
20% Of Valley Startups Can’t Get To Their Cash - jmorin007
http://www.techcrunch.com/2008/03/11/20-of-valley-startups-cant-get-to-their-cash/
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mercurio
A couple of days ago, Fred Wilson made a relevant post about his near escape
from the auction rate bond market. Its an interesting read, with more detail
on how these bonds usually function and how the recent malfunction developed.
From what I understood, these bonds don't lose all their liquidity overnight.
After they lose their "primary" liquidity (by failing an auction), there is a
secondary market that kicks in because of the high interest rates that the
bonds are contractually required to offer once they fail an auction.

Fred says he got a call from his broker saying "your bonds have not yet failed
an auction but you should know that the risk of it happening has gone up". I
imagine that a lot of startups must have got a similar call, but perhaps the
founders were too focused elsewhere to pay attention. Or maybe the smart ones
did listen and were able to avoid this sorry mess.

<http://avc.blogs.com/a_vc/2008/03/our-run-in-with.html>

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rhiltd
Why on Earth would _ANY_ startup want to play "Treasury" like a large
corporation? Using the KISS Principle an 'normal' bank account is much better.
We all have better things to worry about than an extra 1% return on 'cash'.

As Warren Buffet says, if you don't understand it not invest in it.

~~~
motoko
Because "the experts" told them to.

One wouldn't want to be "miss out" on "greater returns for 'virtually' no
risk" because they were "too stupid or cowardly to understand it..." according
to your VC.

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ojbyrne
These things were seen as no-risk, basically like money market funds. Some
startups have raised 8 digit numbers of money, and they have a CFO, and that
CFO would be neglecting his fiduciary duty if he left millions in an account
that earned 0.25% interest.

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marvin
Excuse me, but since when do money market funds earn 0.25% interest?

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ojbyrne
I was saying that safer alternatives to money market funds (i.e. checking
accounts) pay 0.25% interest. I guess it came out a little unclear. These were
seem as just another kind of money market fund, 100% safe. To keep money in a
checking account rather than putting it into a perceived safe investment that
paid a higher rate without sacrificing liquidity, would be neglecting
fiduciary responsibilty.

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rms
from the comments:

# Michael Arrington

March 11th, 2008 at 9:10 am

one VC, speaking off record, said that some of their portfolio companies would
likely fail because of this. When I asked him why he wouldn’t loan the
companies money, he said that perhaps they wouldn’t make the investment
decision again given where the companies have gone, and that the fact that
there are other VCs investing makes it hard/impossible to figure out who
should pay how much.

translation: they are on their own.

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tptacek
The underlying muni's aren't faulting, right? You're losing liquidity, not
assets --- why are people taking writedowns on these?

~~~
Prrometheus
You've just described the current crisis in the credit markets. The crisis
wasn't so bad when it started with higher-than-expected defaults in subprime
credit markets, but people are panicking a lot more now that liquidity is
drying up for high-quality assets. Many firms' business models are based
around having access to sufficient liquidity, they aren't built to buy and
hold.

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mattmaroon
This is why I put our company's savings into potatoes.

