Over the last week I’ve been working on slides a pitch for a discussion I’m going to host at BarCampMilwaukee. The discussion is going to be focused on how VC and startups will react and be affected by the recent financial crisis. Obviously, with the credit markets in turmoil there will be an affect on anyone who needs money to do anything. Many startups will have to refocus in order to stay funded and stay alive…and that may be a good thing!
Also, I uploaded my pitch to a SlideShare.net, a site that I’m a huge fan of, to share the slides and embed them here on Ryan A Graves.com. Then Slideshare did a special on the financial crisis and chose my slides to be featured on the homepage today! In less than 12 hours on the Slideshare hompage 200+ people had viewed the slides and some given me great feedback.
This video of Warren Buffet being interviewed by Charlie Rose is an absolute must watch if you are interested in the financial crisis and it’s affect on the United States. Please watch this and consider what Buffett says about, well, almost everything. I’ve ready many (leather bound) books about Buffett and I have a great deal of respect for his opinions and his incredible insight into the sould of the US finance markets. Let us know what you think of the video.
In 2001 the pop of the bubble in Silicon Valley brought Wall St. tumbling down. Will This pop on Wall St return the favor to Silicon Valley? The super investment savvy in NYC and beyond probably have a pretty good take on what the hell is going on with the financial crisis. What’s most interesting to many of us is how will it affect VCs and start-ups? There are a wide range of opinions even amongst the top dogs of the industry, some think it won’t be bad, some think it will be a “startup depression”.
Here are my summaries and thoughts on many of the opinions I’ve followed over the past few weeks. I’ve tried something new and color coded the first few words to get a scorecard on how things are/will be fore startups & VC.
-Big banks will/have disappeared and small banks who are more willing to work on a small scale projects to find quality investments will fund VCs and startups
-The IPO space is already crawling or stopped. Now as large firms lose capital the M&A space will join the IPO space at a stand still.
-Web and technology markets are probably 2 of the only bright spots in today’s global economy. This is what will bring us out of such a mess. Transparency into these markets will only exist with improvements in technology.
-If the IPO drought continues, eventually LPs will realize the VC model/system is not working properly and it will be much tougher for VCs to get that money. This will make funds smaller and thus less startups will be funded.
-In the “slumping market” VC will become introspective focusing on current portfolio much more than finding new investments.
-Funds that have already been raised by VCs can no longer be counted on. As the LPs are losing money elsewhere in the markets one of the first investments they will renig on are those that are promised but not paid, VC firms.
-this will hurt small funds first
-this will hurt LPs relationships with VCs so the big ones will be safer
-Startups who have VC backing already should be fine but will have to prove themselves to stay on the fun. Startups without VC funding will have to learn the (some what lost) art of bootstrapping. ALL STARTUPS will have to get lean, focus, find PROFIT$ now.
-Strong startups will continue to get funded. The cream of the crop will rise to the top because VC are being more careful. Survive and Thrive!
In an article from PE Week, that many VC’s have discussed recently, the argument was made that the bubble of 01 prepared VC firms to be ready for this type of financial crisis. VC firms don’t seem to be largely affected by the recent financial crisis and many are confused why. A few of the arguments of why VC’s were not affected (which I’ll go into detail on each in a future post) are that VC’s are long term investors so short term credit doesn’t affect them, or that LPs are huge and diversified so there is still money to be invested with VC firms, among others. Here are 4 strong arguments about how and why VC’s were prepared for the 08 financial crisis by the tech bubble of 01:
1. Better Money Management: Milestones matter to VCs. Ask any entrepreneur, and you’ll find it’s likely he or she are getting money in tranches based on deliverables. Most tranches go through, even when milestones aren’t met, but the process allows VCs a better way of keeping track of the progress of their portfolio companies. VCs are less likely to write mega checks in the early stages, many have raised the bar of proof points needed to get a big round. Money is also more likely to go to things that directly drive valuation increases as a smaller percentage of any round is going to PCs, servers and bandwidth.
2. New Sales Models: It used to be about “Big Game Hunting” and multimillion dollar site licenses. It’s a model that was great for vendors: get all the money up front, then worry about delivering the product. But Software as a Service permanently transformed the way IT was sold. Now new installations are cheaper and can be scaled slowly. It’s a model that’s been adopted by IT appliance and PC companies as well. So when Datamonitor finds that IT budgets aren’t going to rise in 2009 Datamonitor Survey , there’s less reason to freak out. Most IT buyers have already planned their spend out: it’ll be re-upping on the services they’re already subscribed to.
3. Decreased Addiction to Advertising: The banner ad was a big part of any dotcom business model. When advertising budgets fell, hundreds of online businesses shriveled on the vine. Now, online businesses look less to online advertising for real revenue. Google Adwords had a big hand in that. Suddenly it was a lot easier to install advertising on your site, but it was also less lucrative. Nobody ever got rich putting up Google Ads, but at least using the service saves companies from having to hire expensive advertising sales people. The addiction to advertising has been broken and many companies are looking for other ways to make real value online.
