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Sinofsky, Gottesman, Liu;, and Redman at GeekWire Startup Day 2016.
Steven Sinofsky, Greg Gottesman, Andy Liu, and Heather Redman speak with GeekWire co-founder John Cook on the VC and angel panel at GeekWire Startup Day 2016.

How should startups navigate turbulent economic times?

That was one of the questions posed to a panel of investors at the recent GeekWire Startup Day. With China’s economy slowing down, gas prices dropping, and turmoil in the stock market, it can be difficult for a startup to know how to manage its resources and how to approach fundraising and other key aspects of its business.

Panelists were Andy Liu, head of BuddyTV and longtime angel investor; Heather Redman, VP at Indix and an experienced angel investor; Steven Sinofsky, former head of Microsoft’s Windows division and a board partner at Andreessen Horowitz; and Greg Gottesman, co-founder of Pioneer Square Labs and partner at Madrona Venture Group. GeekWire’s John Cook moderated.

Continue reading for an edited transcript of their advice, and watch the video of the full session below.

Cook:  What are you telling your startups about how they should be approaching their businesses right now? Are you encouraging the folks in the room to start saving? Not be as aggressive on marketing, hiring? Where are things at, in your mind? What are you telling startups?

Andy Liu at GeekWire Startup Day 2016.
Andy Liu speaks at GeekWire Startup Day 2016.

Liu: I think that optionality is critical. I’ve invested in 90 companies and it’s interesting to see how they’ve all evolved over time and every single one of them, I think, without question, has experienced a near death moment. I think these near death moments are going to happen a lot more in the next year, so just having grit, determination, and a plan to get to optionality —and when I say ‘optionality,’ what I mean is having a plan for when you’re not able to raise money, having a plan for if the capital markets tighten up.

It’s actually an opportunity to really become an excellent entrepreneur because everybody else is going to kind of go by the wayside and you have the opportunity to really build a moat. And if you can build a moat during the downtimes, when it comes back up, you’re going to be one of the best companies remaining. And so, as an angel investor, I’m excited to invest in this time, but as an investor into a company, I’m really telling the companies to make sure you’ve got a backup plan ready to go if you’re not able to raise money.

Cook: Are you telling the companies — and you have 90 companies — are you telling them a certain amount of runway that they should have at this point?

Liu: Yeah, have a plan that you don’t have to raise money in six months. If you have to raise money in six months, and you’re forced to, you may not be able to raise the money, so be prepared for that.

Heather Redman's sweater showing SaaS sector
Heather Redman’s shows her sweatshirt, a chart of SaaS sector trading performance in 2015.

Redman: This is probably a good time for me to mention my sweatshirt. I had my daughter do this last night. Fred Wilson had a thing on his blog yesterday that was the SaaS sector trading multiple for 2015, and this is what it looks like. I think if we extended it into 2016, it would probably go down onto my jeans. But I actually think this is kind of cute, so I think I’m going to keep it, even though it was just a prop for today.

Saas Sector Trading Multiple For 2015. (Credit Suisse/AG.)
SAAS Sector Trading Multiple For 2015. (Credit Suisse/AG, via Fred Wilson.)

Cook: Well it’s cute, but it’s a little scary too. I mean, for the entrepreneurs out there who are thinking about raising money or making the leap themselves. Any other advice? Steven?

Steven Sinofsky at GeekWire Startup Day 2016.
Steven Sinofsky at GeekWire Startup Day 2016.

Sinofsky: It’s easy to translate what’s going on in the public market, and with China, and with the price of gas, and all of this, to your on-demand something. And that can just drive you crazy, as much as if you worked at a big company, watching one stock price at any given moment will drive you crazy. I think that all of the fundamentals are unchanged, like you still have to build a product that works, that meets some need, that people will pay you money for, and you have to build the organization and the capability to do all that. And what some multiple looks like right now is based on a whole bunch of crazy stuff.

And in fact, my view of it is that I’ve never seen anything as short-sighted as what happened 15 minutes after Tableau’s earnings and weirdly how all of that got translated into some market issue broader than even what they sell and how they sell it. This is a very difficult time for people outside the technology industry to evaluate and value technology because we’re in a massive technology shift — a change in leadership, a change in the players. And that’s very hard to value because it’s not going to end up being who anybody thinks right now. To all of a sudden converge onto, “Oh my god, this is all wrong, the model is wrong, the idea of renewing payments is wrong.” It’s just — calm down.

Greg Gottesman speaks at GeekWire Startup Day 2016.
Greg Gottesman speaks at GeekWire Startup Day 2016.

