Will Hsu has a good post called "Dead Blogs Walking", and it was triggered by Fred Wilson’s post related to pulling the plug on ventures and deal fatigue. Agree a lot with what Will is saying. It’s hard to keep a blog fresh. For me, I use it as a way to stretch my mind and to process information. If the long life of my grandfather is any example, keeping the mind fresh may be an important thing for living longer and happier.
But I digress. I reproduce one thing that Will snipped from Fred’s post here (remember the context is from the point of a venture capitalist as to whether to pull the plug on a venture):
In the simplest case, the patient dies. That’s usually good for everyone involved. The company didn’t get customers, revenues, and build a business.
But it’s rarely that simple. Some companies get customers, revenues, create value, but don’t get cash flow positive. They end up on life support and nobody wants to pull the plug for good reason. This is by far the most common cause of deal fatigue.
This strikes me from a couple of dimensions. Although perhaps not common in Fred’s sector, I have some dealings with (sometimes partners of clients I have) that have lifestyle businesses. Lifestyle businesses can be great. They don’t get cash flow positive because they don’t want to get taxed. That nice J-curve Fred depicts turns into a nice "T". The owners and employees may live very comfortable lives and have great salaries, and there are many investment bankers and LBO firms that drool just thinking about squeezing out that prized cash via restructuring both the financing and management, i.e., restructuring the deal. You could even consider that lifestyle businesses are naturally incented to self-sustain … to preserve the lifestyle.
Which brings me to my next point. Another pertinent aspect of Fred’s post is the word "deal". Financing creates pressure in ventures, and the exact type of pressure is dependent on the type of financing and financier. Why? As an example, venture capital funds are under pressure because of the returns that they need to generate for their limited partners. Ed Sim’s recent post puts some great light on that subject. (It is something I find that many entrepreneurs could better appreciate since VCs are, in some sense, customers of the equity product of a company.)
So how might one exploit the deal pressure information in business development? As one example, in many cases ventures are negotiating against much larger, established firms with deep pockets. Questions of financial solvency, customer base, etc. must be answered when selling to a new customer. But what happens when competing against a venture-backed firm and that firm is seen as stronger (for whatever reason)? Well Fred’s post indicates the exact type of weakness that I might recommend exploiting if I were negotiating against the venture. Venture firms can pull the plug even if they have the capital or can syndicate to back the deal.
Everyone company has strengths and weaknesses. That’s what makes business interesting. Depending on who I represent, I always recommend putting oneself in the shoes of the companies I am competing against. I am by no means recommending squashing ventures. What I am saying is that never presume who will win, no matter how good your company is. By putting oneself in a somewhat paranoid mindset when approaching business, you may find out that you can do more to win the customer and satisfy their needs. I have argued that in business, one must learn to argue both sides of every coin. This is a strength.