Ryan A Graves.com

Imagine you bet on baseball. The Padres are playing the Yankees and your betting the Padres to win. Not a very safe bet, but the returns are awesome when the Padres come through (assume that happened 1 in 10 times). Then a huge steroids bust occurs, 3 Yankee starting pitchers get canned, and only 1 Padres starter. Now, lets also assume the returns on your bet for the Padres to win stay the same. This means that although the steroid bust affects the Yankees more than it affects the Padres, you still get the same return on your bet. The risk in betting on the Padres decreased relative to the risk of betting on the Yanks. If the relative risk of betting on the Padres decreased, wouldn’t you now bet more of your total investment dollars on the Padres? If you’re smart you would.

You following me yet? Let me break it down…

Yankees bet = Wall St. investment; Padres bet = Startup (VC/Angel) investment; Steroid bust = Financial Crisis

We all understand that there is a serious steroid bust going down in todays financial markets but there will always be investment money out there looking for its best available player. If a Wall St. bet becomes a lot more risky and a startup bet becomes just a bit more risky then the startup bet will get much MORE ATTENTION. This is the case because of risk relativity and the fact that smart investment money always looks at every option before being invested. For VCs this is great because the large players who still have investable funds after this financial debacle shakes out will be the recipients of large amounts of investable capital.

Nate Westheimer, or innonate blogged yesterday about the risk associated with startup investments. He pontificated upon this idea that if startup investment risk is not increasing at the same rate that more traditional investment vehicles are (such as money markets or even saving accounts) then investing in startups (VC) becomes a safer and safer investment.

All this then begs the question: What’s risky?

Is it less risky to put your money in startups vs in a savings account? On balance, no, but ask that to a Washington Mutual customer and they may hesitate a little before asking.

Are you better off extending a line of credit to an existing company than taking equity in a zero-revenue prototype? Again, on balance, probably not — but for more and more financiers, the early stage investment will be more on par with their appetite for risk and reward.

Mash up the shifting landscape of risk and reward with the openning of the early stage investment game (look at the path Angelsoft is on) and the continuing lowering of early stage barriers, and one of the most significant results of the market could be a tetonic shift of what “risk” looks like in the early stage investment game.