VC Triage: Collateral Damage
October 24, 2008
The phrase “collateral damage” possesses a certain strangeness. A pragmatist accepts damage that is accidental, incidental, or a “slip twixt cup and the lip”. Stacey Higginbotham’s “To Prep for Downturn, VCs Turn to Triage” here carries a banner that sums up the article quite well, “Technology and the Credit Crunch”. The connection between the erosion of easy, fast, and cheap credit puts people in a box with few or tiny air holes. Please, read her write up because she makes the venture capital side of the credit equation vivid. For me, the most telling comment in her write up was this statement, attributed to Fred Wang, Trinity Ventures:
This time around he doesn’t know what percentage of the firm’s investments might be affected, but he compared the process of decision-making about further investments to playing cards. “It’s a little bit like poker in the sense that if the company is not burning a lot of capital and the cost of buying a card is low, it’s a little bit easier,” Wang says. “If $1 million buys them another 12 months that’s easy to call, but if the cost of a card is $5 million to $10 million then it’s a lot harder.” He estimates that we’ll start seeing companies forced to shut down next quarter as funding dries up, and says he believes the carnage could continue through 2009.
As I thought about this observation, I jotted down a quick list of the collateral damage that may occur if Mr. Wang is correct:
- Small, traditional publishing companies that rely on high-tech firms for ad revenue. Get that burger flipping motion down, folks. I think that many of these operations will be forced to cut back, maybe close altogether. If it can happen to the New York Times, it can happen to mom and pop publishing companies leveraged to the nines.
- Conference operators who try to pull traffic with wacky buzzwords. I think of the popularity of “social”, “semantic”, and “business intelligence” as candidates. When cash is tight, who wants to blow $10,000 on a booth boondoggle where most of the attendees are students looking for a job, consultants looking for gigs, or fellow vendors looking for a white knight?
- Mid-range consulting firms that jump into hot new sectors and go from engagement to engagement without the lucrative retainers that blue chip firms manage to land. The consulting game is very different today from what it was just 10 years ago. Outfits like Gerson Lehrman Group and others hire retired blue chip consultants and then peddle expertise by the minute. Who loses in this game? The firms that try to create multi client studies or five figure reports that are expensive to market. Experts, the new players like Gerson, and the blue chips will do okay. Others may find that other occupations hold more promise.
- Public relations will get poked in the eye. Marketing communications and sales support for WebEx type meeting will fare better.
I am probably walking on muddy ground here, but I think the food chain in technology is going to be reworked in the next three to nine months. Will companies have enough cash to survive? Will the firms that borrow to bet on a turnaround be the winners? Will the Darwinian nature of these support and sales-related needs be friendly to the four sectors I identified as “at risk”? I don’t know. I won’t be betting too much money that these four secondary sectors will avoid becoming collateral damage. What sectors do you think will face a firestorm of challenges?
Stephen Arnold, October 24, 2008
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