New year, better year?

Coming out of what has been a very rough 6 quarters of early stage and broader economic activity, from Q3/2008 to Q4/2010, there are some signs of hope in my world at least.  More and better opportunities, better quality entrepreneurs with deeper domain expertise and respect for customer validation, and a hint that early stage institutional investors are awakening.

Reflecting on how the last 6 quarters might change the early stage world is appropriate.  It is instructive to think back to Q4/2008 and recall the dire mood in the country and world at the time.  I had conversations with people who worried at some level that  our prosperity was permanently at risk.  There was open talk in the public and media about another depression.  Investment losses, especially for those with an unbalanced portfolio relative to station in life, were life-changing.  Fear was evident, palpable, undeniable.  While we are no longer in that mood, having been to the brink in such a way changes perspective and behavior.

In much the same way as 9/11 has undeniably changed the way we behave on planes – witness the immediate passenger-first intervention on the Delta Christmas flight – the first financial crisis has permanently changed how people look at banks, Wall Street, investments, retirement, credit, employment security and spending habits.  Those with a self-dependent predisposition, the genetic anomaly that often leads to entrepreneurship, are less inclined to trust large employers.  Others who have not considered small company work in the past are now looking at early stage opportunities as no less secure than big company positions.

For small ventures of all kinds, including going concerns with long operating histories, the deleveraging of the economy was an unimaginable shock.  I know of one small business owner who lost most of his orders and access to working capital at the same time.  Orders fell of a cliff, a long-time banking relationship soured, and he had to survive on his own through 2009.  At just the right moment, a new large opportunity radically changed his upside potential and allowed him to start growing again.  I am sure that he will never again be in a position where he is beholden to the credit markets for survival or growth.

This is the most important lesson of the credit crisis for entrepreneurs.  Capital efficiency is paramount.  Those who invest in early stage ventures will demand it more than ever.  Venture investors were caught out in the same way, as everyone learned how much cheap macro-credit was the lubricant for M&A and PE exits.  Nobody in early stage growth can indulge often in anything but capital efficient, break-even trajectory investments going forward.  Of note, it is probably easier to start a company this way from the beginning than it is to change the habits of existing portfolio company.

It is also a bit early to think we have exited the storm.  Evidence that no one really knows where the national or global economy is the variety of opinions on the topic.  Is China a bubble?  Is Greece a ticking time bomb under the EU economy?  Where will inflation/dollar trends lead?  None of these questions will be answered soon, and the uncertainly calls for some basic, post-credit crisis rules for entrepreneurs and investors.  More on that in the next post.

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