Steady on: Downturn advice from a seasoned investor

There’s an old English political saying that says the Conservative Party never panics, except in crisis. That feels especially true these days. Perhaps you’ve never really experienced an economic downturn, but I’ve been through at least two: In 2000 (when I was in the eye of the storm at Cisco) and again in 2008 (when the crisis hit hardest outside the tech world). Each brought with it a set of lessons that I’m happy to share as we navigate this latest challenge. 

1) Turn off financial media.

At this point, the story is the market decline, which the financial media will cover in all its gory detail. Just as financial media over-rotates to bullish commentators during good times, they will over-rotate to the bearish folks now. At some point in the cycle, we’ll see folks predicting the end of capitalism and democracy… But we have withstood greater challenges than this. Warren Buffett, who in many ways is the sage of market downturns, has a wonderful saying: Be fearful when others are greedy, and be greedy when others are fearful.

2) The cloud is still the greatest opportunity for tech investors. 

For those of us in tech, I believe the big thesis on the move to cloud not only does not change, but actually may accelerate. We’d been in a magic period where both existing companies and startups were ready to adopt new technology at a breakneck pace. Tech companies will need to wait and see if startups are still spending, but I believe enterprises will continue to spend. The new world is much cheaper than the old one, and folks may need to be aggressive in fixing old cost structures.

3) This is a great time to have dry powder. 

We’re still early in the economic downturn (where VC Twitter proclaims boldness in the face of risk). That’s going to change. Soon we’ll find out which companies have been overspending, and which VCs are willing to bet that those companies can improve. My personal feeling is that bad and even mediocre business models will feel a lot of pain.

The flip side is that funds like Operator Collective (which has a clear majority of its funds unspent) will have opportunities to invest in great companies at excellent valuations. Unlike most other VCs, Mallun Yen and Leyla Seka do not have a large legacy portfolio to triage, and instead have the chance to wait, watch, and act as valuations decline and markets become clearer. Rather than compete in overpriced rounds, Operator Collective will have the time and resources to cherry pick the best opportunities. 

4) Cash is still king. 

If you’re operating a company, that particular golden rule still applies today: Do not run out of money. Be ruthless in analyzing your cost structure. If you can adjust your business model to have your cash last longer, you have a greater chance of being able to raise again when the market comes back. The faster you adjust to this new reality and the faster you take cautionary action, the better prepared you are for the inevitable recovery. 

Separating fact from fiction 

In up markets, every VC looks like a genius – but markets like these let us know who’s the real deal. I hope all of you remain upbeat and look for the opportunities that will certainly be there in and amongst the damage. Steady on, friends. 

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