Despite the chaos, start-ups may have reason for optimism

Jeffrey Bussgang says Wall Street's turmoil affects some innovators more than others.

Reading the tea leaves: The main topic in Boston's blogosphere last week was the chaos in the financial markets, and how it may affect the region's innovation economy. Jeffrey Bussgang, a venture capitalist at Flybridge Capital Partners, wrote:

In the dozens of meetings and conversations I've had with entrepreneurs and [venture capitalists] this last week, it is clear that everyone is shell-shocked at the macro level, but surprisingly sanguine on the micro level. "Our traffic numbers keep going up and up," pointed out one [business-to-consumer start-up] CEO, shaking his head in disbelief. "Our portfolio is basically not affected," claimed one VC with a tinge of hubris.

Yet everyone is clearly affected, it's just a matter of degree. Henry McCance, one of history's great venture capitalists and chairman of Greylock, was quoted by my partners (three of whom are ex-Greylock) as saying in the midst of the 1998 Long Term Capital crash (which some say was worse than the 1987 market crash), "We know our portfolio is down 30 percent, we just don't know where."

But it's better to be down 30 percent than 300 percent. In truth, most early-stage companies are not that affected by the stock market gyrations or even a general recession.
bostonvcblog.typepad.com

Remembering dot-com: Sempre Management founder Michael Feinstein compared the current situation to the aftermath of the dot-com frenzy:

We all knew of the excesses of the Internet boom, but very few people were able to resist diving in and trying to capitalize. When things burst, we had to radically change our approach and rationalize our investments. Although incredibly painful, particularly for those who lost their jobs, this is an important part of capitalism.

This type of U-turn is important feedback to remind investors about irrational exuberance in the future. Investors [get] religion on capital efficiency and more coherent business models. Over time, they will get less disciplined as the sting wears off and, eventually, market strength returns. But corrections come, which remind people to stick to the fundamentals.
www.thefeinline.com

Tough time for start-ups: David Aronoff, another partner at Flybridge Capital, offered six predictions about how the start-up community will be affected by the turmoil:

1. [Information technology] budgets are getting slashed as I type this post. I believe that even "hair on fire" projects will be delayed substantially as companies, particularly those directly related to financial services, try to find bottom (again).

2. Many more jobs will be lost, and unemployment in the US is likely to match the worst of the last decade, perhaps going up another point +/- to cross over 7 percent.

3. Venture-backed startups, regardless of the focus, are in for tough follow-on financing markets.

4. First-round companies will find valuations, on the margin, to be lower, but not meaningfully, as the competition among VC firms to find shiny pennies [the best new companies] continues.

5. Troubled companies - those that are running out of money, have not executed well, and/or are in out-of-favor sectors and have been counting on M&A for outcomes - will be disappointed. Buy-outs will be rare and prices low.

We are also starting to see the return of the "two-drunks" M&A, when VCs put together two troubled start-ups, in hopes the critical mass will lift them. But usually it does the opposite.

6. IPOs. On vacation for a while.
www.geekvc.com

Follow the money: Former software entrepreneur Philip Greenspun wondered what Wall Street firms did with all those windfall profits:

People are asking themselves, "How come we have to pay $700 billion to bail out firms that collectively spend more than $700 billion every year paying their employees?" In recent decades, Wall Street has grown from six percent of the US economy to something like 10 percent, while providing the same basic menu of services:taking companies public, selling bonds, managing investments. The bailout angers taxpayers because anyone who can do arithmetic can see that more than $700 billion was taken out of Wall Street in the form of employee bonuses during the years of the real estate/mortgage bubble. The people who created the bubble, in many cases engaging in frauds of various kinds, were rewarded handsomely and are now relaxing in their Greenwich, Connecticut mansions deciding whether to take out the yacht or the private jet. Wall Street firms did not retain their exceptional profits during the years of fraud, but rather paid out almost all of it to the executives and rank-and-file employees who engineered the fraud. (Actually if they had retained some of these profits they wouldn't be needing a bailout!)
blogs.law.harvard.edu/philg

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