I personally cannot understand why so many people are taken aback by recent events in the capital markets. From my perspective, this is the only possible outcome from decades of failed oversight and unbridled expansion. Regardless of who or what you blame for our current mess, some new economic realities face entrepreneurs that are important to get your head around before making any rash moves with your startup.
The number one question that I have been asked as of late is what impact will this have on my ability to get access to capital for my startup? The short answer is that it will have an impact but to what degree depends on several factors. Here are some of my thoughts.
If you are seeking less than $1.5 million, which places you squarely in the angel investor space, the impact will likely be great. Angel investors allocate a portion of their investable assets towards stable and risky investments. Historically, stocks and bonds have been the stable investment vehicle of choice but with the amount of volatility in the markets, the typical allocation for an angel investor is on its head these days. But even this depends because not all angels are created equal. The typical angel investor nationally invests around $45,000 a piece; this type of angel will think harder about his startup investments in turbulent financial times.
The other type of angel tends to have enough wealth that they invest more like a venture capital firm (I call this group “superangels”). Superangels tend to be somewhat insulated from economic peaks and valleys and likely are not overly focused on macro conditions from an investment perpective. We’ll talk more about this group in a moment.
Those companies that are further along and looking to raise investment north of $3 million will see some impact but in unlikely places. Venture capital firms (and some “superangels”) tend to get a bit antsy when Wall Street struggles even thought that venture money is already committed and desperately seeking a good home (nice Fast Company article on this: hat tip to Jeff Cornwall). The impact will be felt in the diligence stage where your model may be discounted a bit more than usual to adjust for uncertain economic growth opportunities. In economic contractions like a recession, companies reduce spending which flows through the economy a limits revenue growth potential early on. Many times, you can spin this in your favor if you have a recession resistant (be careful about this…don’t kid yourself about what’s real) business model or if you are in a nascent market that will not likely start taking off for a few years anyway. Investing at the low points is always best (”Buy low, sell high.”)
One thing I advise all of my clients to do is not panic. I always say that good deals get funded and if yours doesn’t, it may not be as good as you think. Capitalism does not go into hibernation in rough times and opportunities abound for those with a strong stomach for the roller coaster.
I am curious, though…what are you seeing the market?
Nicely thought out comment. It is unfortunate that so many of our leaders including top regulators are amont those taken aback.
Your closing emphasis on avoiding panic is well put. Whenever there is chaos in the economic world, there are opportunities as well.
I’m seeing stagnation at many financial institutions as they are crippled by fear. This is hurting their customers. But at the same time, well run banks have a wonderful opportunity for increasing market share by providing loans to good customers who are frustrated by existing banking relationships. The strong financial institutions know who they are, and I’ve started to see them crank up their marketing machines to take advantage of this opportunity.