Worst of Times, Best of Times

"It was the best of times, it was the worst of times, it was the age of
wisdom, it was the age of foolishness, it was the epoch of belief, it
was the epoch of incredulity, it was the season of Light, it was the
season of Darkness…"
— Charles Dickens, Tale of Two Cities

While I wrote about my concerns on the coming part of the business cycle, I am actually quite positive about the flip side of this coin. These periods are not kind to existing portfolio companies, but create a very attractive environment for new venture investments. I believe that 2008, 2009 and possibly 2010 will be good VC vintage years. Some of the crazy pricing and activity we have seen over the past year or so disappear and more rational investing takes its place. These times are actually, I would argue, also positive developments for well managed companies.

1) fewer competitors are started
2) weaker competitors go out of business
3) Darwin forces efficiency and laser like focus in your business
4) this discipline continues on when markets open back up, making for more profitable exits
5) less capital consumed means more equity for the founders in the end

Sectors that do well are those with low average burn, those focused on performance (e.g. pay for performance models) versus "productivity" or intangible benefits, and those selling into less recession sensitive customer bases. Life is tough if you sell capital equipment, have asset intensive businesses, have high burn, have impression based ad models or sell into recession sensitive industries. You are going to see a lot of dead Web 2.0 companies that rely on advertising for their revenue.

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