Well, like so many other folks I have been amazed by the roller coaster ride that has been 2008. And just like many other people, I too have been pondering as to what 2009 might hold. So, I reached into my crystal ball and thought I would provide at least what I think the year might hold in store for entrepreneurs. So, here is my P R E D I C T I O N (I will use the ten letters in the word to make my points)
1. Planning will be key: I have often used the phrase "hope for the best, but plan for the worst". And I don't care if you are a VC, an entrepreneur, a service provider, an academic or whoever, you ought to take that phrase to heart. Because I think the economic news will get worse before it gets better (I do hope I am wrong on this). 2009 will a tough year from a global recession standpoint. The world will get deeper into recession and hopefully start to begin the journey out of it towards the end of the year. Being pre-emptive pro-active rather than re-active will be key for all in 2009.
2. Rethink, Refresh, Redo: Many companies, especially startups will have to take a fresh look at their business plans, and many will have to retool or completely rewrite them because the fundamental assumptions made during the original plan may no longer hold true in 2009. Advertising budgets may get slashed, number of payment defaults may increase, receivables will stay outstanding for more than 60 days while the plan called for a 30-45 day collection cycle. Customers will think whether they are buying "an absolute must have" or "a nice to have". As a startup, one should obviously aim for the former since the customer needs it and is price insensitive to a certain extent.
3. Environment will take a "front and center" role while decent Exits will be few and far between: Environment will become an even more intensified topic of discussion in 2009 with cleantech continuing to be a hot topic, even as oil prices stay low. It may be the most invested sector in 2009. Additionally, Exits for venture funded companies will come in 2009 because companies "are sold, not bought". What I mean by that is that VCs may have to do triage on their own portfolios to determine which ones to support going forward and which ones to simply let go. With the latter, there may be a flurry of activity around small exits where investors are simply are trying to recover whatever investment they can and hopefully get some small multiple of their investment (being "sold") rather than a flurry of activity by potential acquirers outbidding each other to try to get their hands on a particular company's IP (being "bought").
4. Debt will still be hard to come by and Down-rounds will become more commonplace: For a startup, cash comes from one of three sources, generally speaking – equity, revenues and debt. Debt, in terms of lines of credit, term loans etc will be very difficult, if not impossible, for startups to obtain. As such, cash will have to come through either investment from valuation sensitive investors or from customers who will be looking for deals, discounts and extended payables. Many of the later stage deals that will be financed in 2009 will be flat or down rounds. That is a trend that started in Q3 of 2008.
5. Internet and especially broadband penetration will continue to grow but will not hit the critical hockey stick growth that everyone is expecting. With power infrastructure issues still rampant, people looking for ubiquity will rely more heavily on the mobile phone rather than a desktop for internet access. The 3G auction and infrastructure will take shape in 2009, but data intensive 3G services won't begin in earnest until 2010.
6. Cash will continue to be king. The cash/credit crunch will continue through 2009 resulting in some companies failing or being shut down due to inability to raise additional capital and unwillingness (usually for good reason) on part of existing investors to continue to invest. Up until now, there has been a fair bit of euphoria around the VC community, given the prospects of growth in the India market. In 2009, really for the first time, the still relatively nascent Indian VC market will start to see its first real test. Related to #4 above, companies that raised series A may need a series B financing but not be able to get there due to either lack of product/service milestone achievement or customer traction. Those who raised series B at fairly lofty valuations are already having trouble with their series C and will have significant trouble raising up-rounds in 2009.
7. Technology based investments will take a back seat: I think there will be a move from early stage technology investing to later stage non-technology sectors, which is a trend that has already begun but will intensify in 2009. DFJ itself is looking at the entire continuum of what I call "high tech, mid tech, low tech, no tech". Many other firms who may have started as early stage tech focused funds have also diversified on both fronts, towards later stages and technology agnostic. I predict that 2009 will bring increased investments in non tech sectors including healthcare, education, infrastructure, retail, logistics etc.
8. Investment pace will slow: Even though new funds have been raised and new VC firms entered India in 2008, the pace of investment will slow for two reasons: 1) VCs who have an established portfolio will tend to spend more time making sure that existing companies survive 2009, be sold/merged or wound down if necessary; and 2) the timeline and depth of diligence for investment will increase with greater scrutiny on team, financial/business model, customer traction etc. The timeline for a typical VC investment may increase from 3-4 months to 5-6 months or longer.
9. Opposites will attract: Well, I needed something with an "O" so I stretched a little with the lingo. In 2009, Big and Small will be attractive and perhaps imperative for both VCs and entrepreneurs. One of my complaints with entrepreneurs in India has been that tend not to think Big, and truly game changing. And at least until recently, I was seeing plans where the capital requirements for a startup weren't all that different from what I might have seen in the US. For entrepreneurs to get noticed, it will be important for them to think at a bigger scale. At the same time, VCs will expect the milestones to be hit with less capital. Obviously there are exceptions to the above in naturally capital intensive businesses, but VCs will be more cautious doling out larger sums, and as a result I think the average investment size will reduce. So, in 2009, think Big but practice Small (as in capital requirement).
10. New stars will emerge: Typically during a period of reduced economic activity, a set of companies emerge who become dominant players in their respect industries. In the US, companies like Apple, Oracle, Cisco, Microsoft were founded during these downturns. I think the entrepreneurs who are truly passionate about their vision to "change the world", are not going to be deterred by the current environment. They may actually be emboldened by it. With cheaper real estate, available and more loyal talent, fewer "me-too players", a highly capital efficient culture/DNA, companies will emerge in 2009 who, a few years downstream, will become stars in their respective industries.
Bottom line: I think 2009 on the one hand will be a challenging one for entrepreneurs and VCs, but I believe at the same time that as long as the startups are providing "cancer cures" and not "vitamins", those startups will do well and will be the ones that all of us look back on a 5 years from now and realize that 2009 was a catalyzing year for them.
(Mohanjit Jolly is the Executive Director, Draper Fisher Jurvetson India. Views expressed are strictly personal.)
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