

Entrepreneurs: The End Is Near. Refinance. - Sato
http://blogs.wsj.com/venturecapital/2011/09/28/entrepreneurs-the-end-is-near-refinance/

======
bravura
Look, don't be so alarmist. This article is spot on.

It's not saying the sky is falling.

Venture funding isn't going to _dry up_. It's going to _tighten up_. In three
to six months. That's the thesis of this article.

I believe it's plausible that the venture market will cool down soon. Here's
why:

A lot of companies have been getting funded now with very company-friendly
terms and valuations. This is because the investment market is hot right now.
An entrepreneur told me, in January, that this is one of the best financing
seasons he's seen in a while, and that anyone looking to raise money should do
it immediately. He predicted the market would stay hot until the summer, but
was cautious about predicting after that.

It seems inevitable that the market will cool down at some point. VC funding
keeps lagging general economic trends by a quarter or two, the article notes.
The economy is currently down. The author extrapolates that VC will be down
soon too. Seems like a reasonable inference.

This article predicts that in three to six months, that it will be more
difficult to raise money. Not impossible, just more difficult.

Companies with sound fundamentals (i.e. proven business model) will still get
funded. They just won't have money being stuffed in their hands. Terms won't
be as favorable to entrepreneurs.

~~~
chailatte
The sky is falling. From the article:

"The door may be slammed shut to all new deals."

Translation: Frigid winter.

Why? Because we're in a global economic depression. Because the government
cannot print money anymore. Because anymore printing will most likely induce
hyperinflation.

(That's why there was no QE3 announced last month. That's why Germany/Finland
do not want to expand EFSF from $400 billion to $2 trillion. That's why China
is clamping down on lending, and will most likely earn a 0% growth next year)

And so all the debts will come due. From the $700 trillion derivatives
worldwide held by the banks to the tens of trillions of debt held by the
government.

Sure, there will be individual investors spreading money around willy nilly
(think Dave McClure). But for most, it will be time to prepare for winter. A
long 10-15 year winter.

~~~
cynicalkane
_Why? Because we're in a global economic depression. Because the government
cannot print money anymore. Because anymore printing will most likely induce
hyperinflation._

This is common Internet Wisdom, but there's no reason to believe it's actually
true.

The TIPS spread--the spread between ordinary government bonds and inflation-
protected bonds--is very low. Under 2%. The TIPS spread also tends to
overestimate inflation, because the long-tail risk of inflation is higher than
that of deflation. The Fed is dominated by inflation hawks with substantial
political will to fight inflation and very little to implement monetary
expansion. Very few economists seem to expect the risk of hyperinflation.

This kind of inflationary alarmism is infectious. It's infected our politics,
skewing the GOP primaries towards severe economic ignorance. Nominal GDP is
still limp. Inflation is still low. Unemployment is still high. Borrowing is
still tight. The recovery is stalling. Stop. Please.

------
jackbean
Am I the only one who finds VC telling entrepreneurs "everything is going to
crash soon, so you better close soon and on whatever terms you can get"
disingenuous?

~~~
mbesto
/agreed

> _I can’t emphasize strongly enough to entrepreneurs that if you’re in the
> process of looking for funding, seed money or an early round, hurry up and
> get your term sheets signed._

I can't emphasize enough that making statements like these also make
negotiations very favorable for investors. Sounds like the investors are in a
crunch, and not the entrepreneurial spirit.

~~~
alttag

      >  making statements like these also make negotiations very favorable for investors
    

... and do you think WSJ is targeted more at the interests investors or
entrepreneurs?

------
asanwal
The reality is that with the current financing environment, there will be a
ton of "orphaned startups". So if you're startup that raised an angel round of
$500k but will need to raise a real Series A down the road from VCs, you may
have a tougher time unless of course you are a breakout success (translation:
outlier). And with Series A being tougher to raise, that startup will die die
or sputter along for a while. Of course, if you can become revenue generating
and a real biz, you may be able to live to fight another day.

Angels, unfortunately, cannot bridge this gap as they can't write the bigger
checks of a Series A, B, etc round. So while there may continue to be
seed/super early stage money to start up, it's the follow-ons which will
become more difficult. This, of course, may just be natural selection at work
and a good thing.

Also, while the article talks more about VC, if the stock market falls and
uncertainty grows, angel investors will also pull back. Of course, there will
be some who will not, but for many, their wealth goes up and down every day
with the markets. And if they are feeling less wealthy, their willingness to
invest in startups (the new status symbol for many) will also decline.

~~~
ilamont
Is there an opportunity to raise money from non-traditional sources, such as
foreign investors or PE? Or do the risks associated with these sources
outweigh the benefits?

------
iamelgringo
It's not about VC. It's about angels, and Angel List.

Angel.co has gone from 25 to 3000 investors in 18 months.

Add 10 to 12 IPO's in the next few years, and you'll see thousands of newly
minted "Qualified Investors" interested in angel investing. Where are they
going to go? Angel List.

They've gotten over 600 startups funded in the past 18 months... I think
they're just getting warmed up.

