Not much I can add on a formal VC level to the postings by my VC blogging colleagues Brad Feld and Fred Wilson (definitely read what they have to say). Brad and Fred relate to the current financial crisis by focusing on what early stage start-ups need to do...which is mainly cut costs (and then cut them again) and survive this bleak period. Fred also points out the bit of positive analysis, that unlike 2000/2001 this is not "our" fault (i.e. not Internet entrepreneurs or their backers), but rather a global financial crisis that has its ripple effects across all sectors.
What I want to focus on is how to survive, and take the conversation one step further -- to ultimate entrepreneurial activity.
For me the "ultimate" is when entrepreneurs have no outside funding, when they literally have to work odd jobs, do whatever it takes to put food on the table, while at the same time moving their companies forward. The cleanest version of this would be a start-up that has only been funded to date by "sweat equity." (I will relate in a moment to other situations). When 2,3, or 4 friends come together to start a new venture, the goal should be to get as far as possible without taking outside money. That means keeping your day job[s], whatever it is, and creating something from nothing.
Oh, and besides sweat you might have to fork over some bucks...but not much. There is so much open source out there, free trial services, etc., that pizza money should suffice. And even if you weren't working on a start-up you would need to eat.
The problem in today's start-up culture (certainly in the US and Israel, the markets I know best) is that we have educated entrepreneurs that they need to "raise money." I believe if people are passionate about what they are doing, the goal should be to raise their energy level, and that of their co-founders. Money should be a luxury, a nice-to-have, not a must.
Now, this path is only for the truly driven. Not so good for people with families or other major life commitments. And should be for a specific period of time (anywhere from 6 months to 6 years, depending on your stamina and personal situation). "I don't have time" is the mantra of those who choose not to make time. Sometimes, for good reason-- because you already have children, family, community, that already have received your time pledge. In a time of financial crisis, you probably are not a good candidate for ultimate entrepreneurial activity. That is simply being self-aware.
Now lets look at what happens when you did take in outside money, and now are at a brick wall. You have used up the financing. You want to continue investing sweat equity (your time, which is priceless). Your investors, those who forked over hard cash for a piece of your dream (and did not take salaries) choose not to invest more cash. What happens now? How do you value your time, vis a vis past investors, and what should happen to the cap table? While 99% of the time this is not talked through at the time of investment (and we at Jerusalem Capital are just as guilty), I believe the ethics that should rule is as follows: When someone invests in you (be they formal VC, angel, or family), they are investing in you and your dream. The goal is not to pay you a salary for a few months or years. Salaries are for salaried workers, not for ultimate entrepreneurs. You want a salary, go get a job. Less risk, and sometimes less direct financial reward.
When I invest, it's because I believe in the people, and expect them to whatever is in their power to bring about success (and a return on my hard earned dollars invested in the dream). If there comes a time, when to put food on the table they need to take a day job, so be it, but the moment I come on board, I expect to be treated as a partner.
Now, in formal VC documents and investment agreements, we do speak to situations of next round investors, dilution by new investors, etc. That is the written law (and like most written laws, it is harsh, full of "wipe-outs," "reset rounds," and "death spirals." But then there is the oral law, the law of good faith and integrity. That law demands that everyone involved keep the dream alive, as long there is hope.
Now, if a partner loses all hope, and explicitly gives up, the status qou changes. The cap table should change. But hope should NOT be dependent on whether salaries are being pulled out every month. And hope is very difficult to measure. It's like weighing air. My best advice is to leave nothing unspoken -- talk through where the company is, where it wants to get to, and reach deep down to see who still has hope and can remain committed.
In times like this, hope and commitment are the most important ingredients to potential success. Obviously one cannot run forever on empty, and quite difficult to completely survive on air (most breathatarians don't survive that long).
May our world be blessed with a quick recovery and may none of us need to run on empty or survive on air for longer than absolutely necessary.
Fred Wilson is a partner at Union Square Ventures. He writes the influential 
