Summary:

A market collapse, a cash crunch, and an IPO. I experienced it all in 2001. Now that another (even broader) recession is upon us, I offer my hard-earned lessons for “weathering through” uncertain economic times. (I write often about such topics my blog,Market Mine.) Back in […]

A market collapse, a cash crunch, and an IPO. I experienced it all in 2001. Now that another (even broader) recession is upon us, I offer my hard-earned lessons for “weathering through” uncertain economic times. (I write often about such topics my blog,Market Mine.)

Back in 2000 I was running a company that made software for microprocessor designers, called Simplex Solutions. We had $40M in revenue, and we were profitable, but when the bubble burst in spring 2000 – we ran into a cash crunch. We were growing the sales channel but also investing in infrastructure, so we knew we would need access to more capital soon.

But Simplex was an old style company, growing with a real product. In early 2000 I couldn’t talk eyeballs or click-throughs, so I had been unable to get attention from investment bankers. We just weren’t a sexy dotcom story.

Our line of credit was coming to its end and TransAmerica Finance was not going to renew it. They were scared, just like everyone else. So, we were forced to concentrate on conserving our cash to weather through — not knowing how long it would be until things got better. We survived, and eventually did go public. Here are the lessons we learned from the trials of 2001, I think they will be as useful in today’s downturn…

1. Build a detailed model of cash flow so you can test every decision against it and manage the business for cash conservation.

2. Push out accounts payable as long as you can. This takes a tough CFO or controller.

3. Structure deals to be paid up front. Resist payment terms as much as you can and negotiate discounts to get paid up front if you have to (we were very successful with this strategy with all but our largest customer).

4. Don’t destroy your market but do some aggressive deals if you need to in order to keep the top line and your market share growing. If you slow down it’s a self fulfilling prophesy and you’ll run out of money – which leads to loss of control of your destiny.

5. Spend in sales to keep growth up. Sales and R&D are the critical value creation points of a software business, focus on them and tighten your belt everywhere else

6. Manage performance aggressively. If someone isn’t performing let them go quickly and only replace them if you absolutely have to (see prior point).

7. Squeeze into your space. Put off taking on new rent obligations as long as you possibly can.

8. Get a line of credit and draw it down before you need it. By the time you need it you won’t be able to get it, so get it while you can.

9. Likewise if you need to raise venture capital do it well before you need it , and don’t get greedy on valuation. A successful company makes everyone money, don’t risk long term success for valuation or your percentage.

10. If you have to, take the company through a pay cut. As CEO cut your pay first, cut all bonuses and consultants, cut executive pay and when you have no choice cut everyone’s pay to make it through. Believers will stick with you, and they are the ones you want.

There is a happy ending to the Simplex story. We had filed our S-1 on Sept.11, 2000 so we were ready to go public when the market window opened. I bugged the CSFB tech banking team continuously through Q1 of 2001 but at first they would not consider taking us out, and then when they would we could not agree on the valuation to put on the cover of the red herring because they were so skittish about the markets. CSFB had done no tech deals in 2001 at that point and the capital markets team was scared to take one out in case it failed.

So, in the end I went with one of my board members, Larry Sonsini, to a meeting with Frank Quattrone (who was running CSFB investment banking at the time) to get a decision made. The capital markets team wanted to put a price of $8 to $10 per share on the cover to low-ball the value, to manage the risk of taking a deal on the road; we wanted to put $10-12 on the cover because we knew we had a great company and we didn’t want to send a message that this was a cheap deal. I had two Silicon Valley power players in the room deciding our fate and I was certain that if Frank would give me a chance I could sell the deal, raise the much needed capital and make money for anyone who invested on the deal. Frank and Larry discussed golf for 5 minutes, I made my pitch, and Frank decided to put $10 on the front cover and take us out. Just $10. No range. An unconventional idea for a strange time in the market – and it worked.

We went on the road, were oversold 11X, priced at $12 on May 2, 2001, raised $50M, closed at $22 on our first day and had the best performing first day in 2001 – which was a very rough year to go public, and it got even harder four months later, when the 9/11 hit, and in 2002 Simplex was sold to Cadence Design Systems.

I, for one, am glad to see Frank Quattrone back at “banking startups, because he’s creative, smart and knows how to get a deal done even under the toughest circumstances.

No one is sure of how long or deep the recession is going to be this time. Now is the time to manage cash carefully until we know what we are facing. At FirstRain I have a detailed cash forecast model so I can see the effect of every decision.

Penny Herscher has been CEO of FirstRain, a leading search-driven application provider to the financial services market, since late 2004. Prior to FirstRain, Penny was Chairman and CEO of Simplex Solutions, an electronic design automation company that served the semiconductor industry (now part of Cadence Design Systems). From 1988 to 1996, Penny was an early employee and executive at Synopsys. She started her career in 1982 as an R&D engineer with Texas Instruments and then Daisy Systems (an early Vinod Khosla company). Penny holds a B.A. with honors in mathematics from Cambridge University in England. Penny has much more advice for startup founders and CEOs on her blog

By Penny Herscher

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