Compliance & Regulation

I will survive

In economic downturns, the venture capital CFO must be the firm's central command for cost cutting initiatives at fledgling portfolio companies

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Sequoia Capital recently presented a grim PowerPoint to its portfolio companies. Forebodingly titled “RIP Good Times”, the slides give Sequoia's explanation of the factors underlying the current crisis, a summary of the trends on Main Street and Wall Street which would impact the venture model, and advice on how to survive the downturn.

Among the final slides, Sequoia gives a concise list of its rules for survival:

  • • Perform situation analysis
  • • Adapt quickly
  • • Use a zero-based budgeting approach
  • • Make cuts
  • • Review salaries
  • • Employ a heavily commissioned sales structure
  • • Bolster balance sheets
  • • Become cash flow positive as soon as possible
  • • Spend every dollar as if it were your last

    This advice is being echoed by VC finance managers everywhere looking to make their portfolio companies' balance sheets recession-proof. In times of trouble, it becomes more important than ever for VC CFOs and controllers to get into every detail of their portfolio companies' financials to ensure their survival.

    The need to remain cash flow positive is paramount, says Todd Chaffee, a general partner at late stage firm Institutional Venture Partners. He tells IVP's portfolio companies to make sure they have 12 to 18 months of cash on hand, or or they may face having to go back to the capital markets, which is sure to be a “very painful experience”, he says.

    “The terms have changed,” he says. “The valuations have completely reset, and so the dilution will be difficult to digest .”

    In some cases, it might be better to make cuts in the business than to seek new capital. And when a firm does have to make cuts, Chaffee recommends that it “cut deep, and cut once”.

    At San Francisco-based CMEA Ventures, managing director Faysal Sohail has similar advice for his portfolio companies.

    “We have those conversations with our CEOs every week, making sure that they are saving every possible non-essential dollar,” he says. “Right now is the time to focus on your core competency, and get to the break even ASAP. And if it has to be done at the sacrifice of new products or new markets, then so be it. Because if you survive, then you have an opportunity to do those things later.”

    In addition to helping them cut costs and preserve capital, CMEA provides all of its portfolio companies with outsourced service providers for everything from payroll and human resources to legal, accounting, and investment banking services. CMEA portfolio companies even use cloud computing technology so that they don't bear fixed IT infrastructure costs. Going forward, CFO and COO John Haag will approach every new portfolio with a complete package of outsourced services, Sohail says.

    “This does two things: one, we can get the best rates, and two, the CEO is not spending time and money hiring people and trying to find services from scratch that we've already created,” Sohail says.

    The key is to reduce the fixed costs of the company as much as possible so that it can scale up or down quickly in reaction to the economic environment. Scaling down tends to be the more difficult of the two for entrepreneurs to accept, of course.

    “Most entrepreneurs are by definition optimists,” Chaffee says. “But now is not the time for optimism, now is the time for realism.”