5 ms·

Stock Market Drops. VCs Hold Partner Meetings. What Happens Next?

131 points by schlichtm 15y ago

nickpinkston 15y ago
Suster doing what he does best: great insight and synthesis. Mixture of macro-Econ and startup-micro. Worth the read.
rdl 15y ago
It seems pretty clear that public companies (with recent IPOs especially) are most affected; seed stage the least. Raising a seed or A round really shouldn't be any different (the sums involved are smallish for the funds, even with multiple investments and reserves), but it's entirely possible it will be (or, that it will be used as an excuse). I'm going to hypothesize that the push to cloud, and need for improved computer security, is a much much stronger positive trend than the current economic issues. I'd be more concerned if I were a B or IPO stage company which relied on local/state/federal government sales (e.g. some kind of government-optimized CRM), or maybe an expensive consumer product. Genuine luxury seems like it should do ok, especially non-deferrable luxury servies, but "aspirational luxury" for middle class and lower class might suck. However, really cheap entertainment might win, too -- much better to be video games than movies in a downturn.
- hugh3 15y ago
  Surely public companies have no need to care that much? Once your shares are sold, they're out there, you don't care all that much if they decline in value. The people for whom this is really bad news are the companies who were planning an IPO in the near-to-mid-term future.
  - rdl 15y ago
    If only. 1) "Fiduciary duty" in 2011 in the USA seems to mean maximizing share price at all times. If you don't, you're out of a job. 2) Compensation is largely tied to stock price -- either via options, or via bonuses paid explicitly on stock price. One thing you can do is bury your own specific bad news in a general downturn, since you'll be blamed a lot less for external things. E.g. if you have recalls, bad numbers, etc. to announce, announce them on a day when everyone is getting hammered for exogenous reasons. But yes, definitely worse for companies who have registered but not completed IPOs.
    - blackguardx 15y ago
      Point 3) is that it is nice to keep the stock price high if you need to do an additional offering down the road. This is probably the only real reason why a company should care about its stock price. Tying executive compensation to the stock price encourages the company to think on a quarterly basis. I don't think this is good in the long term.
- groby_b 15y ago
  Nitpick: much better to be _small_ video games. The big ones easily push into the same financial territory (for making them) as movies, and have way less avenues to monetize afterwards. (No "DVD sales", no money from the rental market, no TV deals...)
  - rdl 15y ago
    I was thinking more hours of enjoyment per $. Sushi costs $50-100 for an hour of enjoyment. A movie costs maybe $15 to see in theater, good for maybe 2h of enjoyment. A $50 video game might be good for 50h of play. Maybe more. Netflix is $10/mo for ~unlimited movies.
    - groby_b 15y ago
      Sushi is $100 an hour? Where do you go for Sushi? I've been several times to an _excellent_ Sushi bar, in Los Angeles, and the worst damage I ever did was $75. And that was really trying for it. (Sidenote: gold flakes on Sushi don't add in any way to the taste, but they sure look shiny ;)
bgentry 15y ago
Leave it to a guest writer to post the best TC article I can remember in ages. Excellent article, do yourself a favor and give it a read.
- Estragon 15y ago
  I agree, an excellent article. The main thrust, though, seems to be "This is a terrible time to start any business exposed in any way to US retail. We won't have sane economic policy until at least the 2012 elections." My message to entrepreneurs has been, “It’s coming soon to a theater near you.” You know – the “butterfly effect” on a local and tangible basis. Consumers hurting in Detroit or Biloxi will not continue to spend money they don’t have and income they’re not earning. It will impact retail. It will impact brands. These companies advertise. On your tech platforms. These consumers buy iPads, iPhones, Androids. You’re counting on them for up-sells to your app. For buying virtual goods. You need consumers – they’re 70% of the economy. Trouble is – they don’t have jobs. Those that do still have too much debt. Their 401k ain’t what it once was and it just got whacked again. They still have too much personal debt. And the equity in their house isn’t rising. They’re doing what economists call “de-leveraging,” which means spending less, saving more. ************************************************************************ Maybe the stock market drop will bring some clarity to congress. Maybe it will bring some bi-partisan spirit to solving the nations problems. Maybe. But evidence seems to the contrary. Right now people seem to be angling more around November 2012. And that sure sounds a long way away to me.
  - nl 15y ago
    I don't think he's saying 2012 will bring sane policy - he's saying that people are hoping the 2012 election will break the gridlock on policy. Maybe sane economic policy will win out, maybe it won't. (In my opinion, either way: the reduction in uncertainty is likely to improve the investment environment)
- martythemaniak 15y ago
  Indeed, quite the refreshing change from the usual petty punditry.
rgrieselhuber 15y ago
At the end of the day, if you're a VC you've raised a fund to invest, not sit around and wait to see what happens. What is the outcome one could hope for by not investing in promising companies? Waiting for lower valuations? Weeding out the riff-raff? Is that the best use of a fund's time? There are going to be good and bad companies no matter what the rest of the economy looks like. Figure out your thesis and stick to it when you invest. But don't just sit there.
- chailatte 15y ago
  If you notice that it's a horrible market, the sensible thing to do is to return the investors' money. Look at Carl Icahn recently.
- deleted 15y ago
  [deleted]
- meterplech 15y ago
  Startups aren't completely independent of the market. They either seek to IPO or be acquired by a company. Both of these possibilities are highly dependent on the availability of excess capital. When the market goes down, acquirers & potential IPO purchasers have less capital. This doesn't mean it affects an entrepreneurs day-to-day life, nor should it. But, VCs by definition invest until they can get an exit. If the IPO and M&A market dries up, it is harder for them to get an exit, and thus they are less likely to invest.
