“What goes up, must come down”

    - Isaac Newton

“Every great party brings a great hangover”

    - Anonymous

“Holy Disappearing Wall Street, Batman!”

   - Robin

It’s weeks like these I wish I had paid more attention to my econ classes in college, or had decided to take that capital markets class in business school. But I did neither and given the epic tailspin that Wall Street is experiencing, it probably wouldn’t have helped me anyway.

The best I can reckon, the US banking sector has been playing the markets on their margin account, and they’ve just been issued a margin call they cannot fulfill. The house of cards built on sophisticated debt instruments and derivatives, which several floors below has subprime mortgages as a foundation, has tumbled. And it is unclear where or when it will end.

How will this effect the startup community? I wondered about this topic back in March, when the “only” prominent worry was the subprime crisis. My conclusions, obvious ones albeit, were as follows:

1. •Expecting that all their customer’s budgets will be cut and under great scrutiny, companies in any sector who depend on selling to large US-based retail banks that had mortgage exposure ought to re-plan their 2008 forecasts and take those plans down.
   

2. •Expecting that jitters throughout the economy will put greater pressure on earning, enterprise software companies selling into corporate America that are not in the top 3 priorities for CIOs, ought to plan for a very cold year.
   

Let me update these predictions (sorry for the doom and gloom):

1. 
   

1. 1.IT budgets are getting slashed as I type this post. I believe that even “hair on fire” projects will be delayed substantially as companies, particularly those directly related to financial services, try to find bottom (again).
   

2. 2.Many more jobs will be lost, and unemployment in the US is likely to match the worst of the last decade, perhaps going up another point +/- to cross over 7%. Online and mobile advertising, as small as they are in comparison to their traditional equivalents, will take a hit. Consumer spending will take a bigger hit as we all figure out this is going to last longer that we thought. (again)
   

3. 3.Venture-backed startups, regardless of the focus, are in for tough follow on financing markets. The VC business seems constipated again - like the post 2001 bubble burst and we are seeing (and doing) more inside rounds. Some of the rounds are “offensive” - the thought being that we’re not seeing anything great out there for new investments, so are better off buying more of the companies we are already invested in! But most inside rounds are “defensive” - supporting companies that either cannot raise additional capital at reasonable valuations or at all. While these types of defensive rounds are nothing new, the frequency is greater and I have heard more than a few VCs lamenting that so-called “up rounds” are now close to mythical.
   

4. 4.First-round companies will find valuations, on the margin, to be lower, but not meaningfully, as the competition among VC firms to find shiny pennies continues.
   

5. 5.Troubled-companies - those that are running out of money, have not executed well, and/or are in out-of-favor sectors and have been counting on M&A for outcomes, will be disappointed. Buyouts will be rare and prices low. We are also starting to see the return of the “two-drunks” M&A, when VCs put together two troubled startups, in hopes the critical mass will lift them. But usually it does the opposite.
   

6. 6.IPOs. On vacation for a while.
   

My advice:

1. •Don’t panic. Yes things such is a very bad way, but keep your head screwed on and focus on realistic assessment of your situation.
   

2. •Move quickly to take decisive action. If John Thain can arrange the sale of Merrill Lynch to B of A in 48 hrs over the weekend, you can assess your strategy and create an action plan with your team in a similar time frame.
   

3. •Do a colonoscopy on your sales pipeline. Close the deals that are on the brink quickly, even if it means giving a little more in the terms than you normally would. Revise your plan based on a very brutal assessment of which of your customers are likely to be in trouble.
   

4. •(From March) Protect the cash you have on your balance sheet by examining your plan, taking out costs that are just too speculative. Be aggressive on cost-cutting soon.
   

5. •(From March) If you are in the midst of a VC fund-raising, if you are able, take a little more money than you were planning, even if it means a little more dilution
   

6. •(From March) If you are able to raise money (equity, debt, NRE) do it.
   

7. •Make sure you get close to your likely partners and acquirers. As I mention above, I don’t think any meaningful M&A will be happening soon, but if budgets are frozen, the chance to partner with other members of your ecosystem are more likely than usual.
   

Remember that in the aftermath of the last bubble, some very strong startups emerged to become profitable and large enterprises. Google, RiverBed, Data Domain, Constant Contact and others should be beacons.

Hang in there ...