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
9 comments:
On the subject of valuation, if public companies have newly low valuations (as they do now), how can private companies get the same high valuations they were getting before?
Agreed. Check out www.rockstarfair.com happening on Oct. 28.
14 startups, 40+ positions, and cool technology (including an Android demo by TuneWiki).
Looks like not everyone believes the world is ending.
Great article, read it off techmeme
let me know if you hear about any startups going under?
Web 2.0 Fdcompany.com
$26b new fund? That would be one very large venture fund... dwarfing the $929m fund that they announced in September.
But I think you need to consider how venture funds work. The size of the fund represents commitments from limited partners over the life of the fund, usually 8-10 years. The VC can sit back and collect management fees on the fund and invest in nothing for years, the LPs only provide the cash when capital calls are made.
There isn't a boatload of cash out there right now, the proverbial battening down of the hatches is underway and even VCs are preparing for worst case scenarios like LPs not being able to fulfill their capital commitments.
I wish it were not so, but it is.
Sequoia $26 billion? Really, can you link to that, if so, I'll be the first to back you up. Last fund I could find for Sequoia was an India fund at $725 million. Big money admittedly, but not $26 billion.
RE: Anonymous. Public vs. private company valuation. It's an interesting question: why shoudl startups (a small subset of private companies) by valued by the same criteria as public companies? It strikes me that startups have always been valued by a different set of criteria.
Re: Jeff. Agreed, the fact that some LPs are not ponying up on their capital calls is worrisome. And if that's the scenario that VCs are worried about then reasonably they shouldn't invest in anything until the economy recovers. So VCs may not. My point is that the value created by a GOOD startup is independent of investor psychology. And yes, I'm aware that the valuation of a company is set by the market, so if all VCs decide to invest at lower valuations, that's what will happen. But there's no inherent economic reason that it has to be that way. It's still all psychology.
Re: duncan. That's a big oops on my part. I forgot to get the actual number before I published. But hey, they could probably raise that much, Sequoia did invest in Google and YouTube. :)
My ideas how to enjoy recession as a startup: http://kaljundi.com/2008/10/28/10-reasons-startups-love-recession/
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