- pedalpete 15y ago
  I think part of Mark's point is that they need to reserve funds for the portfolio companies which will need another cash infusion. They've already invested x in company A. If company A needs another 2 million to reach profitability, they may not be able to raise it from another firm. The VCs are being prudent and cautious to ensure that they can keep their existing portfolio companies going. Remember, they aren't looking for 10x returns, they're looking for 100x+ returns. They know their is risk for their portfolio companies and need to make sure they look after their current investments before bringing on any new investments.
- 15y ago
ssebro 15y ago
I just love how the title of this post implies causation.
mbesto 15y ago
What happens next? Easy - The bubble pops.
davidw 15y ago
> PIGS as it is called: Portugal, Italy, Greece & Spain) Nitpick: initially it was PIIGS for Portugal, Ireland, Italy, Greece and Spain, especially since Ireland got worse much faster than Italy has, and Italy is still on the cusp, as it were.
mapgrep 15y ago
Though this post is great it makes me worry the tech sector has learned nothing from the past. If you're worried about the stock market and the climate for IPOs and acquisitions you've failed to learn the lessons from the 2000 bust. Quick refresher: After the first, big dot-com bubble burst a new ethos based on its lessons spread and came to dominate biztech thinking for at least several years. It emphasized slow, organic growth; revenues exceeding expenses from almost the very start of a business; and a bootstrap self reliance that said you pay for growth from income, personal debt (credit cards) and maybe some very trusted seeders (friends and family). Think Joel Spolsky, 37signals, Paul Graham. This was the start of the deprecation of VC. People were receptive to this message not only because VC was discredited and largely AWOL, and because so many revenueless VC backed companies had blown up, and because Spolsky Fried and Graham were such articulate writers, but also because servers and bandwidth and hosting services got so cheap in the early aughts. You didn't need VC to get up and running on a Sun with Netscape Enterprise Server any more; you could conceivably launch with a VPS running a free LAMP stack for $100 month or less. It seems to me a lot of this very sensible, fundamentals-oriented thinking has been lost in the last several years. You still see a lot more bootstraping than in the first boom, don't get me wrong, but you also companies taking loads of VC to stay afloat, before they have a real revenue source, just like in the bad old days. The biggest companies doing this would be Twitter and Foursquare but there are loads more smaller ones beneath them in the same boat obviously. Even Spolsky who partly made his name railing against dot com era VCs (e.g. http://www.joelonsoftware.com/articles/VC.html http://www.joelonsoftware.com/articles/VC.html) took VC for Stack Exchange, a startup without much revenue (though the tech and user experience is superb and the whole Careers 2.0 thing could produce some very solid revenue some day). All of this is a long way of saying, if VCs had been investing in the 2001 style all along -- companies with a demonstrably viable business plan; with real, substantial and growing revenue streams; and with a specific identified use for the capital invested, with plausible scenario for how it would be returned to investors (not IPO/acquisition lottery) -- they would have no reason to worry about the public market because the model for return on their investment would have to do with the income of the company and not the existence of lots of Greater Fools in the stock and M&A markets.
- jonmc12 15y ago
  This was my first notion too, but I think if you look more closely as Suster's arguments, he is really pointing out disparity between 2 forces: 1. The short-term economy (including stock markets, jobs, growth and politics) 2. The long-term (10-yr) tech investment opportunity So, he is saying "we know the returns are there over 10 years, but we've got to survive in the meantime". Equity markets aside, the fundamentals of business are effected by the short-term economy. I kept wondering too, is this true for private investment (ie, angels)? Are they susceptible to the same short-term concerns? Or will Angels keep pumping money into early stage independent of the economic conditions? Perhaps this post is doing nothing more than pointing out the obsolescence of the VC model through uncertain economic conditions..
mark_l_watson 15y ago
Even tough I am not directly interested in startups (I enjoy a lifestyle of learning a lot from many consulting jobs) this article is the best article I have read about the economy in a long while.
pge 15y ago
While I think Mark's article is insightful about macro issues, I have a different perspective on how VC firms should react. I will never forget the partner meetings we had when the bubble collapsed in 2000. The lessons of the years that followed immediately after the collapse always stuck with me. First of all, we are long term investors (VCs as a whole). I saw numbers recently that the average time from Series A to exit was up to 8 years. Managing through that entire lifetime means that a Series A investor that is looking at the public markets is looking in the wrong place. What the public markets are going to be doing in 8 years is the real question, and it is an unanswerable one. So we all have to build companies, real companies. An exit should be a pleasant interruption of the process of building a company. Building a company means planning for good times and bad (as a company and as a funder), not having to suddenly panic because the stock market went down. The only companies in my portfolio that need to react quickly are those in registration for IPO or in discussions with public acquirers whose stock prices just dropped. Otherwise, it's steady as she goes. One note I will make though, is that VC valuations do seem to track (irrationally) the public markets. After a crash is often a good time to invest, particularly if other funds do pull back, and competition is diminished.

