Venture economy Archives

The Q2 2010 CEO survey has logged more than 50 respondents, so although additional responses may roll in, we’re posting the results in order to make the feedback to those who participated as timely as possible.   Additional responses are unlikely to skew the percentages significantly.

We at BSG Team Ventures periodically take the temperature of the markets we serve.  Below are the results.  This survey’s focus was on the economic recovery (is it indeed here, and if so, measured how?), and where CEOs are budgeting their spend in the 2010 recovery year.

A note on methodology.  We send these surveys only to those who fit the category (in this case, sitting CEOs or board member/founders of technology/science-driven growth-stage companies).    All responses were anonymous due to the web-based survey technology employed. The majority of respondents were in the United States, with the highest concentration on the East and West coasts (New York, Boston, and San Francisco/Silicon Valley areas).

For prior survey results from Q3 2009, titled “Strategy & Outpacing Your Competitors in the Recovery”, go to http://www.bostonsearchgroup.com/blog/3rd-quarter-innovation-ceo-survey-results-outpacing-competitors-recovery/.

The response to the first question clearly demonstrates that CEO sentiment versus our last survey has demonstrably shifted, with almost 75% of CEOs indicating that the economy has either bottomed out, or is recovering.

Similarly, for those growth-stage tech or sciences driven companies, when looking at revenues, more than 40% of CEOs reported that revenues were up from Q1 to Q2, with the largest percentage revenue increases in the 1-25% range.  Approximately 10% of CEOs reported revenue increases of 25% or more.

We periodically survey the CEOs in our network on topics we feel are relevant to aggregate information around and rediseminate.

Below is our Q2 2010 CEO Survey.  Please participate, and we’ll share the results back with you once the survey closes in the next week or so.

Click on “Take my survey” below.  It won’t take more than a few minutes for mere mortal CEOs.  But, as you’re more the superhero CEO type, it will no doubt take you a fraction of that time to complete.

To see the results from our last survey, titled “Outpacing Competitors in the Recovery”, go to http://www.bostonsearchgroup.com/blog/3rd-quarter-innovation-ceo-survey-results-outpacing-competitors-recovery/

There’s a lot written about the entrepreneur, entrepreneurship, and what ingredients make for success over failure in the industry of business venturing.  Much of it is pretty shallow, pop psych fodder, meant to be read in a short trip to the commode, and disposed of similarly.

Books like Malcolm Gladwell’s Outliers takes a much more thoughtful approach, one of myth-busting versus myth-making.

Another similarly thoughtful deconstruction of entrepreneurship was brought to my attention via Babson College’s new president, Len Schlesinger, and his efforts to better match entrepreneurship’s leading institution for  higher education and its curriculum with a more effective toolbox for start-up success [full disclosure, Babson is my MBA alma mater].

Dr. Saras Sarasvathy, Professor at the Darden Graduate School of Business, is the author of this piece, written back in the dark corners of the 2001 post-Bubble recession, when entrepreneurship was the worst nightmare of those smart enough to avoid its allure while clinging to safety in their day jobs.    The full piece can be found at www.effectuation.org/ftp/effectua.pdf.

As a foundation for the suppositions Sarasvathy makes in her article, she interviewed 30 founders of U.S. companies ranging in size from $200M to $6.5B across the spectrum of industries.  She also had them each tackle the same case study to see how each founder approached the problem-solving required.  Her goal was to try to determine whether there was a common denominator in the way entrepreneurs thought, and if so, could it be distilled to several core nuggets of “teaching wisdom” to help aspiring entrepreneurs.

After Sarasvathy completed her interviews, she transcribed the tapes in search of a common set of principles each entrepreneur operated from in problem-solving.  Sarasvathy strings the principles she identified together into what she terms “effectual reasoning” of the entrepreneur.  Effectual reasoning is a different approach to problem solving than what is used in large corporations, or already successful and established enterprises.  She refers to the mature company’s approach to problem solving as the inverse, or predictive, “causal reasoning” -

Causal rationality begins with a pre-determined goal and a given set of means, and seeks to identify the optimal – fastest, cheapest, most efficient, etc. – alternative to achieve the given goal.

However, effectual reasoning takes a very different approach, and the metaphor Sarasvathy uses paints an evocative image of the difference-

It does not begin with a specific goal.  Instead, it begins with a given set of means and allows goals to emerge contingently over time from the varied imagination and diverse aspirations of the founders and the people they interact with. While causal thinkers are like great generals seeking to conquer fertile lands (Genghis Khan conquering two thirds of the known world), effectual thinkers are like explorers setting out on voyages into uncharted waters (Columbus discovering the new world).

