It should be something you should be doing when times are good as well as bad."

And while he urged start ups to do all they can to survive the next 18-24 months of tough times, Mr Tolia warned entrepreneurs to remember what drove them to start their own business in the first place.

"We can cut perks. We can cut spending. We can't cut hope," said Mr Tolia.

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