It’s one thing to read the letters to portfolio companies to cut costs, but it’s a whole other experience watching high finance, top VCs and C-level execs from various Fortune 500s as they digest the economic crisis, openly exchange data and shift the entire industry into recession mode. Wow.

In October, I attended ETRE 08 in Stockholm. If you don’t know of it already, ETRE an 19 year old invite-only Red Herring event.  In one sentence:

ETRE is the heart of the ITC business and investment world taking stock of the year just past, and readjusting the industry for the year to come.

I was stunned to get a call from the organizers inviting me to participate. Passpack had been chosen as one of five baby startups to come and present in what’s called the “Meet the money” session — that was my ticket in. Here’s an overview of the Agenda, or you can download the Who’s Who Book [PDF] with profiles of all the attendees.

Recession Mode: New Rules of the Game

1. Portfolio Companies: Stop spending
This is obvious. Cut the burn rate down to the bone, and then some.

2. Portfolio Companies: Sink or Swim… in 6 Months Max
The ideal company will achieve cash-flow positive within six months. And tolerance for less-than-ideal companies is lower than low. If you’re not making money, don’t be surprised if your fund cuts you loose.

3. VCs: Fund the Portfolio First, Leftovers for New Investments
VCs will be evaluating their portfolio’s capital needs throughout the recession. That money will be set aside. Any capital left over will be made available for new investments.

4. VCs: No Hurry to Invest, Recession Does the Due Diligence
during a panel, one fund declared that the next check they write won’t be until at least 12 months from then (October) and let the recession kill off the weaker businesses in the meantime. There was (audible) general consensus among the audience of VCs.

5. Assets cost less in a recession.
On one hand, that’s good for VCs as they can invest on better terms. On the other hand, the dollar value on exits will be lower. For large multi-nationals sitting on boatloads of cash… that means it’s party time. Most of these guys confirmed that they will increase acquisitions in 2009 — and they can expect to do so at bargain prices.

6. Early 2009 Ugly for ITC.
The community was less compact on when the crisis was going to hit the technology sector the hardest, but most estimates seemed to converge on the first semester of 2009. There was less consensus on how long the recession would last. Estimates ranged from 3 to 7 years for full recovery.

7. Everyone His Own Optimist
The industry as a whole was overall very excited as recessions generally build great companies. You could see entrepreneurs get excited about having a real challenge, and VCs were happy about all the on-sale prices they’ll get on revenue making companies coming out of the recession, worn thin but still kicking.

Take-Aways for Startups

If you’re a startup, you have a rough 6-8 months ahead of you. If your business plan calls for uberfast growth fueld by a hefty marketing budget, or revues via advertising — throw it out. It’s crap.

Whatever money you have in the bank must last for the next 12 months at your current revenues mark. Do whatever you have to, no matter how heart wrenching, to make that happen.

Even if you’ve already started a relationship with a VC for your next round, expect them to drag their feet on investing, and offer very conservative valuations (aka: painfully low) when they do. On the upside, the lack of easy-money investments, will mean less icky me-too companies copying your product, and more valid competitors slowly growing the market with you.

If you’re able to hold out, maybe one of those industry giants on a buying spree will perk up and notice what a great thing you’ve got going. So whatever investments you do make, make them on your product-  that’s the fun part anyway no?