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The Silver Lining

Entrepreneurialism and innovation during a recession.
April 21, 2009

These are tough days for entrepreneurs seeking new cash, and even for venture capital firms that may be forced to conduct triage on existing portfolios. Still, now may be just the moment to turn a great idea into a lasting enterprise. That was the take, anyway, of venture capitalists and entrepreneurs who gathered in Silicon Valley earlier this year to talk about why recessions are the best times to launch companies and topple old orders.

Krishna Subramanian (top left), cofounder of Mobclix; Leah Culver (top right), developer at Six Apart; Dave Goldberg (center), former manager of Yahoo Music and entrepreneur-in-residence at Benchmark Capital; Steve Jurvetson (bottom left), managing director of Draper Fisher Jurvetson; Sol Lipman (bottom right), cofounder of 12seconds.

Steve Jurvetson, managing director of the venture capital firm Draper Fisher Jurvetson, and Dave Goldberg, former manager of Yahoo Music and entrepreneur-in-residence at Benchmark Capital, explained that while a world of failing corporate titans and changing government policy is chaotic, chaos creates opportunity and leaner times bring focus. Jurvetson and Goldberg were joined by three entrepreneurs who described their travails and coping strategies in their recently launched ventures.

They are Krishna Subramanian, cofounder of Mobclix, which helps iPhone developers monitor and profit from their apps; Leah Culver, who founded the now-defunct microblogging site Pownce (she’s now developing social technologies at the blogging site Six Apart); and Sol Lipman, cofounder of 12seconds, which he hopes will do for short videos what Twitter did for text.

Jason Pontin, editor in chief and publisher of Technology Review, moderated the discussion at a February gathering in Mountain View, CA, sponsored by the Churchill Club, a Silicon Valley business and technology forum. Edited and condensed excerpts from the event follow.


  • Watch the full Churchill Club panel discussion.

Jason Pontin: Why start a venture now? To many, it might seem like the worst of times. And yet, as Steve will tell you, there are good examples from history that suggest that now may be a very goodtime to start a company.

Steve Jurvetson: The best time. Certainly from an investor’s standpoint, there’s perhaps no better time to be investing in startups. The entrepreneurs doing it are pretty passionate about what they do. Companies raised with scarce resources tend to be more resourceful, right?

This tends to form the DNA of the firm early on. Some companies, like Hewlett-Packard, are still frugal to this day, largely tracing back to their roots. … It’s also the case that startups thrive in disruption.

Big companies falling on their swords left and right create opportunities for new entrants. It’s almost like a forest fire has cleared out the old-growth trees and now prairies can grow again, and new entrants and new species. If you’re [electric-­car startup] Tesla, for example, what better time to compete with General Motors and Chrysler?

JP: Sol, why did you decide to start your venture now?

Sol Lipman: We were looking for funding in September. It was a very difficult time; it’s still a very difficult time. In October I said, “We’re not going to go looking for any more funding,” because I was spending 80 percent of my time looking for funding instead of focusing on my product and doing a kick-ass job. As soon as we started focusing, we started succeeding. And I think that is the key to succeeding in this recession. … Yes, you’re going to work about a thousand times harder than you generally do, but you’re passionate and you’re there for the journey.

So when we do go to raise money, I think that (a) our company is going to be more valuable, and (b) we’re going to understand our revenue model. We’re going to have traction. We’re going to be in a way better position. And we will have–as Steve said, we’re going to have a culture of frugality.

JP: Krishna, why launch a company now?

Krishna Subramanian: There’s tremendous talent around. There are always people looking to leave some of these larger companies that are really talented, and they have been almost like in a cave, just waiting to explode.

I mean, if you’re going to do it, you might as well do it now.

Dave Goldberg: [Until] probably a year, year and a half ago, capital was cheap. It made sense to take that money. But the capital being cheap made everything else expensive. And so talent, real estate, advertising, and anything you needed to do to build your business was really expensive. Everyone had access to cheap capital. And now we just flip that around. What these guys are saying is that everything else now is cheap. You probably can negotiate to get free rent if you really need it.

JP: You’re not going to raise capital?

DG: I’m not going to raise venture capital for this business [developing an online music-licensing system], because this business doesn’t really need that expensive level of capital for the scope of business that we’re trying to build.

A year and a half ago, would I have taken it if it were cheap? Probably. You have to be able to be flexible about these things. But I’m happier this way, because everything else I’m doing got cheaper, so I didn’t need the capital.

JP: So every single one of these people–including Leah, who has gone to work for a larger company–isn’t raising capital. No one wants your money, Steve.

SL: That’s not true!

JP: Well, Sol wants your money.

Leah Culver: If this is a scary time for VCs when it comes to the consumer Internet, right now is the best time ever for developers. Open-source software has got to the point where you can build highly scalable systems. Cloud computing is cheap. Everyone from Amazon to Microsoft is now providing cloud computing, and it’s awesome. So for the consumer Internet, it’s really been like this great, great thing. Everything is so cheap. And how are the VCs feeling about that?

SJ: We’re finding that we’re writing a lot of smaller checks for the Internet companies, and that’s great. We actually like that.