4. Moderate Exit Expectations: If you’re not looking to flip a startup to the public market, what do you care that Wall Street’s investment banks are falling like dominos? Had this same crisis had happened 10 years ago, you can bet VCs would be pulling their hair out. But when there are already no IPOs, it’s hard for the public market to get worse. When exit expectations are more reasonable, it’s easier to keep cash burn in check. Startups are less likely to build out sales teams, for example, planning perhaps to later plug in to an existing sales organization via aquisition.
I started thinking about how the Financial Crisis has got everyone freaking out, often times for good reason. Many have lost significant portions of their net wealth and other have lost college savings funds, etc. But, I have been raised to find the positive in all things, so I did that. In my mind there had to be opportunity in this crisis for early stage technology startups, and there is…
As large IT companies are strapped for cash because of significant decreases in corporate IT budgets they will be forced to go into cost cutting mode. Anyone who’s been through a business cycle knows that often times those extra projects, the ones that seem innovative but unnecessary, are the first to be cut…
—-> enter startups to fill the innovation gap, pick up the innovation efforts, and thrive!
A summary of the governments bailout or takeover of Fannie Mae and Freddie Mac from Fred Wilson:
This means the US taxpayers are now the guarantors of many of the mortgages that have been issued in recent years. Nobody really knows how much liability that the government/us taxpayers have taken on, but it’s certainly a huge number, way more than the savings and loan bailout of the late 80s. ….. Some will argue that this is really good news, that this marks the bottom of the bear market in real estate and the final capitulation from which we can now start moving higher. I don’t think so. The small regional banks that the Fed’s been letting go under the past couple weeks will continue to go under and I think we’ve got at least another six months to a year of bad news in the real estate/mortgage business before it’s all over. …..How does this impact startup land and venture capital? Well from my vantage point, we’ve been largely spared for the past year. And I think we’ll muddle through this period better than many other sectors. But the capital markets are a mess and we should not expect a rosy exit environment any time soon. And we should expect to continue to get bad news on fridays after the market closes for a little while longer too.
“A solid working knowledge of productivity software and other IT tools has become a basic foundation for success in virtually any career… Beyond that, however, I don’t think you can overemphasise the importance of having a good background in maths and science… Communication skills and the ability to work well with different types of people are very important too. ” -Bill Gates
I think Bill nails it on the head here. It is extremely important for our (the US) undergraduates and high school students to put more of a focus on math and science. If the United States is going to be able to compete with the students from China and India we are going to have to stress these fields of study more. We have set ourselves apart from the rest of the world because of the quality of education that we provide but that competitive advantages is dwindling away. The margin of superior education that the United States once had is quickly disappearing and it is because of the types of educations we are offering. Although communication and PR skills may be very important, I believe that these majors will not provide us with the competitive workforce we will need in the future. As an economics major I definitely believe that a good understanding of the global economy and general business is very important but more and more it needs to be backed up by a more applicable discipline such as math or science. Bill later states:
“If you look at the most interesting things that have emerged in the last decade - whether it is cool things like portable music devices and video games or more practical things like smart phones and medical technology - they all come from the realm of science and engineering. ”
Whether it is an industry revolutionizing iPod or and industry revolutionizing ultrasound machine a well educated core of math, science, and engineering students are A MUST to reach these heights and a must to remain globally competitive.
Today the National Association of Securities Dealers Automated Quotations (NASDAQ) released that they would be creating an “internet index” that will follow many of the large internet companies (i.e. Google, Yahoo) and other publicly traded internet companies. As Duncan Riley on TechCrunch speculated, it is likely that any good or bad news around Google would have a VERY large effect on the index. I strongly agree with Riley that the rise of this index shows the growing importance of the internet and the companies that it spawns in the US and global economy.
My question is this…Will the existence of this index alleviate or encourage another bursting of a tech bubble? Now that there is one number that inevitably everyone (myself included) will comment on and scrutinize as the “grade” given to our industry, will it serve as a pump to the next tech bubble? Or, will it help us to track the industry more closely and help prevent another bubble?
My hunch is the former. I think that having this new index that people can follow and get inevitably excited about, people will blow it up even faster causing another “pop”. The more stock people put in this number as it grows the more money will poor into Silicon Valley and nationwide internet start-ups. Eventually, as it always does, the newly measured internet economy will correct itself.
The US Dollar has decreased by roughly 12% in the last year.This directly affects the
US’s ability to hire quality individuals from other countries (outsource). As industries like technology, health-care and sciences begin to rely more on the less expensive but very well educated individuals from other countries it is very important for the US to keep the dollar strong against foreign currencies.
The
United States has done a very good job in its relatively short history in educating its citizens and that is a very large reason for our success. However, other countries are beginning to provide very high quality educations and in order to keep the “quality” or “competitive advantage” within the US we need to be able to pay these individuals to stay and work domestically. If the US Dollar continues to decline at this rate we will not be able to pay these competitive prices for people.India graduates 1.5 million engineers a year and the
US graduates only a couple hundred thousand. The crop is dwindling and WE WILL NEED TO BE ABLE TO HIRE COMPETITIVELY!The private sector may be benefiting from higher prices from our exports but it needs to start pushing the government (FED and the like) to focus more on regaining strength in the US Dollar.
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