~~~
ekanes
AngelList is shockingly effective, I can't recommend it highly enough. We were
at the end of our fundraising when we opened up that channel, and we ended up
turning away 14 investors. YMMV of course.

~~~
diolpah
YMMV indeed. AngelList only works for those companies who already have
preexisting connections to the angel/VC community. For companies with little
or no existing social proof, AngelList is shockingly ineffective.

~~~
wensing
(I decided to turn this comment into a blog post with pictures here:
[http://wensing.tumblr.com/post/11062968069/hacking-
angellist...](http://wensing.tumblr.com/post/11062968069/hacking-angellist-or-
social-proof))

Stormpulse first appeared on AngelList on 8/24/10. We go no interest
whatsoever and didn't even make it past the gatekeepers for any kind of
introductions. It stung, bad. We had lots of traction, some revenue, and
millions of visitors. And the best product in its class. I pretty much swore
off AngelList with the same attitude you have right now.

13 months later we have 46 introductions and 149 followers, and the
gatekeepers are saying it's one of the hottest listings on AL.

How did we do this?

* I applied to StartupRiot in Atlanta. I got accepted and pitched my heart out for 180 seconds. Didn't win, but met a guy from IBM.

* Guy from IBM invites us to Austin, TX to IBM SmartCamp. We pass through each of their interviews and become an Austin finalist. I pitch to a room full of investors for 5 minutes. We didn't win, but we met a lot of interesting folks in Austin, including Joshua Baer.

* Things were going pretty well for us earlier this year. We decide to try fundraising again. I email Joshua Baer. Joshua Baer invites us to Capital Factory Demo Day 2011 in Austin. I pitch for 180 seconds to a room full of investors. All of a sudden investors start handing us their cards and other entrepreneurs start offering to introduce us to anyone they can.

* We re-apply to AngelList, voila.

If you want to raise money, there's no substitute for working hard on your
reputation. I'm a nobody from West Palm Beach, Florida. Seriously. If I can do
it, maybe you can too. It's worth a try. (Also, please understand I'm not
saying that working hard is the key to success--you may work just as hard or
much much harder than I did and still fail. But that's for another blog post).

~~~
diolpah
Thanks for the story, and congratulations on your success. You helped give me
a better picture of how one goes about building social proof with the investor
class.

We don't actually need funding, as we have successfully bootstrapped our
business and are quite profitable. But we set up a profile on AL anyway, in
case we ever do decide to shake the money tree to accelerate growth beyond
what our cash flow permits, in the future. Naturally, we have 0 followers.

Interestingly, 42 Floors (<http://angel.co/42-floors>) has done the same
thing, and they have managed 112 followers despite not seeking funding.

------
asmithmd1
What is it about people with money and October?

Remember three years ago almost to the day when Sequoia said investment in
start-ups was about to dry up?

[http://gigaom.com/2008/10/08/sequoia-rings-the-alarm-bell-
si...](http://gigaom.com/2008/10/08/sequoia-rings-the-alarm-bell-silicon-
valley-in-trouble/)

luckily founders of Twilio,AirBnB, and Foursquare didn't listen and got
started around then.

~~~
toyg
Well, all things in economy are cyclical, so sooner or later this will really
happen. This said, people like Sequoia have agendas, so they might be just
trying to hurry up people on the fence in order to drum up some business for
them.

~~~
davedx
"all things in economy are cyclical"

That's a bold statement - care to back it up? :)

~~~
toyg
You're fishing for a discussion that will never end :)

Let's flip it the other way: which economic elements or actors DON'T go
through cycles, in your opinion ?

I'm genuinely curious.

~~~
rudiger
Well, debt doesn't seem to be in a cycle. It just keeps getting bigger! :D

~~~
iand
Maybe it's just a long cycle.

[https://secure.wikimedia.org/wikipedia/en/wiki/File:US_Feder...](https://secure.wikimedia.org/wikipedia/en/wiki/File:US_Federal_Debt.png)

------
PaulHoule
It's a strange situation.

My take on the startup "bubble" is that the stock market, bonds, and hedge
funds have done poorly lately.

People with money are looking for alternative investments, and often that
means startups. If money gets pulled out of startups, where is it going to go?

~~~
pedalpete
Lots of money has already left the stock market. When the market is down, it
is a great opportunity to invest, therefore, the money could be going back
into the stock market.

~~~
spiantino
circular logic detected

------
Roritharr
Well... no more double-digit mio investments in companies like Color?

Probably not the worst for the tech-entrepreneur scene.

~~~
ovi256
B-b-but team! Track record! Pedigree!

That's what good VCs are supposed to look for right ? Not just ideas/market
fit.

------
talkingquickly
I wonder how much this will impact the accelerator scene, since a lot of
accelerators which have tried to replicate the YC model are viable mainly
because there are substantial sums of money floating about to "accelerate"
startups towards. If so I wonder what the lag will be between VC money
becoming harder to obtain and accelerator programs reducing their intakes.

------
axefrog
Sometimes it seems to me like many people are betting the farm on getting
funded without already being in the coveted position of having prior successes
which will (mostly) guarantee them their funding. I tend to think it's best to
operate as though you're not going to get funded. Build/bootstrap a
sustainable business (i.e. build something useful that people want and charge
money for it), make it successful and leverage that to build a bigger idea. If
along the way you get to accelerate the process through funding, fantastic,
but without it, you've still built something successful and can then fund your
own next idea, or potentially use your success as proof of the fact that
you're a lower risk when it comes to funding.

------
danmaz74
If this will happen, thing may still be good (or even better) for bootstrapped
startups, or those that try to get to break even early...

