Viewpoint / Company Building

Our View on the Reasons for Optimism During Bubble or Bust

Articles these days are filled with talk of the upcoming winter, caution about start-up spending, and tweetstorms advising us to worry. I respect the authors of these points of view, as vanity investing can be a trap in bull markets. It’s also highly valuable to advise entrepreneurs to ask themselves if they are being capital-efficient and if they are providing a product that is a must-have versus a nice-to-have.

However, I think history has shown us that there are reasons to be optimistic even in a slowdown, as great companies are often founded or thrive in tough times. Examples include:

  • HP (founded in 1939), after the Great Depression and at the time of the Second World War;
  • Amgen (1980), Microsoft (1981), Electronic Arts & Adobe (1982) founded right after the recession of the 80s;
  • Cisco, (founded in 1984), but licensed the technology from Stanford & hired their first CEO after the stock market debacle of 1987;
  • Google, (founded in 1998),  whose 2004 IPO was the one bright spot after the Internet bust of 2000.

More recently, successful companies created in the slow decade of the 2000s include LinkedIn & Tesla (2003), Facebook (2004), Workday (2005), Solarcity (2006), and the list goes on.  In addition, after the one sole tech IPO of Arcsight in 2008, the years following have given rise to several valuable companies, including many of our current unicorns.

But as a venture capitalist with more than 15 years of experience investing in early-stage companies in the U.S., India and China, I know that there are many more casualties than successes. As we go into the tail end of 2014, arguably a banner year for venture capital with over $23.8 billion raised and over $33 billion invested as of the third quarter, but also with some signs of market softening, here are my thoughts on how an entrepreneur can ensure his/her place among the haves vs the have-nots, irrespective of what the macro-economic climate holds:

  1. Follow your true North – not conventional wisdom. A recent iconic example of course is that of Mark Zuckerberg who reportedly turned down the Yahoo acquisition offer, against all advice. There was no question that he was focused on following an independent path and the rest, as they say, is history. I find that too often, entrepreneurs get influenced by feedback from their inner circle, rather than following their own instincts.
  2. Think of pivot as a verb, not a noun – and that it can take many iterations of business model and product, before you find escape velocity. A great example of this is Solarcity which tried solar installation before it landed upon lease financing to unlock customer adoption.
  3. Conserve precious resources, capital being the primary one – in this environment where cash is plentiful, it’s easy to raise money and spend it like a bandit. A great example of capital efficiency is Palo Alto Networks which only raised $65 million from founding  to an IPO.
  4. Remember that it’s a marathon, not a sprint – this well-worn phrase along with the more colloquial one of *there’s no such thing as an overnight success*, continues to hold true. For 3PAR, a pioneering utility storage provider, the decade between founding in 1999 to the $2.4 billion acquisition by Hewlett Packard in 2010 was marked by many challenges which tested the resilience of its leadership team.
  5. Surround yourself with excellence – The talent war in technology continues, and no one willingly hires a B player, but when a company is growing fast, it’s easy to compromise. As early stage investors, we are often involved in interviewing C level execs for our companies, and I have found that the companies that are able to filter their hiring through the lens of their core values are the ones that scale more effectively. A couple of good examples are LinkedIn which made a seamless transition from founding CEO Reid Hoffman to current CEO Jeff Weiner six years ago, and Marketo, whose CEO Phil Fernandez set a high standard to promote leaders from within and hire the best people from outside to support the company’s growth.

These are some of the principles that have guided my thinking first as an entrepreneur and now as an investor. I believe that by following them and remembering the lessons of history, today’s entrepreneurs will become the leaders of tomorrow’s industry giants.

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