Gottesman: This is not a Tableau or LinkedIn thing, I mean, I’ve talked to a dozen later-stage investors and there’s no question that that type of investing is going to be much more difficult to come by. The valuations are going to be much lower. And so you’re right, especially for early-stage companies, the fundamentals of what you have to do haven’t changed. But I do think, just sitting on boards of some of these companies, I think there’s a transition in terms of investment decisions and what you were going to do with capital, which used to be growth, growth, growth.

I think there’s now a shift, and I think it’s a meaningful one, towards more focus on, “How do we get toward profitability or move more in that direction?” So it may be that it depends on the company and it depends on the stage, but I do think that sort of ‘easy dollars,’ the number of unicorns we saw, raising immense amounts of capital without any business model or any revenue, I think that is delayed or slowed down.

Sinofsky: I agree with the tone and obviously I’m the cheapest guy around, so that’s not it. But it’s more that it’s a little bit of a caution because I think that what was happening in this graph of the multiple is more of a questioning of the whole overall model and a question of, ‘Is this ever going to make sense?’ And, you know, “Oh, all that matters is being cash flow positive super early. Boy, a subscription SaaS model —that’s not the easiest thing in the world to pull off.” Whereas, frankly, if everyone who had a SaaS product went perpetual, they could change the graph overnight. But two years from now, everybody would be like, “Wow, we sure left a lot of value on the table there.”

Gottesman: We’ve had huge run up, if you saw before the graph, the graph kinda went like that [he gestured straight up to indicate a major uptick in the SaaS sector trading multiple].

Sinofsky: My main point is just that the whole market isn’t questioning the fundamentals of the software shift, even though you could actually hear that on CNBC in the morning right now.

Cook: So for the early-stage entrepreneurs in the room, what does this translate to? That they’re seeing these big haircuts in valuations of these bigger companies. Does it trickle down to them? And how should they be thinking about financing?

Gottesman: I think it’s the best time. The best stage to be at is the early stage because I think it’s still about building great teams, building great products, solving real problems. I do think the kinds of questions you may get may be slightly different in this climate than they were a couple months ago, so you may now hear more questions around business model, how much money are you raising, how long is that going to last, what milestones are you going to achieve with that capital. Whereas before, there was a sense that money was going to be a little bit easier, so the kinds of questions you’re going to ask and going to have to be able to answer well are different, but I don’t think the fundamentals are significantly different.

Liu: I’m also seeing right now that for entrepreneurs, there’s a huge bifurcation of opportunities for investors to invest in. Truly, if you’re an entrepreneur that’s done it before and you’ve killed it — I know Greg and I are in a deal that just raised $9 million — it’s extremely easy to raise money. It’s actually getting much harder for a first-time, early-stage entrepreneur to raise money. So if I were an early-stage entrepreneur trying to raise money in this environment, the goal would be to get above the noise. And the noise right now is you gotta have a team, you gotta have a product, you gotta have some customers, you gotta have some traction. If you’re able to hit those things, you’re going to have a much easier time raising money. Spending six months raising money right now just doesn’t make much sense to me. I think building a company and having grit and determination and going after it really demonstrates a lot of credibility to angel investors right now.

Sinofksy and Gottesman
Sinofksy and Gottesman

Cook: So if somebody in the audience is thinking about making the leap into the startup world and they’re working at a big company — Greg, I know you’re specializing in trying to cultivate some of these folks and push them into the entrepreneurial market — what’s the most critical first step they need to do before taking that leap?

Redman: I was going to recommend that people really think about playing to Seattle’s strengths. We’re a small community still, so it’s easy to get connected with the right people. It’s easy to leverage off of the great expertise and infrastructure that we have. Pick something that Seattle is great at. Pick something that is capital efficient if you’re a first-time entrepreneur. Then really set your building blocks in place — all of your connections, your early traction with customers. Do as Andy suggests, try to build something in a bootstrap manner before you try to raise money. It makes no sense to raise money before you’re really ready to, so you need to put those building blocks in place first. But I think Seattle is a great environment right now to start a company.

We have a wonderful and accessible community for starting companies, teams are available, and it’s also a great place for angel investors. I think Andy and I would both agree that it’s a great time to step in if we are in a market correction and we have a little bit of rationality around valuations. This would be a great time to write some checks. Andy was sharing with me over lunch that he got into angel investing during the last downturn and it’s turned out very well for him. So I think that you will see some nice, solid blocking and tackling both with startups and with investors here in Seattle over the next couple of years, regardless of where this graph goes next.

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