Entrepreneurs: The End Is Near. Refinance.(blogs.wsj.com)
blogs.wsj.com
Entrepreneurs: The End Is Near. Refinance.
http://blogs.wsj.com/venturecapital/2011/09/28/entrepreneurs-the-end-is-near-refinance/
17 comments
The sky is falling. From the article:
"The door may be slammed shut to all new deals."
Translation: Frigid winter.
Why? Because we're in a global economic depression. Because the government cannot print money anymore. Because anymore printing will most likely induce hyperinflation.
(That's why there was no QE3 announced last month. That's why Germany/Finland do not want to expand EFSF from $400 billion to $2 trillion. That's why China is clamping down on lending, and will most likely earn a 0% growth next year)
And so all the debts will come due. From the $700 trillion derivatives worldwide held by the banks to the tens of trillions of debt held by the government.
Sure, there will be individual investors spreading money around willy nilly (think Dave McClure). But for most, it will be time to prepare for winter. A long 10-15 year winter.
"The door may be slammed shut to all new deals."
Translation: Frigid winter.
Why? Because we're in a global economic depression. Because the government cannot print money anymore. Because anymore printing will most likely induce hyperinflation.
(That's why there was no QE3 announced last month. That's why Germany/Finland do not want to expand EFSF from $400 billion to $2 trillion. That's why China is clamping down on lending, and will most likely earn a 0% growth next year)
And so all the debts will come due. From the $700 trillion derivatives worldwide held by the banks to the tens of trillions of debt held by the government.
Sure, there will be individual investors spreading money around willy nilly (think Dave McClure). But for most, it will be time to prepare for winter. A long 10-15 year winter.
Why? Because we're in a global economic depression. Because the government cannot print money anymore. Because anymore printing will most likely induce hyperinflation.
This is common Internet Wisdom, but there's no reason to believe it's actually true.
The TIPS spread--the spread between ordinary government bonds and inflation-protected bonds--is very low. Under 2%. The TIPS spread also tends to overestimate inflation, because the long-tail risk of inflation is higher than that of deflation. The Fed is dominated by inflation hawks with substantial political will to fight inflation and very little to implement monetary expansion. Very few economists seem to expect the risk of hyperinflation.
This kind of inflationary alarmism is infectious. It's infected our politics, skewing the GOP primaries towards severe economic ignorance. Nominal GDP is still limp. Inflation is still low. Unemployment is still high. Borrowing is still tight. The recovery is stalling. Stop. Please.
This is common Internet Wisdom, but there's no reason to believe it's actually true.
The TIPS spread--the spread between ordinary government bonds and inflation-protected bonds--is very low. Under 2%. The TIPS spread also tends to overestimate inflation, because the long-tail risk of inflation is higher than that of deflation. The Fed is dominated by inflation hawks with substantial political will to fight inflation and very little to implement monetary expansion. Very few economists seem to expect the risk of hyperinflation.
This kind of inflationary alarmism is infectious. It's infected our politics, skewing the GOP primaries towards severe economic ignorance. Nominal GDP is still limp. Inflation is still low. Unemployment is still high. Borrowing is still tight. The recovery is stalling. Stop. Please.
Am I the only one who finds VC telling entrepreneurs "everything is going to crash soon, so you better close soon and on whatever terms you can get" disingenuous?
/agreed
> I can’t emphasize strongly enough to entrepreneurs that if you’re in the process of looking for funding, seed money or an early round, hurry up and get your term sheets signed.
I can't emphasize enough that making statements like these also make negotiations very favorable for investors. Sounds like the investors are in a crunch, and not the entrepreneurial spirit.
> I can’t emphasize strongly enough to entrepreneurs that if you’re in the process of looking for funding, seed money or an early round, hurry up and get your term sheets signed.
I can't emphasize enough that making statements like these also make negotiations very favorable for investors. Sounds like the investors are in a crunch, and not the entrepreneurial spirit.
> making statements like these also make negotiations very favorable for investors
+1 He digs even deeper towards the end invoking high unemployment, failed IPO's and the deadlocked administration.
You go preach it. We'll just keep building it.
You go preach it. We'll just keep building it.
I'd call it biased, and treat it with skepticism. Disingenuous seems too strong a word. If they really wanted to hide their agenda, they'd astroturf the idea.
The reality is that with the current financing environment, there will be a ton of "orphaned startups". So if you're startup that raised an angel round of $500k but will need to raise a real Series A down the road from VCs, you may have a tougher time unless of course you are a breakout success (translation: outlier). And with Series A being tougher to raise, that startup will die die or sputter along for a while. Of course, if you can become revenue generating and a real biz, you may be able to live to fight another day.
