Market Turmoil Effects StartUP Financing
when this kind of value destruction occurs in the market there is a massive correction of value. what you used to own is now worth decidedly less say even 10-15% less and of course the number across the market must be trillions - or near that - it was reported on the 17th of january the world’s markets have adjusted down $4 trillion (which is 4,000 billions!) - when you compare that to the global economy estimated at $44 trillion in 2006 this is a big adjustment.
the guys that have in place venture funds with 1/2 or most of their money in the bank are effected differently than those that are near the end of fund investments and looking for more money to continue the firm & begin the next fund round!
the existing stock market turmoil probably means a prolonged period where the amount of money people and institutions thought they had is indeed maybe 5-10-15% less in real terms. lot’s of these wealthy individuals and institutions that invest in venture firms limited partnerships allocate only 2-3-5% of their portfolios to venture investments. so if you thought you had a $1.00 but when you check your pocket it’s only $.85 - well maybe you’ll trim the smallest purchases the most, and leave the biggest ones as in tact as you can. you’d feel less effect from having less money than you thought.
so those venture funds with money in their bank accounts will slow their investment rate to double-check and extend their pool, while those looking to raise their next fund have hit, at least for the moment, a new 911.
deals will slow down - valuations will be lowered
so the first effect will be those not looking for money for a fund, will slow their rate of expenditure. they’ll worry about how hard it will be to raise more money later. but don’t forget they have to spend - they have to invest - if they don’t make investments they don’t have a business - but they will jerk around a bit and they’ll invest slower. the second effect will be the valuations will immediately be lowered - now - those that are literally in the oven right now and have a good vc - they probably won’t get hacked - but those with a hack vc or only nearly baked in anew deal will indeed get hacked, pressured, or maybe no deal at all.
venture capitalists are pessimistic. on December 17th, 2007 the National Venture Capital Association published their 2008 predictions. there were 170 participants so you now there was some bulk! almost 60% of them said they would be raising similar or smaller funds in 2008. 57% said venture firms will decrease in number during 2008. 61% said the economy will decline, while perhaps a different but overlapping 60% said the sub-prime mortgage mess will be contained. only 40% thought the dollar would improve. you can see the press release here and you can get the powerpoint here.
so what’s this all mean?if you’re the entrepreneur i’d drive any deal that was near to closing to a close. figure out the vc’s timetable, what needs to be done to get a yes, push the crap out of the milestones, and dates, and entice with lowered stock price, increased incentives perhaps based upon time, and drive the hell out of prospects, customers, recommenders, and product functionality. create the frenzy and close the deal.