Monday, September 29, 2008

VC = Visions of Collapse?

Some people use complex math models, others a method they call “common sense.” But no one has a foolproof method for predicting the financial future. Least of all the risk calculators whirring to a halt at major banking houses that will soon cease to exist, including Lehman Brothers and Wachovia.

(Of course, with a 777-point Dow Jones freefall today following House rejection of the proposed $700 billion economic-recovery bill, the market offers its own self-fulfilling prophecy. Think we’re all going to hell in a hand-basket? Then, by golly, it’s already getting hot in here.)

So perhaps that’s why it was hard to pin down a precise answer on what will happen to
venture-capital investing in the wake of the current market turmoil.

It’ll be fine, an industry representative told me.
In fact, market downturn could even spur innovation, according to Emily Mendell, the vice president of strategic affairs for the National Venture Capital Association.
Heck, laid-off tech workers could turn around and invent the Next Big Thing with newfound free time, she said.
"There's no recession of good ideas. There's always opportunity here. It could set off a whole slew of entrepreneurs who get laid off from their jobs and decide to take a risk and start their own business."
Yet blogs were less upbeat. A VentureBeat posting warns of bank-backed VC firms taking a serious head shot when they can no longer count on formerly guaranteed capital. As institutional lenders topple at a rate even faster than trendy yogurt stores opening in downtown Palo Alto, whither venture capital? Dean Takahashi asked in another posting.
“VC firms, for example, rely on large banks, endowments and pension funds for their cash. If enough of a VC firm’s so-called ‘limited investors’ default, or get scared and run, the VC firm may be forced to close,” he warns.
And Mendell admitted that VC firms may hold onto startups longer, fearful of downright murderous conditions for initial public offerings (IPOs)– meaning diminishing returns on investments as firms are forced to pump startups with more cash.

It’s cash that may be scarce elsewhere, angel investor Gadi Behar told me. Angels know the market isn’t ripe for going public and may hold back with their pots of gold and magic wands for a bit, he said.

And the whisper on the street out here is that VC is already feeling skittish – although no VCs told me so, point blank, today.
Hence the question mark at the end of the headline I eventually wrote: “Local venture capital 'insulated' from crisis?”

Of course, there will be nay-sayers who’ll say we’ll float through, no matter what.
I learned as much at the start of all this trouble.

Last year, right when the mortgage crisis hit – before it became a massive credit crunch, widespread banking failure and looming depression – I spent an afternoon calling folks to ask how local, affluent readers would be affected.
Jumbo mortgage loans will be tougher for the rich to get, realtors told me – a story the New York Times also ran the next day.

And one lawyer speculated the venture capital industry would get hurt. Money comes to Sand Hill Road from plenty of places – and some are likely to hurt from the mortgage meltdown, said Julia Wei, a real estate and mortgage lawyer in Palo Alto.
I put together the material I’d gathered and posted it online.

Boy, did our paper get heat for that posting. No, it wasn’t groundbreaking investigative journalism. It was a mix of local perspectives thrown together late on a Friday afternoon. But the suggestion that venture capital could be affected rubbed people the wrong way. Commentors called the article “horribly naïve” and told our paper to stick to covering City Council.
Well, then the chickens came home to roost and the industry has had its worst year for IPOs since 1978.

So, um, economic predictions. Sure, they’re often wrong. But when people predict that venture capital is not immune to negative market conditions, they seem to be onto something.
So here’s crossing my fingers for the economy this week. Not just for venture capitalists. For anyone needing a loan, anywhere; for bright young people –and bright older people – getting laid off in droves on Wall Street and elsewhere; for everyone who earns money and wants to keep doing so – here’s hoping things won’t be so bad.

Image of trading floor from New York Times. Money image Creative Commons licensed.


At December 15, 2009 at 11:14 PM , Anonymous Julia M. Wei said...

Hmm. Sorry if my comment about Sandhill being affected by the Subprime crisis was inflammatory. I was not trying to be a visionary, but time has proven the no one was immune from the crisis.


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