~~~
analyst74
This is a time of change, and changing times brings more opportunity.

Maybe funding will be harder to get, but I believe there will be a lot more
opportunities for entrepreneurs despite that.

------
westicle
I had to double-check the author of the article.

For a second I thought Eddard Stark was freelancing for the Wall Street
Journal.

------
toyg
I wonder how much of this applies to Europe. Interest rates are extremely low
at the moment, and will likely remain so for a year or two. Thanks to these
low rates, banks spent two years hoarding cash, and are now starting to lend
it back to businesses and consumers. The currency market is undervaluing GBP
and Euro, which will help exports and global services based here.

From a purely monetary point of view, the next 12 months will be great for
businesses in UK... and possibly in the Eurozone as well, if the Greek bomb is
somehow defused (or something else diverts media attention from it for a few
months).

~~~
shin_lao
I run a business in Europe; France to be more precise.

I'm more likely to have money by extending my hand and saying "Great Cthulhu!
Have gold appear in my hand!" than by asking my banker for a loan.

(For the record our business is profitable and always had.)

~~~
stygianguest
Would you think France is representative for the rest of the Eurozone in this
respect? In my experience French exceptionalism is strongest in the banking
sector, but I have no experience with banking for business.

~~~
shin_lao
The problem is most likely stronger in France.

------
robjohnson
It's always fascinating to me when the population knows that certain events
don't affect their line of business, but they let it influence them anyway. It
happens so much, not just in private equity, but in corporate finance too.

------
Hitchhiker
" Prediction is very hard, especially about the future " - Yogi Berra

------
robryan
Who cares about the short term cycles, as time goes by there is more and more
money to be made online and ever increasing amounts of quality web companies
being started. Those that stop investing will just miss out on quality
companies.

Sure the valuations may not be as crazy high but that didn't seem to be a bad
thing a few years ago.

------
gersh
Where should investors be putting their money? The stock market is extremely
volatile, and it is no higher than it was years ago. T-bonds are paying
historically low interest. Even real estate looks really risky. Meanwhile,
startups have been doing relatively well. Startups like AirBNB, Groupon, and
Dropbox have all grown really fast.

------
mckoss
I'd call BS on anyone saying the investment climate is going to be markedly
different 3 to 6 months from now. no one has a crystal ball, and neither does
he have inside information unavailable to everyone else.

~~~
garbowza
He laid out his reasoning quite clearly - do you disagree with his points? If
so, which ones and why?

~~~
veyron
The sustainability hypothesis is broken.

investment in VC firms also lags investment by VCs. As a result, you can't
look at the fact that deployed capital currently exceed AUM and conclude that
somehow the trend will continue. I fully expect VC firms to raise more money
as there are more investible opportunities.

To put it concretely, there is a state of the world in which VC firms leverage
up (at very low rates), reducing the amount of money they need to accept
upfront. Imagine that the firms arranged for a 2x leverage scenario. Then,
they would only need about 7.2 B to service the 14.3B investment, much less
than the 8.1 B invested

And as far as market moves are concerned, the fact that even smart money is
getting slammed in the market moves suggests that most asset classes are poor
short-term investments. And for those things that are doing well (e.g. gold),
margin pressures and other actions (e.g. redemptions) are slowly forcing
people out of those markets. In fact, he admits as much: " A number of sharp
daily swings highlighted the volatility that makes venture capitalists and
other investors nervous about investing." nervous about investing in equities
and derivatives markets, not in startups which aren't subject to the whims of
the stock market.

~~~
timr
_"[Investors are] nervous about investing in equities and derivatives markets,
not in startups which aren't subject to the whims of the stock market."_

Um...what? I know that around here people tend to focus disproportionately on
the "exits" involving Google buying dinky, 2-person companies for talent, but
industry-wide VC returns are predicated _almost exclusively_ upon stock market
performance. IPOs don't do well in bear markets, and if there's no IPO market,
there's no venture capital. If there's no VC, there's no angel investment.
Google can't prop up the whole ecosystem.

It might take a few years to shake out (especially to work its way down to the
angel investors), but if the recent bear markets hold, the money will do what
it's always done in bear markets: go to cash, bonds and other conservative
vehicles -- even if it means taking a small loss. The hypothesis that people
will suddenly start making speculative investments because bond yields are low
ignores the very factors that are making bond yields low in the first place.

~~~
jpadkins
Is down IPO market due to bear market or SOX regulation?

I think IPOs went down well before 2008. Classic unintended consequence, where
SOX hurts IPOs, which hurts VCs, which hurts startups, which hurts job
creation...

~~~
timr
Companies have been postponing IPOs due to crappy market conditions for
several months now. Did Sarbanes-Oxley have something to do with it? Yes. Is
it the exclusive problem? Obviously not.