Sarasvathy identified that there is no question that creativity is the cornerstone of effectual reasoning.  Another metaphor she uses is that of cooking – a chef given a recipe, versus a chef given the ingredients.  The chef given the recipe can go out and shop for what they need, compare cost versus quality versus convenience given the time allowed to prepare the meal, and create a very “causal” approach to the preparation.  However, the chef given the ingredients must use his or her creativity and invent a dish out of a combination of what raw materials they were given, and the background and experience they have had in cooking across their career.  Sarasvathy refers to this creative chef as having three categories of means:

1.      Who they are – their traits, tastes and abilities

2.      What they know – their education, training, expertise, and experience; and

3.      Whom they know – their social and professional networks.

From these means, they start to cook up their idea, be it a product, service or invention.  More…

Here is the balance of the survey responses from the VC-backed CEO survey we administered at the end of December 2008 into the first week of January 2009, both responses and a bit of interpretation.

Given survey responses, it appears the bell curve peak is in the 20-40% reduction in headcount.  The group of CEOs who indicated these reductions were approximately half of the 60 CEO respondents.

• •    40% or more staff reductions? ~ 10% of total CEOs surveyed
• •    Less than 20% staff reductions? ~ About 17% of all CEO respondents

Winner on this question was “more than 9 months,” with more than 40% of the CEOs.  Runners-up were the “0-to-6 months of cash” CEOs, evenly split with 25% saying 3 to 6 months, and another 25% saying “less than 3 months.”  What this may indicate is that there is a bimodal distribution of funding in the market –those who are well-funded, with 9 months or more, and those companies who are running out of cash (popular definition = less than 6 months of cash remaining).  This is reinforced by the fact that very few companies responded that they had 7-9 months of cash (less than 10% of companies).  Therefore, one might imagine that those companies who are shortest on cash are also those who are making the deepest cuts in staffing.  In addition, that there may be another round of cuts in store for those low-cash companies if they can’t get another round closed soon.

Top implied answer here?   Don’t raise a venture round in 2009.  And this is what the largest slug of CEOs responded with (33%).  Of those who are going to try to raise in 2009,

• •    one-third of CEOs see a flat round
• •    16% feel they’ll get an up round
• •    and almost half (45%) are predicting a down round

Winner for this question shows some great optimism however, with about 1/3 each of the CEOs responding answering with either “revenues up 1 to 25%”  or “Up more than 50%.”

There was an intentional effort to get a fairly even distribution of venture-backed CEO respondents for this survey, to try to avoid sector bias.  We were fortunate to have at least 10% (6 or more companies) from each of life sciences / biotech, medical devices, and the cleantech sectors.  Software/Internet/telecom was the largest category represented, with 42% of CEOs hailing from this sector.

BONUS SLIDE

Q: If YOU could survey your peer CEOs, what question(s) are both urgent AND important to running your business you’d like us to consider asking in future polls?

This was one of the most rewarding questions for which to see the responses.  Fully half of the CEOs polled had a question they’d like to pose to their peers, and some CEOs had several.  Below is a partial list of questions we’ll choose from in follow-on surveys.  If any of those CEOs would like to respond individually to any of the questions below, feel free to post a comment on this blog entry and we’ll post it for public consumption (clustered by general question subcategory as well as by industry sector).  Of course, the winning question asked by one of you CEOs, just to validate that venture capital-backed CEOs are-if anything-self-aware, pragmatic, and not fatally over-optimistic:

“What will CEOs do if their company fails?!”
1.   Cost-related questions

• •    Approaches or success stories in restructuring debt to the company’s advantage.
• •    Is it better to reduce headcount 20%, go to a 4-day work week, or reduce salaries by 20%?
• •    In addition to headcount reductions (if any), what type of expenses are you reducing?  Are you delaying new projects/initiatives?  How have investors reacted to this?
• •    Will you consider outsourcing some of your product development to make cost variable, at the expense of some know-how then being outside the company?

2.    Sales/Marketing/Revenue-related questions

• •    How are you using the economic downturn to improve your business position/model?
• •    What are you going to spend more money on in 2009 than in 2008?
• •    What changes in the sales cycle are you seeing in the last 6months, 2 months, currently?  What does the resultant trend point to for 2009 and what actions are you taking in response?
• •    How has your visibility into the level of future business changed in the last 3-6 months?Asked another way – what level of confidence do you have in your current forecast of business?
• •    (1) What emphasis do you place on marketing in your organization? (2) What do you consider the top 3 most important elements of marketing to be?
• •    How will you as CEO deal with longer term rate issues if you are a service business as it seems all labor rates are being pushed down?
• •    The number one reason why clients buy your product is? (cost, quality, service, other?)

