In the Trenches: Cutting Costs in a Tight Economy

January 21, 2009 | 6:30 – 8:30PM

Moderator:

  • Mark Sherman, General Partner, Battery Ventures

Speakers:

NOTES:

  • Jason Lemkin

    • He built:

      • Babycenter:

      • Nanotech co: 100 meetings to get funded

      • Echosign: Founded in 2005; 18 people, 10,000 customer, grabbed $8M (“the balance of which is still in the bank.”)

    • Takeaway – get Really really focussed and kill anything that’s not working as fast as you can.

  • Munjal Shah:

    • Take-away: skip the “what can we take away from the budget approach” and go for zerto based budgeting where you start with nothing and then ask, “what is the stuff we absolutely need to have.” It gives you a better result. It’s harder but better

  • Seth/Meebo:

    • have raised $37.5M up to C.

    • raised after they had traction;

    • doing 40M uniques/mo

    • Take-away: we focused on having a founding team that could build a product without having to pay anybody Hire SLOW, not fast.

  • Eric Ries / ImVu

    • founded in 2004;

    • we sell virtual cllothes for avatars;

    • Eric is now with Kleiner as a venture advisor after building three startups

    • Take-away: runway is not the issue; the issue is how many more iterations can you do? Don’t just do the same X iterations slower. That’s stupid.

  • Auren Hoffman / Rapleaf:

    • shareholder in 29 companies including Meebo;

    • Take-away that is non-obvious: when you get a term sheet from a VC, the beest clause to negotiate to cut your costs is your investors’s counsel’s fees. Cut that down to $zero or $10K

  • Mark Sherman / Battery Ventures

    • 30 years in business;

    • have taken 8 companies public (2005-2008) like Omniture, Netezza, BlaeLogic, sold another 6 companies;

    • sold an unmanned aeuronautical vehicle to Beoing for $400M

    • Key Takeaway: the world of vc has changed fundamentally and will reset things for the next 3-5 years. The number of firms and dollars will decline. So be as capital efficient as you can. Every dollar now counts.

  • Seth:

    • Build cheaply. When you take on capital, your company will grind to a halt because you have to stop working and start hiring and giving powerpoints to your investors.

    • Get Traction first!!! Then add money. Money does not bring traction:

  • Munjal Shah:

    • “Eat appetizers when they’re there, not when you’re hungry. If the money is avaialable and raisable, do it. Always.

    • They always want to give you money when you don’t need it and never want to give you money when you need it.

    • Don’t overcapitalize. But raise it when you can.

    • All companies fail for the same reason – running out of cash. Don’t run out of cash.

  • QUESTION: What are the advantages/disadvantages of raising money today?

    • Eric:

      • really good deals are still being done.

      • There is no way for people to walk in with a bplan and walk out with cash.

      • Tough enviironments force you to really sharpen your plan.

      • Do your investors think that you can create value or

      • Raise money when you don’t have to (cuz that’ swhen it’s available.)

      • We tried to get off the multi-round treadmill (how will we get to the milestones so we can raise ANOTHER round????) and think instead of “how do we use this round to get to profitability.

    • Mark Sherman:

      • There is a lot of talent out there right now that you can tap for free product development. They’re working at boring big co and want a side project.

      • Check out the viability of the firm you’re dealing with since the venture firms are collapsing.

    • Jason Lemkin:

      • It’s the wrong question. The right question is “what’s your business model? and do you need venture funds in order to actually succeed?”

      • [I agree with that. Advantage and disadvantage is subjective.]

      • There are few companies that REALLY make sense as venture funded plays.

      • If you DO have to raise it, do it as late as you can in the lifecycle of your company.

      • Get it out and do it until you’re breaking things significantly so that you now how big that business can scale.

      • You might be better off running your business and just banking the cash in your jeans.

    • Mark Sherman:

      • We have found that the more we give early stage businesses, the less successful they are at exit. The less we give, the more successful they are.

  • What can you suggest to people?

    • Auren/Rapleaf::

      • 3 things that make sense right now

        • B2B: Products that the CFO likes that help them make savings or help him make money

        • B2B: help companies sell more stuff to their current consumers;

        • B2C: diapers.com. Simple focussed and

    • Munjal::

      • DO NOT DO SALARY CUTS. It breaks an implicit contract.

      • Cut one person before cutting everybody.

      • Cut the full person and pay your others full fare.

  • Question: I just raised money in October 2008. I have some opportunity to bring on more.

    • Rapleaf guy:

      • we do significantly serious reference checks (criminal, debt, civil, an everything else.). We go DEEP.

    • Jason Lemkin:

      • get the money now. Get it because we’re probably heading into nuclear winter.

    • Eric Ries:

      • Pull your moment in time forward when you start asking people to buy your product.

      • Don’t wait to learn that information.

      • You can sell your alpha TODAY to people even if it’s only half-built.

  • Question:: which expenses would you target for cost-cutting?

    • Seth/Meebo:

      • wedecided not to build a second data center on the east coast.

