Echoes of 2008 — Five takeaways for VCs and startups, by Oscar Farres

I joined the VC industry in May 2008. Debaeque Venture Capital was raising at that moment its third investment vehicle and they hired me after the first closing of the fund to support the two partners in all investment and monitoring activities. I was the happiest man on earth.

I was super excited when I participated in my first investment as a venture capitalist and the third investment of fund III: in late August/early September 2008 we signed a €3 million investment in a couple of French entrepreneurs who relocated from New York City to Barcelona, and had a punchy business plan to create an on-line financial comparison site like MoneySuperMarket.

The first product to offer on the site (MVP to be created) would be mortgages, what could go wrong? Everything. One week later Lehman Brothers collapsed and the world as we knew it started to change very quickly: bankers carrying their cupboard boxes, fears of a bank run… and the rest is history.

So, we were at the beginning of a financial crisis of unknown depth with three portfolio companies and a fund somewhere between one third and one half of its target fund size. I am not going to describe how painful it was to open the newspaper day after day with gloomier and gloomier headlines, and to witness the decline of the Spanish economy to a point where its belonging to the Eurozone was in doubt.

But the learnings and the resilience that we all had to develop might prove useful in the current uncertain environment. Here are my five takeaways for VCs and start-ups from the 2008 crisis:

1. Crisis are deeper and longer than expected. Be prepared. It is our nature to be optimistic. It is a survival mechanism. V-shaped recoveries, miraculous solutions… Indeed crisis do not last forever, but rephrasing John Maynard Keynes: the market can stay bearish longer than you can stay solvent. In other words, prepare for the worst and hope for the best.
2. Adjust your fundraising expectations and fund strategy. Now. Following the collapse of Lehman Brothers, prospective LPs did not respond to our phone calls and decision processes were delayed, for ever. LPs less familiar with the VC asset class abandoned the boat and even those who understood the VC cycle had liquidity issues and capped their exposure to VC. We ended up doing a final closing at almost the first closing size, far from our target fund size. We should have adjusted our strategy to avoid concentration in a few portfolio companies and lack of follow-on reserves.
3. Your reputation as a VC will be built during the crisis. For good or for bad. In an environment of abundance of capital, if you turn down an entrepreneur, or do not follow on in a portfolio company, nobody will remember for long. But during an economic crisis the consequences of your decisions are more dramatic. There are plenty of opportunities to show what kind of investor you are: deterioration of financials after a term sheet is signed, follow-on rounds with existing investors having exhausted their follow-on capabilities, in 2008 we even had non-dilution clauses in our SHAs to protect us in down rounds. You win in the short term but what are the consequences for your firm and consequently for your investors? VC is a long-term game and reputation is the word.
4. Entrepreneurs: build your war chest. It is better to have big debts and lots of cash than no debt and no cash. Because the latter scenario is your end. Prioritise your actions with this motto in mind. Renegotiate loan terms, extend credit lines, reduce costs, sell non-core assets, … endless discussions with entrepreneurs in 2008 who thought the crisis would be shorter, that they would raise money earlier, that they were about to sign a big client.
5. Even (or more so) in times of crisis, there is no better business than the business of innovation. Whereas crisis hits every corner of the economy, innovation prevails. Innovation is not immune to failure, on the contrary failure is at the core of innovation. But innovation lies at the heart of economic development in free-market economies and generates the vectors of future growth. During the 2008 economic crisis in Spain, the start-up ecosystem proved to be a haven in a devastated country and the unemployment rates among IT professionals were a fraction of those in the “old economy” (having gone through the 2000 dot com ups and downs I hate to use this term). I am sure this will be the case in the current environment: the only way forward is innovation, and start-ups will continue to bring a big chunk of innovation to market.

The company I mentioned at the beginning — Helpmycash — is alive and kicking, and it is one of the leading financial portals in Spain today. I am still proud of that investment: as a reminder to sustain good companies and believe in good investments despite turbulent times… whilst keeping your long-term vision.

-Oscar

Since January 2020, Oscar Farres is Head of VC — Digital Economy investments at the EIF. Previously, he was Head of BA Investments in charge of deploying the European Angels Fund (EAF) programme with his team. This post was first shared on his personal blog and LinkedIn.