JP: One of the most striking things about this market is that liquidity events, the exit strategies for which VCs look–initial public offerings and acquisitions–are very uncertain. How do VCs manage their investments when they don’t know how they will get their money out?

SJ: There are two layers of difficulty. It’s the worst time to be forcing a sale of a startup, which you couldn’t do if you tried. You shouldn’t be seeking liquidity just for its own sake. And then, within the venture firm there could be a separate problem. … You’ve drawn down all the capital that was available and yet you’re still waiting for those IPOs. There’s a triage exercise some firms are going through.

DG: This is the more fundamental problem in the venture business, and it affects the investment strategy. It’s not just at Benchmark. A lot of firms at any other time would already be public–great firms, profitable, growing nicely. But there’s no public market for these firms. And so you’re left with an M&A [mergers and acquisitions] decision which may not be there. … This might be the time we lose a lot more of the weaker [venture] firms.

JP: [Looking at the entrepreneurs] Do you think about exit strategies at all?

SL: We think about the exit strategy all the time. You need to have a goal in mind, you need to visualize and think about it every single day. However, the value creation happens on a day-to-day basis. We really actually focus on doing our job day to day.

JP: We’ve all said airily that recruitment is easier during a recession, because people are available; but it’s also difficult, because stock options aren’t very appealing when there are no IPOs. Leah, how did [CEO] Chris [Alden] attract you to Six Apart?

LC: You’re going to put me on the spot? Six Apart makes lots of money, providing services for media and professional, big bloggers. They are hoping to really turn over this year and become profitable. Can’t talk too much about it.

KS: Lucky for us, the iPhone has been really hot, and a lot of people are trying to get into the mobile-application space. We’ve been lucky enough to find talented people from some of the large firms.

DG: If you want to be an entrepreneur, the best thing to do is figure out, can you sell people on a dream and a passion? Because if you can, that’s probably one of the biggest qualifications. You’ve got to have other skills, but if you can’t do that, it’s tough to be an entrepreneur in a good or bad period.

JP: When you have too much money, you can fund every crazy idea. Can having too little money be a salutary discipline?

SJ: We were trying to find out what correlates with success or failure in a portfolio. The one correlation [with failure] that held through up and down was the size of the series A–the first round of funding. The bigger it was, the more likely the company was going to fail.

SL: I think the economy has done every entrepreneur a big favor, by making you focus, making you know what you want. The point is to go do something. It’s not the exit, it’s not the money–it’s to do the thing that’s there for you to do.

JP: Entrepreneurs: the disinterested artists of the business world! None of the entrepreneurs [here] took angel funding. Did any of you consider it?

KS: Angel funding is definitely something we are very interested in, especially in this market where we are able to take a smaller amount of angel funding, where the exit size might not be as large as it might have been five years ago. A lot of the professional angels do come with contacts, and open a lot of doors.

LC: The ones who have the big pocketbooks in good times tend to be keeping their money close now.

JP: If it’s true that recessions are often periods when great ideas are turned into lasting enterprises, what are those ideas?

SL: Twitter!

SJ: I don’t think there’s one elephant in the room–there are a lot of mammals, and I’d bet on the whole field.

DG: We are marginally through the transition of the media business from the physical to the digital. Obviously, people see that the first thing to go away is the physical newspaper. … We are still very early on, and video is probably the biggest part of that.

LC: Omigosh. Phones: make them smaller, get there faster. Please hurry up. I want to watch videos on the phone. I want to check in with friends on my phone, I don’t want to own any other device. Just get there, please.

JP: In the developing and poor world there are a whole host of problems calling out for elegant solutions. There are real markets and money to be made, but they are also places where technology can truly improve human lives. Are any of you interested in creating technologies for India, China, or Africa?

SJ: There are so many needs on the planet. A subset of that is water purification–probably the biggest mismatch between a screaming, enormous market and a lack of technology innovation I’ve ever seen. This is a trillion-dollar opportunity, and that’s just water purification.

JP: The U.S. government’s stimulus package (see Can Technology Save the Economy?) means that a lot of money is about to pour into Silicon Valley and places like it. Will people know what to do with it?

SJ: Some of Obama’s efforts are going to funnel a lot of money into startups. A lot: several hundred million dollars. And I don’t think it’s entirely a good thing.

Audience: But will you leverage capital with government stimulation capital?

SJ: Yes, in certain companies. There are some companies involved with solar thermal and solar installation that used to rely on tax-equity investment [in which state or federal governments provide tax incentives for funding renewable-energy projects].

Now there is a new plan in place that is even better than we’d dreamed of. We didn’t lobby for it, we never asked for it, but from our perspective it will create a boom in solar installations of all sorts. We don’t invest in companies with the hope of a handout, or the hope that the government will swoop in and create a regulatory regime that is noncompetitive.

But when it happens, then it’s a windfall, and it’s not like we’re going to turn it away. The only problem is that you can’t predict the next one. Moore’s Law doesn’t pay any attention to a recession or depression. … So you have all this pent-up innovation that will find a way to revolutionize industries.

Startups and new-company formation are the economic juggernaut of the future–always have been, always will be.

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