Sunday, October 26, 2008

Sunday Startup: Don't Believe the Recession Hype

Note: my earlier version of this post said Sequoia raised a 26 billion fund. Clearly, that's absurd. They raised 725 million. I put 26 billion in as a placeholder so I wouldn't forget to check the actual number...and then I forgot. Doh.

First, yes there's a recession. It will probably be bad.

You've all probably heard about the Sequoia end of the world presentation.

Yes, funding has dried up for existing companies.

But there's still a crapload of money, billions in fact, in funds that HAS to be invested in new startups because its part of those fund's charter.

In fact, Sequoia has a 725 million dollar fund that they just raised.

You probably keep hearing that you won't be able to get good valuations any more because of the credit crisis.

Who's saying it? Venture Firms. Why are they saying it? Because they see an opportunity to justify taking a larger percentage for less money.

It's a brilliant negotiation tactic. But it's crap.

Venture firms still need you. Their entire purpose is to fund start-ups. While it's entirely reasonable to fund fewer startups because times are bad. It does not follow that a company that is worth funding should receive a lower valuation because of a bad economy. If one doesn't think that a company will thrive in the current economic climate that you shouldn't be investing in them. Penalizing a company merely because one can is short-sighted and greedy.

In fact, a good startup's value may actually rise. Good startups may become scarcer because of entrepreneurs throwing in the towel because of fear that they won't get funded. As result, less companies in which to invest. Yay!

The flipside is that lower-tier venture firms may not be able to raise capital so there'll be less buyers. That's what Sequoia hopes. Less competition for the good companies.

But that hasn't happened yet.

For more inspiration check out: Paul Graham and Dave McClure