Profitability covers a multitude of sins

In a fascinating letter from Sequoia Capital to the CEOs of its portfolio companies, Sequoia urges the obvious: be prudent and conserve cash. The counsel is obvious but largely unheeded in the technology industry, as well as throughout our economy: debt equals unhappiness, while profitability equals happiness (and flexibility).

Like every major shift in the environment, this one will offer opportunities as well as risks. JP Morgan was able to buy two great assets as substantial discounts with government assurances, precisely because they played the game frugally while others were more risk seeking...Many companies that thrived post 2001‐2003 were simply "Last Man Standing" in their industry. It doesn't sound all that glamorous, but it was the exact right strategy to deploy at the time.

As a result, Sequoia urges its companies to "(not) spend money until you have to," warning that "access to...capital...may be dramatically impacted" and that the "cost of capital is going way up."

I'm grateful to work for a company that has prudently managed its resources. Our CEO, the former COO of Business Objects, is very frugal and we've never hired in advance of the revenue to support those hires. Consequently, we have most of our venture money in the bank, as well as a profitable business that should get stronger during the downturn.

I've written before about how a recession would benefit open-source buyers, but it's also important to recognize how it benefits the vendors. Open-source vendors are demand-driven: the software is made available for download and customers find you. Alfresco routinely closes six-figure deals over the phone/e-mail in a 60- to 90-day sales cycle. Virtually none of our deals require an on-site visit.

This means we can invest more in our products while simultaneously charging less, which is what customers need in a tightening economy. Get more, pay less. That's the open-source value proposition for this recession-plagued economy. A subscription model helps, too, because it doesn't require the sale of new licenses, as a license-driven model like Microsoft's does. Red Hat could not sell a single new subscription this year and hold revenue steady. That's the power of open source.

But the fundamental premise underlying all of this is to operate one's business in a prudent and profitable manner.

It's critical, in Clayton Christensen's words, to be "impatient for profits and patient for growth." Following Sequoia's advice, many of the winners in this economy will simply be the "last ones standing." Open-source companies have an opportunity to gain market share and solidify brands in a spiraling economy, but to do so they must be profitable.

My own advice? If your headcount is far out in advance of your profitability, you should strongly consider cutting headcount to get to profitability as soon as possible. In my own house, we went to a cash-based budgeting system a few months ago and paid off all debts to ensure we were ready for any downturn. Today we're reaping the rewards.

Do yourself and your employees a favor: get profitable. Spend less than you earn. Grow slowly. That's the open-source mentality, and it works.