Angels, unfortunately, cannot bridge this gap as they can't write the bigger checks of a Series A, B, etc round. So while there may continue to be seed/super early stage money to start up, it's the follow-ons which will become more difficult. This, of course, may just be natural selection at work and a good thing.
Also, while the article talks more about VC, if the stock market falls and uncertainty grows, angel investors will also pull back. Of course, there will be some who will not, but for many, their wealth goes up and down every day with the markets. And if they are feeling less wealthy, their willingness to invest in startups (the new status symbol for many) will also decline.
Angels, unfortunately, cannot bridge this gap as they can't write the bigger checks of a Series A, B, etc round. So while there may continue to be seed/super early stage money to start up, it's the follow-ons which will become more difficult. This, of course, may just be natural selection at work and a good thing.
Also, while the article talks more about VC, if the stock market falls and uncertainty grows, angel investors will also pull back. Of course, there will be some who will not, but for many, their wealth goes up and down every day with the markets. And if they are feeling less wealthy, their willingness to invest in startups (the new status symbol for many) will also decline.
Is there an opportunity to raise money from non-traditional sources, such as foreign investors or PE? Or do the risks associated with these sources outweigh the benefits?
It's not about VC. It's about angels, and Angel List.
Angel.co has gone from 25 to 3000 investors in 18 months.
Add 10 to 12 IPO's in the next few years, and you'll see thousands of newly minted "Qualified Investors" interested in angel investing. Where are they going to go? Angel List.
They've gotten over 600 startups funded in the past 18 months... I think they're just getting warmed up.
Angel.co has gone from 25 to 3000 investors in 18 months.
Add 10 to 12 IPO's in the next few years, and you'll see thousands of newly minted "Qualified Investors" interested in angel investing. Where are they going to go? Angel List.
They've gotten over 600 startups funded in the past 18 months... I think they're just getting warmed up.
AngelList is shockingly effective, I can't recommend it highly enough. We were at the end of our fundraising when we opened up that channel, and we ended up turning away 14 investors. YMMV of course.
Did you raise for FastCustomer? I would love to hear your fund raising story in detail.
YMMV indeed. AngelList only works for those companies who already have preexisting connections to the angel/VC community. For companies with little or no existing social proof, AngelList is shockingly ineffective.
(I decided to turn this comment into a blog post with pictures here: http://wensing.tumblr.com/post/11062968069/hacking-angellist...)
Stormpulse first appeared on AngelList on 8/24/10. We go no interest whatsoever and didn't even make it past the gatekeepers for any kind of introductions. It stung, bad. We had lots of traction, some revenue, and millions of visitors. And the best product in its class. I pretty much swore off AngelList with the same attitude you have right now.
13 months later we have 46 introductions and 149 followers, and the gatekeepers are saying it's one of the hottest listings on AL.
How did we do this?
* I applied to StartupRiot in Atlanta. I got accepted and pitched my heart out for 180 seconds. Didn't win, but met a guy from IBM.
* Guy from IBM invites us to Austin, TX to IBM SmartCamp. We pass through each of their interviews and become an Austin finalist. I pitch to a room full of investors for 5 minutes. We didn't win, but we met a lot of interesting folks in Austin, including Joshua Baer.
* Things were going pretty well for us earlier this year. We decide to try fundraising again. I email Joshua Baer. Joshua Baer invites us to Capital Factory Demo Day 2011 in Austin. I pitch for 180 seconds to a room full of investors. All of a sudden investors start handing us their cards and other entrepreneurs start offering to introduce us to anyone they can.
* We re-apply to AngelList, voila.
If you want to raise money, there's no substitute for working hard on your reputation. I'm a nobody from West Palm Beach, Florida. Seriously. If I can do it, maybe you can too. It's worth a try. (Also, please understand I'm not saying that working hard is the key to success--you may work just as hard or much much harder than I did and still fail. But that's for another blog post).
Stormpulse first appeared on AngelList on 8/24/10. We go no interest whatsoever and didn't even make it past the gatekeepers for any kind of introductions. It stung, bad. We had lots of traction, some revenue, and millions of visitors. And the best product in its class. I pretty much swore off AngelList with the same attitude you have right now.
13 months later we have 46 introductions and 149 followers, and the gatekeepers are saying it's one of the hottest listings on AL.
How did we do this?
* I applied to StartupRiot in Atlanta. I got accepted and pitched my heart out for 180 seconds. Didn't win, but met a guy from IBM.