131 points by schlichtm 15y ago

Suster doing what he does best: great insight and synthesis. Mixture of macro-Econ and startup-micro. Worth the read.

rdl 15y ago

It seems pretty clear that public companies (with recent IPOs especially) are most affected; seed stage the least. Raising a seed or A round really shouldn't be any different (the sums involved are smallish for the funds, even with multiple investments and reserves), but it's entirely possible it will be (or, that it will be used as an excuse). I'm going to hypothesize that the push to cloud, and need for improved computer security, is a much much stronger positive trend than the current economic issues. I'd be more concerned if I were a B or IPO stage company which relied on local/state/federal government sales (e.g. some kind of government-optimized CRM), or maybe an expensive consumer product. Genuine luxury seems like it should do ok, especially non-deferrable luxury servies, but "aspirational luxury" for middle class and lower class might suck. However, really cheap entertainment might win, too -- much better to be video games than movies in a downturn.

hugh3 15y ago
Surely public companies have no need to care that much? Once your shares are sold, they're out there, you don't care all that much if they decline in value. The people for whom this is really bad news are the companies who were planning an IPO in the near-to-mid-term future.
- rdl 15y ago
  If only. 1) "Fiduciary duty" in 2011 in the USA seems to mean maximizing share price at all times. If you don't, you're out of a job. 2) Compensation is largely tied to stock price -- either via options, or via bonuses paid explicitly on stock price. One thing you can do is bury your own specific bad news in a general downturn, since you'll be blamed a lot less for external things. E.g. if you have recalls, bad numbers, etc. to announce, announce them on a day when everyone is getting hammered for exogenous reasons. But yes, definitely worse for companies who have registered but not completed IPOs.
  - blackguardx 15y ago
    Point 3) is that it is nice to keep the stock price high if you need to do an additional offering down the road. This is probably the only real reason why a company should care about its stock price. Tying executive compensation to the stock price encourages the company to think on a quarterly basis. I don't think this is good in the long term.
groby_b 15y ago
Nitpick: much better to be _small_ video games. The big ones easily push into the same financial territory (for making them) as movies, and have way less avenues to monetize afterwards. (No "DVD sales", no money from the rental market, no TV deals...)
- rdl 15y ago
  I was thinking more hours of enjoyment per $. Sushi costs $50-100 for an hour of enjoyment. A movie costs maybe $15 to see in theater, good for maybe 2h of enjoyment. A $50 video game might be good for 50h of play. Maybe more. Netflix is $10/mo for ~unlimited movies.
  - groby_b 15y ago
    Sushi is $100 an hour? Where do you go for Sushi? I've been several times to an _excellent_ Sushi bar, in Los Angeles, and the worst damage I ever did was $75. And that was really trying for it. (Sidenote: gold flakes on Sushi don't add in any way to the taste, but they sure look shiny ;)

