We have all heard how the brave and extremely capable Captain “Sully” Sullenberger and crew performed heroic measures to bring all members of US Airways flight 1549 to a safe landing in middle of the Hudson river this past month. All with the complete absence of a runway!

 

In the world of high-technology start-up companies the term runway is often used to describe the amount of time and cash a company requires to get to profitability or, at a minimum, to their next round of financing. In fact, it is probably safe to say that if you were a fly on the wall in the Venture Capitalists’ (VC) conference rooms of Sand Hill Road, or the boardrooms of many a venture-backed startup, you would have heard more discussions of runway than in the pilot training rooms for many airlines.

 

The last calendar quarter of 2008 brought the onset of what is potentially the greatest global financial crisis of the past 100 years. Amidst this financial carnage we are now beginning to see a new, third application of the common term, runway. Albeit similar to the latter definition, the term may now be applied to the strategies and economic models of the VCs themselves. This is mainly due to a tightening of the money that fuels the VC community. This fuel often originates as a slice of the overall investment pie of large investment funds (i.e., state employee retirement funds), wealthy individuals, and university trusts, etc. The investment managers of these funds often set aside a percentage of their overall funds (perhaps a slice of 10%) that is earmarked to the relatively high-risk, high-return VC investments. Of course, if the overall size of the investors’ pie is reduced via the demise of the financial markets, there are significantly fewer dollars available to invest in the funds of VCs. As a direct result, the VC community may not be able to raise more, or at least as much funds in the near future. If the VCs targeted available funds shrink they are obviously faced with the prospect of having less cash than they had planned; or, in fact, the runway of their funding now appears to be significantly shorter than it did prior to the crisis.

 

As in historical financial crises, Wall Street stocks are now at a recent historical low point and this further complicates this runway problem. VCs’ astronomical returns flow from strong financial exits of their portfolio companies, and these exits come in the form of acquisitions (the ‘A’ in M&A) by larger companies or Initial Public Offerings (IPO). When Wall Street is ill, the currency of potential acquirers is greatly reduced or non-existent and, as a result, potential acquisition exits are reduced in both frequency and valuation. Compounding matters, the IPO market is often virtually non-existent during difficult financial times. These two points now make it very difficult for the VC community to raise new funds because it is not easy to show new investors the highly desirable short path to a very rich exit. As a result, VCs need to extend their runway. This translates to fewer new investments and a thinning of the herd of their existing companies that require venture funding.

 

So where is the exit door? As with any door they open, close and open again. Therefore, the goal of the startup and the VC is often to be ready when the door next opens. The door may or may not open for a while, so that means we all will look again to extend the runway.

 

What is the real cost of VCs looking to extend their runway and the resulting reduction of new investments? In telecommunications, the best new ideas and technology almost always originate in the minds of focused entrepreneurs with the fuel of the VC community. Additionally, the resultant startup companies and their exciting products and services drive and accelerate change at the much larger incumbent providers of products and services. With less investment in new and exciting ideas, there will very likely be less change and innovation overall, and that’s just not good for the customer. Ironically, we are all often customers of these services, especially in telecom.

 

This is definitely a time for smarter, thriftier decisions and there will be much talk and many actions related to extending runways. Unfortunately, there will also be some that end up in the river without the good fortune of Captain “Sully” and his team.