* Guy from IBM invites us to Austin, TX to IBM SmartCamp. We pass through each of their interviews and become an Austin finalist. I pitch to a room full of investors for 5 minutes. We didn't win, but we met a lot of interesting folks in Austin, including Joshua Baer.
* Things were going pretty well for us earlier this year. We decide to try fundraising again. I email Joshua Baer. Joshua Baer invites us to Capital Factory Demo Day 2011 in Austin. I pitch for 180 seconds to a room full of investors. All of a sudden investors start handing us their cards and other entrepreneurs start offering to introduce us to anyone they can.
* We re-apply to AngelList, voila.
If you want to raise money, there's no substitute for working hard on your reputation. I'm a nobody from West Palm Beach, Florida. Seriously. If I can do it, maybe you can too. It's worth a try. (Also, please understand I'm not saying that working hard is the key to success--you may work just as hard or much much harder than I did and still fail. But that's for another blog post).
Thanks for the story, and congratulations on your success. You helped give me a better picture of how one goes about building social proof with the investor class.
We don't actually need funding, as we have successfully bootstrapped our business and are quite profitable. But we set up a profile on AL anyway, in case we ever do decide to shake the money tree to accelerate growth beyond what our cash flow permits, in the future. Naturally, we have 0 followers.
Interestingly, 42 Floors (http://angel.co/42-floors) has done the same thing, and they have managed 112 followers despite not seeking funding.
We don't actually need funding, as we have successfully bootstrapped our business and are quite profitable. But we set up a profile on AL anyway, in case we ever do decide to shake the money tree to accelerate growth beyond what our cash flow permits, in the future. Naturally, we have 0 followers.
Interestingly, 42 Floors (http://angel.co/42-floors) has done the same thing, and they have managed 112 followers despite not seeking funding.
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I had very few pre-existing connections to the angel/VC community when we started raising, but we did have some social proof when we opened up on AngelList.
Case in point. Your social proof enabled you to "be seen" on AngelList. Hundreds of other startups go entirely unseen and unnoticed on AngelList because of their low follower count and nonexistent social proof, regardless of team, idea, product, traction, revenue, or earnings.
Ties.com might be an amazing and wonderful business, but I can't imagine too many investors getting excited about they types of exits they might have by investing in Ties.com.
I wouldn't necessarily blame Angel List.
I wouldn't necessarily blame Angel List.
What is it about people with money and October?
Remember three years ago almost to the day when Sequoia said investment in start-ups was about to dry up?
http://gigaom.com/2008/10/08/sequoia-rings-the-alarm-bell-si...
luckily founders of Twilio,AirBnB, and Foursquare didn't listen and got started around then.
Remember three years ago almost to the day when Sequoia said investment in start-ups was about to dry up?
http://gigaom.com/2008/10/08/sequoia-rings-the-alarm-bell-si...
luckily founders of Twilio,AirBnB, and Foursquare didn't listen and got started around then.
AirBnB was around well before the Sequoia letter -- they were around in (at least) 2007.
Also, Sequoia wasn't wrong. Venture funding slowed dramatically in 2008, and didn't pick up again until (roughly) 2010. The latest cycle of good times is still quite young.
Also, Sequoia wasn't wrong. Venture funding slowed dramatically in 2008, and didn't pick up again until (roughly) 2010. The latest cycle of good times is still quite young.
Well, all things in economy are cyclical, so sooner or later this will really happen.
This said, people like Sequoia have agendas, so they might be just trying to hurry up people on the fence in order to drum up some business for them.
"all things in economy are cyclical"
That's a bold statement - care to back it up? :)
That's a bold statement - care to back it up? :)
You're fishing for a discussion that will never end :)
Let's flip it the other way: which economic elements or actors DON'T go through cycles, in your opinion ?
I'm genuinely curious.
Let's flip it the other way: which economic elements or actors DON'T go through cycles, in your opinion ?
I'm genuinely curious.
Well, debt doesn't seem to be in a cycle. It just keeps getting bigger! :D
Maybe it's just a long cycle.
https://secure.wikimedia.org/wikipedia/en/wiki/File:US_Feder...
https://secure.wikimedia.org/wikipedia/en/wiki/File:US_Feder...
Sometimes it goes up and sometimes it goes down, but the academic consensus is that its a random walk, rather than any sort of predictable cycle.
wealth distribution
I think it's fair to say 3 months after Oct 2008 investment really did dry up. You'll always find some exceptions, since VCs dont disappear off the earth in a recession, but it is much harder to get financed.
It's a strange situation.
My take on the startup "bubble" is that the stock market, bonds, and hedge funds have done poorly lately.