bgentry 15y ago

Leave it to a guest writer to post the best TC article I can remember in ages. Excellent article, do yourself a favor and give it a read.

Estragon 15y ago
I agree, an excellent article. The main thrust, though, seems to be "This is a terrible time to start any business exposed in any way to US retail. We won't have sane economic policy until at least the 2012 elections." My message to entrepreneurs has been, “It’s coming soon to a theater near you.” You know – the “butterfly effect” on a local and tangible basis. Consumers hurting in Detroit or Biloxi will not continue to spend money they don’t have and income they’re not earning. It will impact retail. It will impact brands. These companies advertise. On your tech platforms. These consumers buy iPads, iPhones, Androids. You’re counting on them for up-sells to your app. For buying virtual goods. You need consumers – they’re 70% of the economy. Trouble is – they don’t have jobs. Those that do still have too much debt. Their 401k ain’t what it once was and it just got whacked again. They still have too much personal debt. And the equity in their house isn’t rising. They’re doing what economists call “de-leveraging,” which means spending less, saving more. ************************************************************************ Maybe the stock market drop will bring some clarity to congress. Maybe it will bring some bi-partisan spirit to solving the nations problems. Maybe. But evidence seems to the contrary. Right now people seem to be angling more around November 2012. And that sure sounds a long way away to me.
- nl 15y ago
  I don't think he's saying 2012 will bring sane policy - he's saying that people are hoping the 2012 election will break the gridlock on policy. Maybe sane economic policy will win out, maybe it won't. (In my opinion, either way: the reduction in uncertainty is likely to improve the investment environment)
martythemaniak 15y ago
Indeed, quite the refreshing change from the usual petty punditry.

rgrieselhuber 15y ago

At the end of the day, if you're a VC you've raised a fund to invest, not sit around and wait to see what happens. What is the outcome one could hope for by not investing in promising companies? Waiting for lower valuations? Weeding out the riff-raff? Is that the best use of a fund's time? There are going to be good and bad companies no matter what the rest of the economy looks like. Figure out your thesis and stick to it when you invest. But don't just sit there.

chailatte 15y ago
If you notice that it's a horrible market, the sensible thing to do is to return the investors' money. Look at Carl Icahn recently.
deleted 15y ago
[deleted]
meterplech 15y ago
Startups aren't completely independent of the market. They either seek to IPO or be acquired by a company. Both of these possibilities are highly dependent on the availability of excess capital. When the market goes down, acquirers & potential IPO purchasers have less capital. This doesn't mean it affects an entrepreneurs day-to-day life, nor should it. But, VCs by definition invest until they can get an exit. If the IPO and M&A market dries up, it is harder for them to get an exit, and thus they are less likely to invest.
pedalpete 15y ago
I think part of Mark's point is that they need to reserve funds for the portfolio companies which will need another cash infusion. They've already invested x in company A. If company A needs another 2 million to reach profitability, they may not be able to raise it from another firm. The VCs are being prudent and cautious to ensure that they can keep their existing portfolio companies going. Remember, they aren't looking for 10x returns, they're looking for 100x+ returns. They know their is risk for their portfolio companies and need to make sure they look after their current investments before bringing on any new investments.
15y ago

ssebro 15y ago

I just love how the title of this post implies causation.

mbesto 15y ago

What happens next? Easy - The bubble pops.

