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How to survive a nuclear winter? Hibernation is one choice, says top VC lawyer

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Editor’s note: This is the second in a series of reports about “Nuclear Winter 2009: Survival of the Fittest.”

ATLANTA, Ga. — How will companies survive in the coming “nuclear winter” as the world’s economy slows and capital remains tight? How will some companies grow in tight times?

John Yates, of the Atlanta-based law firm Morris, Manning & Martin and one of the top venture-capital-focused attorneys in the Southeast, warns that the best strategy may be one of hibernation.

“If you have a startup, then consider hibernation for several quarters,” Yates told Local Tech Wire.

Local Tech Wire will be publishing a series of interviews with executives and experts from a variety of fields in coming days. The goal: To share the insights of leaders who either survived the fallout of the “nuclear winter” in 2001-02 when the “dot-com” and telecom industry crashes wiped out thousands of companies and the wealth of millions or learned the lessons of that collapse and hopefully have prepared themselves to survive the emerging new one.

Here are Yates’ responses to LTW’s questions:

What is your advice to fellow and would-be entrepreneurs entering the New Year?

If you have a startup, then consider hibernation for several quarters. Use this as an opportunity to conduct market research, target prospective customers and pilots and locate strategic angels. Also, use this time to prepare a rock solid executive summary and business plan and share it with trusted friends. In short, before jumping in the pool, read every book you can about swimming, so you are well educated and avoid drowning.
 

Who will be not just the survivors but the winners still standing when the recession ends sometime in 2009?

With regard to startups, the winners will be those who have located strategic angel investors, conducted thorough market research, established solid relationships with prospective customers and pilots and developed a strong sales model. These startup "winners" will be burying their roots deeply – you may not see anything above ground, but they'll be ready to sprout when capital budgets are re-opened.

In what areas do you see opportunities for growth in 2009?

The hot areas will be those that are either recession-proof or directly tied to cost savings. Health care IT and services will continue to be hot. Cloud computing will become hotter, as companies find ways to reduce IT spend by using this model. Outsourcing will also expand into previously untouched areas such as legal services.

Will venture financing tighten?

Yes, and it already is constricted. Funds have less money and are having to allocate more of their existing capital to struggling portfolio businesses that require more cash to break even.

The winning startups will be very strategic in how they select their investors.

A new category of "strategic angels" is emerging. These are serial entrepreneurs who have been remarkably successful in selling their companies and are now looking for angel investments where they can maintain a role on the board and provide advice and counsel. In some cases, the strategic angels also have kids who are graduating from college and could be additions to these new startups.

Caveat – these strategic angels seldom advertise themselves and like to maintain their anonymity. They obtain their contacts through trusted relationships with their professional advisers, venture funds and contacts with their former colleagues.

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