People with money are looking for alternative investments, and often that means startups. If money gets pulled out of startups, where is it going to go?
My take on the startup "bubble" is that the stock market, bonds, and hedge funds have done poorly lately.
People with money are looking for alternative investments, and often that means startups. If money gets pulled out of startups, where is it going to go?
I wonder how much this will impact the accelerator scene, since a lot of accelerators which have tried to replicate the YC model are viable mainly because there are substantial sums of money floating about to "accelerate" startups towards. If so I wonder what the lag will be between VC money becoming harder to obtain and accelerator programs reducing their intakes.
Sometimes it seems to me like many people are betting the farm on getting funded without already being in the coveted position of having prior successes which will (mostly) guarantee them their funding. I tend to think it's best to operate as though you're not going to get funded. Build/bootstrap a sustainable business (i.e. build something useful that people want and charge money for it), make it successful and leverage that to build a bigger idea. If along the way you get to accelerate the process through funding, fantastic, but without it, you've still built something successful and can then fund your own next idea, or potentially use your success as proof of the fact that you're a lower risk when it comes to funding.
If this will happen, thing may still be good (or even better) for bootstrapped startups, or those that try to get to break even early...
This is a time of change, and changing times brings more opportunity.
Maybe funding will be harder to get, but I believe there will be a lot more opportunities for entrepreneurs despite that.
Maybe funding will be harder to get, but I believe there will be a lot more opportunities for entrepreneurs despite that.
I wonder how much of this applies to Europe. Interest rates are extremely low at the moment, and will likely remain so for a year or two. Thanks to these low rates, banks spent two years hoarding cash, and are now starting to lend it back to businesses and consumers. The currency market is undervaluing GBP and Euro, which will help exports and global services based here.
From a purely monetary point of view, the next 12 months will be great for businesses in UK... and possibly in the Eurozone as well, if the Greek bomb is somehow defused (or something else diverts media attention from it for a few months).
From a purely monetary point of view, the next 12 months will be great for businesses in UK... and possibly in the Eurozone as well, if the Greek bomb is somehow defused (or something else diverts media attention from it for a few months).
I run a business in Europe; France to be more precise.
I'm more likely to have money by extending my hand and saying "Great Cthulhu! Have gold appear in my hand!" than by asking my banker for a loan.
(For the record our business is profitable and always had.)
I'm more likely to have money by extending my hand and saying "Great Cthulhu! Have gold appear in my hand!" than by asking my banker for a loan.
(For the record our business is profitable and always had.)
Would you think France is representative for the rest of the Eurozone in this respect? In my experience French exceptionalism is strongest in the banking sector, but I have no experience with banking for business.
The problem is most likely stronger in France.
I bet Cthulhu's rates are dead high ;)
Maybe you should try again in a few months...? In the UK things are looking better now, but then again, in last 3 years they were much worse than in the Eurozone.
Maybe you should try again in a few months...? In the UK things are looking better now, but then again, in last 3 years they were much worse than in the Eurozone.
I had to double-check the author of the article.
For a second I thought Eddard Stark was freelancing for the Wall Street Journal.
For a second I thought Eddard Stark was freelancing for the Wall Street Journal.
It's always fascinating to me when the population knows that certain events don't affect their line of business, but they let it influence them anyway. It happens so much, not just in private equity, but in corporate finance too.
" Prediction is very hard, especially about the future " - Yogi Berra
Where should investors be putting their money? The stock market is extremely volatile, and it is no higher than it was years ago. T-bonds are paying historically low interest. Even real estate looks really risky. Meanwhile, startups have been doing relatively well. Startups like AirBNB, Groupon, and Dropbox have all grown really fast.
Who cares about the short term cycles, as time goes by there is more and more money to be made online and ever increasing amounts of quality web companies being started. Those that stop investing will just miss out on quality companies.
Sure the valuations may not be as crazy high but that didn't seem to be a bad thing a few years ago.
Sure the valuations may not be as crazy high but that didn't seem to be a bad thing a few years ago.
I'd call BS on anyone saying the investment climate is going to be markedly different 3 to 6 months from now. no one has a crystal ball, and neither does he have inside information unavailable to everyone else.
He laid out his reasoning quite clearly - do you disagree with his points? If so, which ones and why?
The sustainability hypothesis is broken.
investment in VC firms also lags investment by VCs. As a result, you can't look at the fact that deployed capital currently exceed AUM and conclude that somehow the trend will continue. I fully expect VC firms to raise more money as there are more investible opportunities.