3.    Funding/exit/valuation questions

• •    Are you finding lending lines out there?
• •    If an acquirer made an offer to buy your company today, but at a multiple less than what it would be in a strong economy, would you consider it, or wait until the economy improves so you could get a higher valuation?
• •    Are you considering merging your company with another? Are you looking at merger partners as a legitimate exit option in 2009?
• •    Are you looking to current investors or new investors for additional rounds of financing?

4.    Board of Directors/investor-related questions

• •    How will venture capital investing change in 2009?
• •    What is your satisfaction with your Board’s ability to fundraise in the future? (I think the current environment highlights a board’s function as protector of value through fundraising and too few board members are good at it)?
• •    Compensation for outside board members?

5.    Staffing/talent questions

• •    How are you balancing full time versus contract employees?
• •    How are you retaining employees during these tough times?
• •    What kind of retention ideas have you considered to make sure your key folks don’t bail for a more stable environment?
• •    What skills are you as CEO still looking to hire?
• •    What do you do to conserve cash? attract customers?
• •    How many of you CEOs have proposed reducing people to part time levels and adding equity compensation instead of releasing them all together?

6.    Economy-related questions

• •    When do you predict the market conditions to take a turn for the better?

There a few industry-specific questions CEOs wanted to ask their peer as well:

Life sciences/biotech-related questions

• •    What kind of deal structures are you seeing in liquidity-directed partnerships? What kind of partnerships, if any, are you envisioning for discovery stage assets?

Medical devices-related questions

• •    How do you expect reimbursement to be influenced during the next administration?

I’ve had the opportunity to be in Asia (Hong Kong and Singapore), Silicon Valley, Boston, New York, and Europe in the last 2 months of this year.  Most of the community I’ve been with has either been technology or science-based entrepreneurs, venture capitalists and other institutional investors banking those start-ups, or professional services providers helping fast-growth companies hit their various milestones.  It struck me that I’d had the opportunity to sample how each community, country, culture, or continent was responding.

Asian perspective: “We’ve had tsunamis, bird flu, SARS, and financial crises like the Asian flu (1997 financial crisis), and this recession that’s hitting us now is likely worse than all those combined.”  U.S. and European entrepreneurs who were offshoring their manufacturing were saying that getting products prototyped in mainland China– something that used to be a problem because start-up run lengths were too short– was no problem at all.  Vast numbers of factories were laying off workers, and these same factories were more than willing to start with shorter runs and low/no guarantees to help offset the freefall in the manufacturing sector there.

Silicon Valley: Suffice it to say, out at dinner on a Monday night at a restaurant called A16 in the Marina District in San Francisco, there was no sign of recession.  We had a 7pm reservation, and almost got waved off for being 15 minutes fashionably late,  getting the last table squeezed in amongst the revelers.  Consumers were showing no spending fatigue.  Out near Sand Hill Road, it was a bit of a different story.  A few investors were shorting the stock market with their personal money, but still emphasizing that this was the time to do seed and Series A investments.  All in all, as is typical for Northern California, optimism abounded.

Boston:  Here, it sounds much more like Asia:  pull in all investing.  Only add follow-on investment to your own portfolio.  If you do invest, the going rate in some VC circles was rumored to be, “new valuation pre-money is equal to the amount of last money in.”  In other words, if the last round was $15 million, that would be the valuation, no matter how much had preceded it.  CEOs in Boston are talking about the return of “vulture capital.”  In the parking lot of a commuter rail train station, one late-night rider yelled back to another who was also getting off at the same stop, “What you doing getting home so late?” The response– “Went out with some of the people from work who got laid off today.  Cut 15 or 20.”  The first commuter answered back, “Yeah, layoff at our work today as well, but no one went out.  Stayed and worked late.”

New York: Quiet.  For the city that never sleeps, there was a really good imitation of somnambulism.  Everyone seemed to have had a prolonged Ambien moment.   The epicenter of the financial crisis seems to have brought down virtually every other sector along with it.

Europe: Or, more specifically, the UK.  With the Sterling down, and the second biggest stock market suffering similar downdrafts as that of the U.S., it’s also really quiet.  Unlike the last recession brought on by the dot-com bubble burst where Europe lagged a full 6 to 12 months behind in its slowdown, the UK in particular has suffered almost simultaneous with the U.S.

Ultimately, this was the take-away for me– no matter whether I traveled 3 thousand miles west, or 15 thousand miles east, the speed at which this downturn has traveled was faster than any plane I could catch.  It had beat me to each continent I landed on, each city I was doing business in.

As we cruise into the New Year, my wish is a hope that the recovery is also as globally instantaneous.