davidw 15y ago

> PIGS as it is called: Portugal, Italy, Greece & Spain) Nitpick: initially it was PIIGS for Portugal, Ireland, Italy, Greece and Spain, especially since Ireland got worse much faster than Italy has, and Italy is still on the cusp, as it were.

mapgrep 15y ago

Though this post is great it makes me worry the tech sector has learned nothing from the past. If you're worried about the stock market and the climate for IPOs and acquisitions you've failed to learn the lessons from the 2000 bust. Quick refresher: After the first, big dot-com bubble burst a new ethos based on its lessons spread and came to dominate biztech thinking for at least several years. It emphasized slow, organic growth; revenues exceeding expenses from almost the very start of a business; and a bootstrap self reliance that said you pay for growth from income, personal debt (credit cards) and maybe some very trusted seeders (friends and family). Think Joel Spolsky, 37signals, Paul Graham. This was the start of the deprecation of VC. People were receptive to this message not only because VC was discredited and largely AWOL, and because so many revenueless VC backed companies had blown up, and because Spolsky Fried and Graham were such articulate writers, but also because servers and bandwidth and hosting services got so cheap in the early aughts. You didn't need VC to get up and running on a Sun with Netscape Enterprise Server any more; you could conceivably launch with a VPS running a free LAMP stack for $100 month or less. It seems to me a lot of this very sensible, fundamentals-oriented thinking has been lost in the last several years. You still see a lot more bootstraping than in the first boom, don't get me wrong, but you also companies taking loads of VC to stay afloat, before they have a real revenue source, just like in the bad old days. The biggest companies doing this would be Twitter and Foursquare but there are loads more smaller ones beneath them in the same boat obviously. Even Spolsky who partly made his name railing against dot com era VCs (e.g. http://www.joelonsoftware.com/articles/VC.html http://www.joelonsoftware.com/articles/VC.html) took VC for Stack Exchange, a startup without much revenue (though the tech and user experience is superb and the whole Careers 2.0 thing could produce some very solid revenue some day). All of this is a long way of saying, if VCs had been investing in the 2001 style all along -- companies with a demonstrably viable business plan; with real, substantial and growing revenue streams; and with a specific identified use for the capital invested, with plausible scenario for how it would be returned to investors (not IPO/acquisition lottery) -- they would have no reason to worry about the public market because the model for return on their investment would have to do with the income of the company and not the existence of lots of Greater Fools in the stock and M&A markets.

jonmc12 15y ago
This was my first notion too, but I think if you look more closely as Suster's arguments, he is really pointing out disparity between 2 forces: 1. The short-term economy (including stock markets, jobs, growth and politics) 2. The long-term (10-yr) tech investment opportunity So, he is saying "we know the returns are there over 10 years, but we've got to survive in the meantime". Equity markets aside, the fundamentals of business are effected by the short-term economy. I kept wondering too, is this true for private investment (ie, angels)? Are they susceptible to the same short-term concerns? Or will Angels keep pumping money into early stage independent of the economic conditions? Perhaps this post is doing nothing more than pointing out the obsolescence of the VC model through uncertain economic conditions..

mark_l_watson 15y ago

Even tough I am not directly interested in startups (I enjoy a lifestyle of learning a lot from many consulting jobs) this article is the best article I have read about the economy in a long while.

pge 15y ago

While I think Mark's article is insightful about macro issues, I have a different perspective on how VC firms should react. I will never forget the partner meetings we had when the bubble collapsed in 2000. The lessons of the years that followed immediately after the collapse always stuck with me. First of all, we are long term investors (VCs as a whole). I saw numbers recently that the average time from Series A to exit was up to 8 years. Managing through that entire lifetime means that a Series A investor that is looking at the public markets is looking in the wrong place. What the public markets are going to be doing in 8 years is the real question, and it is an unanswerable one. So we all have to build companies, real companies. An exit should be a pleasant interruption of the process of building a company. Building a company means planning for good times and bad (as a company and as a funder), not having to suddenly panic because the stock market went down. The only companies in my portfolio that need to react quickly are those in registration for IPO or in discussions with public acquirers whose stock prices just dropped. Otherwise, it's steady as she goes. One note I will make though, is that VC valuations do seem to track (irrationally) the public markets. After a crash is often a good time to invest, particularly if other funds do pull back, and competition is diminished.