Sunday Startup: Don't Believe the Recession Hype

two responses:

"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."

Disagree with this slightly. Yes, they will always invest in startups, but if they're feeling really skittish, you can bet that they'll hang onto the cash a bit longer than anticipated and be much more selective about what they invest in which translates to fewer deals. Sure, they still have the money, but if they're nervous about spending it, then that, from a startup's perspective, is no different than if their funds were miniscule. Obviously stand-out startups will receive money, but the requirements for what constitutes a stand-out startup are changing daily.

"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."

I don't think that's true. If, collectively, the VC industry resets the valuation equation, startups will receive a lower valuation in the same way that, during boom times, startups receive higher valuations. If they can go up, they can certainly go down.

This is definitely good advice.

We went to several VC's and received fairly unpractical offers (well not unpractical: but it felt like they were trying it on for as much %age as they could get).

Trouble is if you play hard ball with them they seem to lose interest fast (I guess it's easier to go with other people who'll just take the cash as it's offered).

In the end we went with private investment - and I;d advise others to do the same. Yeh there is a lot less money in that area BUT if you get a few people invested then it cuts the individual percentage any one investor might have (always useful) and also means (with the right investors) you'll have a more personal relationship with your "money"

:D

I have to disagree with the OP. I think that valuations are going to decline with the bad economy.

1. Most pre-funding startup founders and employees are working for deferred cash and equity, which means that they need to subsist on savings or parental generosity for living expenses, health insurance, etc. Those sources are likely to dry up for some people, which increases the urgency of the funding problem.

2. It's going to get harder for a lot of startups to become "ramen profitable", to use Paul Graham's terminology.

Valuations will decline because VCs have more leverage, and therefore can get away with weaker offers.