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Hi, I’m Brad Feld, a managing director at the Foundry Group who lives in Boulder, Colorado. I invest in software and Internet companies around the US, run marathons and read a lot.

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Gloom and Doom – or Capital Efficiency

Comments (8)

Fred has a fantastic blog up titled Capital Efficiency Finds It’s Moment.  It – combined with his posts My Thoughts On "Startup Depression" – are full of suggestions that entrepreneurs should be thinking about and taking action on right now.  They are both completely consistent with my post Ok Entrepreneurs, Time to Step Up.

I’m not into Gloom and Doom.  I love the Warren Buffett quote that goes something like "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."  Part of the brilliance of this is to be harshly rational and evaluate the current situation through a realistic lens at all times.

Fred’s post help us focus on this.  He’s not shouting out gloom and doom.  Rather, he’s suggesting that the thing VCs and entrepreneurs have been talking about since the dawn of our good friend Web 2.0 – namely capital efficiency – should now be front and center in every startup company.  That doesn’t mean you should freak out, stop doing anything, and go hide under your desk.  Rather, it means that you should sit down with your management team, look carefully at your business, and decide if you are running at your optimal level and spending / investing every nickel wisely.

This is good advice in any market context.  Sometimes it takes the rough and tumble "market downtown" and a rapid approach of a "highly uncertain future" to bring this into focus and make it a priority – for all of us.

  • tim

    capital efficiency happens in an open market free of government intervention or controls. it is darwinism – yet what is happening now is pure socialism. you cant have capital efficiency when the government artificially and temporarily intervenes to “rescue” or bailout” companies that should go out of business, consumers that should be bankrupt, executives that should be imprisoned, and shareholders that should be outraged.

  • http://www.intela.com Jim – Intela

    I am also concerned about all the rhetoric on “regulation” from Obama. With the US headed for its most liberal White House and Congress in my lifetime I am somewhat skeptical at the Dems ability to not over regulate and tax the “Wall Street fat cats” and “greedy CEOs” and it not trickle down to small and emerging businesses.

  • http://newmanva.com/blog arinewman

    This post isn't about politics guys – its about running a business.

    In the context that Brad and Fred are talking about, capital efficiency is all about the value (and revenue) produced by a company that doesn't consume tons of cash to achieve its goals. One of the big failures of bubble-era startups was that they paid NO mind to capital efficiency. They thought nothing of burning through $500k a month prior to generating revenue or shipping product.

    There are cost-effective ways to do things around development, web hosting, staffing, etc. that can save tons of money without limiting the ability of the team to execute. In times like these, the more efficient companies can be, the longer their runway and the more attractive the'll be for follow-on investment. This also means the company is more likely to be able to get to break even

    A start up in the storage hardware space is unlikely to be all that capital efficient. They need a big office, a lab, expensive equipment, expensive, specialized engineers, etc. A web service company (like Filtrbox, for example) can be highly capital efficient because, today, there are powerful and cheap resources available. At Filtrbox, we use Cloud computing, open source software, best practices, and are very careful to no reinvent wheels already rolling. We invest in key areas but are always thinking “better, faster, cheaper”.

  • tim

    Ari is right, but if we cant rant here about the morons ruining this country, where can we?

  • http://polimentary.posterous.com Adil

    I think, Startups have to pursue the capital-efficiency policy all the time. Why spend tons of dollars when things can get done in few hundred dollars.

    I wonder, din't VCs give such type of advices all the time ? Or is it something new advice that is particularly for the current crisis.

  • http://timwolters.blogspot.com Tim Wolters

    Brad, good post. Curious about what you think about the leaked Sequoia “RIP Goodtimes” deck posted this morning on Venture Beat http://venturebeat.com/2008/10/10/the-sequoia-rip… It certainly underscores the need for capital efficiency and certainly the web 2.0 business building recommendations in O'Reilly's Web 2.0 Strategy Guide. But from a VC perspective what is the overall impact?

