Should start-ups put their head in the sand – or put their house in order for when the upturn comes?

Over the past few weeks, venture capital firms from New York City to Silicon Valley have called in their portfolio companies to tell them that they better prepare themselves for a protracted economic downturn.  As we pointed out on our blog, the VCs’ cataclysmic announcements sure made it sound like the start-up community should downsize its expectations for 2009.  But are VCs really as gravely concerned as it seems, or is there a little more to their gloom-and-doom presentations than meets the eye?  

Sequoia Capital kicked off the series of “R.I.P. good times” meetings at the beginning of October by telling the top executives of all its portfolio companies to put survival strategies in place and figure out ways to outlast the broader market troubles.  According to GigaOm’s Om Malik, speakers at the meeting went through each functional business area and told the companies how to cut costs.

Also in early October, early-stage investor Ron Conway advised entrepreneurs not to quit their day jobs unless they could get a year's worth of funding in advance.  According to Conway, the best thing startups can do right now is to raise money by reducing their own spending.  

And back in September, Web entrepreneur Jason Calacanis wrote that as many as 80% of emerging tech businesses would go under in 18 months.

All of this augurs badly, and so it is no wonder that small business confidence is at a record low right now.  

However, there is at least one observer out there who thinks that the VCs’ presentations might not be what they seem.  As Tom Foremski of Silicon Valley Watcher points out, startups’ “horizons are in the future” and they therefore “don’t care about what the economy is like today” – they “care about what the economy is going to be two to five years out.”

Sequoia et al, he speculates, might simply be trying to scare competitors to their portfolio companies into cutting back – pulling their foot off the pedal – in order to give their own companies a fighting chance.

So, in short, some of the gloom and doom rhetoric might be less about what is truly happening in the VC community and more about trying to slow competitors down.  

The “R.I.P good times” presentations might be a setup.

As Foremski rightly states, downturns are cyclical (and, I would add, we need to distinguish the cyclical economic downturn we’re currently experiencing from the liquidity crisis) and right now is therefore actually a really good time to invest.  You want to take the necessary steps to make sure you’re ready for a brighter future.  Your house needs to be in order when the upturn comes.  

This view is confirmed by Jim Armstrong, Managing Director of Clearstone Venture Partners.

In a recent presentation at the Under the Radar Dealmaker Roundtable in Los Angeles, Armstrong reiterated that start-ups and VCs build businesses that will only be viable three, four or even five years from now.  The VC and entrepreneurial communities therefore have to be focused on what will be in the future, not on what the economic situation is like right now.  

In fact, Armstrong went so far as to say that the biggest mistakes Clearstone made in 2003/04, after the dotcom bubble had burst, were “not the investments we made, but the investments we didn’t make.”  In his view, “if you have any experience in VC at all, you have to be investing