      • Service providers just stack up. quickly. REview and cut them.

      • Pre-empt future hires. Do not hire more people if you can avoid it.

    • Jason:

      • Avoid PR firms

      • Minimize office space

      • Do NOT cut your core sales and marketing engine. It takes 18 months to build up again.

    • Q: Anybody renegotiated a lease?

      • Munjal: In 2000,

        • Our lessor went bankrupt. We stopped paying them. It was caught in bankruptcy court.

        • You think that people will come after you but they won’t.

        • RENEGOTIATE. It’s better to do that.

        • Don’t cut your people.

        • Cut your overhead costs.

        • At Like.com, we always “hire the best and pay the best. (in cash and/or equity.)

        • But we hire less people than you might have in other cases. We make our teams work really really hard as a result.

        • Our teams are understaffed on purpose.

      • Mark Sherman:

        • One of the mistakes I see with our smaller companies is that they overinvest in their spaces. / real estate.

      • Jason Lemkin:

        • YES – monitor your landlord

        • I have been through two renegotiations.

        • If you default on your lease, they can get a full judgement agaisnst the full amount

        • Go to your landlord with your balance sheet and and model.

        • Show them how they will make more money

      • Mark Sherman:

        • Do a zero-based org chart on top of just zero based budgetin

        • Start fresh. Figure out what’s critical. from a blank sheet. to get as much ramp as you can.

      • Auren:

        • If you have a 15 person team, you should have no more than a CEO and 2 VPs.

    • Q: During this time, should companies be tweaking their busines model?

      • Eric: if it’s already successful, no.

      • If you haven’t validated your model, sure.

      • Get more efficient wit your existin gteam.

    • Q: My point was that sometimes harsh times can make you realize that your model just sucks. I watched a client/server company go from client/server to SaaS and now the’re a 1.5B/yr company. Nextag was another great examle.

    • Sales

      • Jason Lemkin: We made our existing sales teams go from base + commission to 100% commission.

      • Sales and marketing people BOTH should be paid only on bringing in revenue

    • Gadi:

      • GO TALK TO YOUR CLIENTS

    • Question: Have any of you gone back to your customer?

      • Manjal: we built a microsite that ONLY shows stuff on sale. That is the only stuff that is now selling. And the conversion rates are much better than on the original site.

      • The key to being able to change your business model is having low-denial.

      • Get over it.

      • The smartest guys in the biggest bank in te country didn’t know what happened either.

      • Be interested in being successful more than you’re interested in other stuff like “following through, being right, or other concepts.”

      • I used to meeet with a group. All of them went bannkrupt – all 15.

      • Get out of denial. Fail Fast. Shut down fast if you have to. Restart fast.

      • 10 guys went and got jobs. 5 built new businesses, each of which went on to generate at least $5M/year. The earlier they got out and started building anew, the better they are doing now.

      • Seth: As long as you’re generating results for your own customers, they will continue to pay and may even pay MORE nowadays.

    • Mark: One of my portfolio companies had planned for significant growth. One of my companies turned away a 1.8M deal that was going to take them off-path I was happy to see them staying focused on THEIR plan.

  • Question: What metrics are you using and is that changing?

    • Seth/Meebo:: we use number of uniques/property; uniques/daily across all Meebo properties; how many impressions we can push to their users; bottom line revenue;

    • Eric: gross revenue; profitability; ROI (expected and actual); acquisition cost per customer; lifetime value per customer (is A>B in this channel?); “most people do not do this work and use proxies instead

    • Auren: too many metrics are really bad; most companies have way too many; your product is probably the most thing

    • Jason Lemkin: our metrics changed radically from (whatever) to 2009 (profitability is my only new metric.) Begin forced to subscribe to a bunch of SaaS metrics who created them was beyond frustrating. Refreshingly, we’re back to bottom line only.

    • Munjal: profitability and cash are all that matter in 2009 and cash-burrn. We have enough cash on hand to run for five years if we want. We do a LOT of A/B testing. ALL of your testing must be parallel A/B testing (where every second users gets the optional difference.). We A/B every site change on 10% of our base. If it is not better than the prior version, it does not go live. We literally instrument every single change. We produce less featurres (like 60 of them) vs competitors (who may release 100) but they’re all heavily instrumented and that is how we can KNOW what works.

    • ****the biggest waste on earth is building code that nobdy wants or that you can’t measure to see if it ever moved the needle

    • Seth: We put fake features on the site and then watch for click-throughs. Onc ethey click on it, we tell them it was a test. Taht saves a TON of development work.

    • Auren: Test EVERYTHING. Assume NOTHING. The worst marketing person is the one who knows what the user wants. You want a marketing person who teases out the user wants not assumes them.

  • Summary::

    • Flat is the new up.

    • Not getting a bail-out is the new up.

    • Move sales to incentive based 100%

    • Cut non S&M costs like overhead

    • Talk to your clients about how to drive more revnue with them or help THEM drive additional revenue from THEIR customers.

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