How to survive the next bubble


Venture funding does not equal a good business

Who: Vivek Mehra, General Partner with August Capital

Bubble Cred: Co-founded server appliance maker Cobalt Networks in 1996. Cobalt went public in 1999 with the third-best IPO in the history of Nasdaq, and Cobalt was acquired by Sun a year later for $2 billion. Mehra joined August Capital, Cobalt’s largest investor, in 2003.

Interviewed by Katie Fehrenbacher

Lessons Learned:

  • Business fundamentals do not change. Every five to ten years new technologies emerge. These change how applications get created, consumed, and how business gets done, but does not change business principles. Venture and public markets are willing to pay for future growth but companies eventually have to become profitable.
  • Raising venture money does not validate your business model. Just because you are in a ‘hot’ sector and VCs are throwing money at you doesn’t make it a good business.
  • Your customers business model matters. If your customers don’t have a business model, you don’t have one either. In the last bubble a lot of startups grew selling to other venture backed startups with unproven businesses. It worked for a while until VCs stopped funding and the house of cards tumbled.
  • Avoid herd mentality. We live in an incestuous world. We go to the same events, read the same media, meet the same people. Conversations get amplified. Think critically and avoid group think.
  • Execution is key. A great vision is important but great execution often separates the winners from the losers.
  • Partner well. Startups have incredible highs and lows. Work with co-founders, partners, and investors that are aligned and have the determination to hold the right course through the shifting winds.
  • Don’t set yourself up for failure. Once again we are seeing large investments at very high valuations often into early stage startups. There are two challenges with this. One, easy money gets spent. Two, investors have high expectations of such investments and the CEO/investor dynamics sour quickly when the company does not deliver.
  • Be willing to change. If the market demands, be willing to make fast and decisive changes. People often know what to do but don’t hoping for better times. Hope is not a strategy.
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