    Slide 44 titled, “New Realities” has the following bullets:

    o $15M raise @ $100M post is gone
    o series B/C will be smaller raises
    o customer uptake will be slower
    o cuts are a must
    o need to become cash flow positive

    I know you said in a previous post that your portfolio companies didn't vary on revenue expectations outside the norm for Q3, and may have had more companies that exceeded, It would be interesting to post a response from your perspective on the “RIP” post.

    • http://www.feld.com Brad Feld

      Look for at least one post from me this week about this stuff.

  • http://vruz.tumblr.com vruz

    perhaps those who have been doing it all along are the ones that deserve to survive ?

  • tim

    capital efficiency happens in an open market free of government intervention or controls. it is darwinism – yet what is happening now is pure socialism. you cant have capital efficiency when the government artificially and temporarily intervenes to "rescue" or bailout" companies that should go out of business, consumers that should be bankrupt, executives that should be imprisoned, and shareholders that should be outraged.

  • Adil

    I think, Startups have to pursue the capital-efficiency policy all the time. Why spend tons of dollars when things can get done in few hundred dollars.

    I wonder, din't VCs give such type of advices all the time ? Or is it something new advice that is particularly for the current crisis.

  • http://intensedebate.com/people/jim122 jim122

    I am also concerned about all the rhetoric on "regulation" from Obama. With the US headed for its most liberal White House and Congress in my lifetime I am somewhat skeptical at the Dems ability to not over regulate and tax the "Wall Street fat cats" and "greedy CEOs" and it not trickle down to small and emerging businesses.

  • http://intensedebate.com/people/arinewman120 arinewman120

    This post isn't about politics guys – its about running a business.

    In the context that Brad and Fred are talking about, capital efficiency is all about the value (and revenue) produced by a company that doesn't consume tons of cash to achieve its goals. One of the big failures of bubble-era startups was that they paid NO mind to capital efficiency. They thought nothing of burning through $500k a month prior to generating revenue or shipping product.

    There are cost-effective ways to do things around development, web hosting, staffing, etc. that can save tons of money without limiting the ability of the team to execute. In times like these, the more efficient companies can be, the longer their runway and the more attractive the'll be for follow-on investment. This also means the company is more likely to be able to get to break even

    A start up in the storage hardware space is unlikely to be all that capital efficient. They need a big office, a lab, expensive equipment, expensive, specialized engineers, etc. A web service company (like Filtrbox, for example) can be highly capital efficient because, today, there are powerful and cheap resources available. At Filtrbox, we use Cloud computing, open source software, best practices, and are very careful to no reinvent wheels already rolling. We invest in key areas but are always thinking "better, faster, cheaper".

  • tim

    Ari is right, but if we cant rant here about the morons ruining this country, where can we?

  • http://intensedebate.com/people/bfeld bfeld

    Look for at least one post from me this week about this stuff.

  • vruz

    perhaps those who have been doing it all along are the ones that deserve to survive ?

  • http://intensedebate.com/people/tim_wolters4266 tim_wolters4266

    Brad, good post. Curious about what you think about the leaked Sequoia "RIP Goodtimes" deck posted this morning on Venture Beat http://venturebeat.com/2008/10/10/the-sequoia-rip… It certainly underscores the need for capital efficiency and certainly the web 2.0 business building recommendations in O'Reilly's Web 2.0 Strategy Guide. But from a VC perspective what is the overall impact?

    Slide 44 titled, "New Realities" has the following bullets:

    o $15M raise @ $100M post is gone
    o series B/C will be smaller raises
    o customer uptake will be slower
    o cuts are a must
    o need to become cash flow positive

    I know you said in a previous post that your portfolio companies didn't vary on revenue expectations outside the norm for Q3, and may have had more companies that exceeded, It would be interesting to post a response from your perspective on the "RIP" post.

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