All VCs, whether large or small, are saying that current cash should be husbanded, with the goal that it should be sufficient to support the business until cash flow breakeven. One of the big dilemmas is how to best support successful, growing early stage businesses that are not yet cash flow breakeven. My friend Fred just shared some interesting thoughts on the topic, citing Tom Evslin's post where he utters a common sensical but important line for people in freak-out mode to remember: "In the end you will succeed because of what you DO spend your money on." Surely time is right.

Though I've generally applied this concept to Wall Street it is certainly applicable to early stage companies: LIQUIDITY CREATES OPTIONALITY. That means having the chance to accelerate growth in the face of weakened competitors, to step up advertising and promotion when others can't afford such expenditures and to hire key talent at better prices to shorten release cycles or to sell more aggressively. The best VCs are helping their companies to balance the twin goals of liquidity preservation and growth, a balancing act that is not easy but essential for supporting the development of world-class businesses. VCs have got to be front-line risk managers. Risk managers aren't just for Wall Street any more.

Angels: Shaking out

The prevailing tone in the market is that angels who "dabble," e.g., aren't professional angels or "super angels" as I've referred to them in the past, are generally shell-shocked and backing away. They neither want to put capital in new deals nor likely have the stomach to participate in pay-to-play recapitalizations that will inevitably come about during 2009 as the cash crunch really takes its toll. We are in the early innings of what will be a very challenging time for companies funded in the past 1-3 years, those in need of capital that are not yet near cash flow breakeven but who have businesses worth supporting.