To put it concretely, there is a state of the world in which VC firms leverage up (at very low rates), reducing the amount of money they need to accept upfront. Imagine that the firms arranged for a 2x leverage scenario. Then, they would only need about 7.2 B to service the 14.3B investment, much less than the 8.1 B invested
And as far as market moves are concerned, the fact that even smart money is getting slammed in the market moves suggests that most asset classes are poor short-term investments. And for those things that are doing well (e.g. gold), margin pressures and other actions (e.g. redemptions) are slowly forcing people out of those markets. In fact, he admits as much: " A number of sharp daily swings highlighted the volatility that makes venture capitalists and other investors nervous about investing." nervous about investing in equities and derivatives markets, not in startups which aren't subject to the whims of the stock market.
investment in VC firms also lags investment by VCs. As a result, you can't look at the fact that deployed capital currently exceed AUM and conclude that somehow the trend will continue. I fully expect VC firms to raise more money as there are more investible opportunities.
To put it concretely, there is a state of the world in which VC firms leverage up (at very low rates), reducing the amount of money they need to accept upfront. Imagine that the firms arranged for a 2x leverage scenario. Then, they would only need about 7.2 B to service the 14.3B investment, much less than the 8.1 B invested
And as far as market moves are concerned, the fact that even smart money is getting slammed in the market moves suggests that most asset classes are poor short-term investments. And for those things that are doing well (e.g. gold), margin pressures and other actions (e.g. redemptions) are slowly forcing people out of those markets. In fact, he admits as much: " A number of sharp daily swings highlighted the volatility that makes venture capitalists and other investors nervous about investing." nervous about investing in equities and derivatives markets, not in startups which aren't subject to the whims of the stock market.
"[Investors are] nervous about investing in equities and derivatives markets, not in startups which aren't subject to the whims of the stock market."
Um...what? I know that around here people tend to focus disproportionately on the "exits" involving Google buying dinky, 2-person companies for talent, but industry-wide VC returns are predicated almost exclusively upon stock market performance. IPOs don't do well in bear markets, and if there's no IPO market, there's no venture capital. If there's no VC, there's no angel investment. Google can't prop up the whole ecosystem.
It might take a few years to shake out (especially to work its way down to the angel investors), but if the recent bear markets hold, the money will do what it's always done in bear markets: go to cash, bonds and other conservative vehicles -- even if it means taking a small loss. The hypothesis that people will suddenly start making speculative investments because bond yields are low ignores the very factors that are making bond yields low in the first place.
Um...what? I know that around here people tend to focus disproportionately on the "exits" involving Google buying dinky, 2-person companies for talent, but industry-wide VC returns are predicated almost exclusively upon stock market performance. IPOs don't do well in bear markets, and if there's no IPO market, there's no venture capital. If there's no VC, there's no angel investment. Google can't prop up the whole ecosystem.
It might take a few years to shake out (especially to work its way down to the angel investors), but if the recent bear markets hold, the money will do what it's always done in bear markets: go to cash, bonds and other conservative vehicles -- even if it means taking a small loss. The hypothesis that people will suddenly start making speculative investments because bond yields are low ignores the very factors that are making bond yields low in the first place.
Is down IPO market due to bear market or SOX regulation?
I think IPOs went down well before 2008. Classic unintended consequence, where SOX hurts IPOs, which hurts VCs, which hurts startups, which hurts job creation...
I think IPOs went down well before 2008. Classic unintended consequence, where SOX hurts IPOs, which hurts VCs, which hurts startups, which hurts job creation...
Companies have been postponing IPOs due to crappy market conditions for several months now. Did Sarbanes-Oxley have something to do with it? Yes. Is it the exclusive problem? Obviously not.
It's not saying the sky is falling.
Venture funding isn't going to dry up. It's going to tighten up. In three to six months. That's the thesis of this article.
I believe it's plausible that the venture market will cool down soon. Here's why:
A lot of companies have been getting funded now with very company-friendly terms and valuations. This is because the investment market is hot right now. An entrepreneur told me, in January, that this is one of the best financing seasons he's seen in a while, and that anyone looking to raise money should do it immediately. He predicted the market would stay hot until the summer, but was cautious about predicting after that.
It seems inevitable that the market will cool down at some point. VC funding keeps lagging general economic trends by a quarter or two, the article notes. The economy is currently down. The author extrapolates that VC will be down soon too. Seems like a reasonable inference.
This article predicts that in three to six months, that it will be more difficult to raise money. Not impossible, just more difficult.
Companies with sound fundamentals (i.e. proven business model) will still get funded. They just won't have money being stuffed in their hands. Terms won't be as favorable to entrepreneurs.