

Ask YC: Impact of Recession on Startup Financing? - enki

Anyone got a clue how negative market expectations are gonna impact founders?<p>Will seed/growth funding availability likely go down?<p>Does it make sense to raise bigger rounds now in case it gets worse?
======
cperciva
Standard economic theory states that during financial crises, investors
exhibit a "flight from risk" behaviour; certainly, one can imagine
institutional investors pulling their money out of hedge and venture capital
funds. However, this crisis also has the US Federal Reserve aggressively
cutting interest rates, with the effect that capital becomes cheaper, given a
fixed risk premium.

My guess is that venture capital will become harder to find, while companies
which are profitable but need capital in order to grow (e.g., to buy more
servers) will find that loans are cheaper. Seed funding probably won't be
affected at all -- money for that generally comes from people who believe in
what they're doing (and are seeking, in part, a non-financial payoff) rather
than people or organizations which are trying to maximize their profits.

~~~
ojbyrne
Loans cheaper? I think you're dreaming. The problem with your "standard
economic theory" is that it fails to account for how much smaller a part of
the world's economy the US is. The way to leave risk behind is to leave the US
and invest elsewhere. I think we will see that happen at a greater scale now.

I think EU startups will do very well.

~~~
drusenko
right, because EU startups are doing very well now... cheaper credit/more
foreign investment doesn't change the fundamental dynamics at play when
starting a company, like how rigid the laws are, or how cheaply one can build
a startup.

~~~
ojbyrne
The EU includes a lot of countries where laws are less rigid, and costs lower.
Lithuania, Romania, etc.

I'm sure there's a pretty long list of European companies with successful
exits. Skype, last.fm, jaiku, etc.

------
dpapathanasiou
There were a few talks about this at BarCampNYC this past weekend
(<http://barcamp.pbwiki.com/BarCampNYC3Day1>).

The consensus was it will probably be _easier_ (in the short term, anyway) to
find VC funding now that investors are fleeing real estate and need to put
their cash elsewhere.

Tech actually looks good now, compared to other investment options.

------
konsl
I was just talking about this today. I believe common investors will want to
see a working business model earlier in the product. The potential for early
revenue with real customers (i.e. not ads) will be more attractive.

I think it's unfortunate. Capital intensive start-ups will be at an even
bigger disadvantage.. in this case, I would agree with andreessen: raise as
much as possible. I've always believed in creating value before you capture
any, and that will be more difficult if you have to focus on your business
model early on.

------
jbryanscott
A recession impacts venture capital in two main ways:

1) Reducing exit potential 2) Reducing available capital for new funds

The first is simple. In a recession, capital is more scarce. Cash on Balance
Sheets shrink. This makes it harder to find buyers (as in acquisitions - think
YouTube by Google). IPOs are also less successful because of depressed stock
market performance. PE ratios generally decline, making these exits less
attractive.

The second is more complicated. Since capital is more scarce, finding
investors for new funds becomes more difficult. Venture capital (and all of
private equity) is viewed as a risky asset class. In a recession, portfolio
managers usually cut back on riskier investments, favoring safer investments,
such as stocks and bonds.

However, VC funds are committed funds, meaning that once a fund starts, that
money is there whenever it needs to be "called down." In this respect,
recessions don't impact startup funding because the money has already been
earmarked. Since the last two years have seen LOTS of money poured into VC
with LOTS of additional funds created, I don't expect to see a significant
slowdown over the next 1-2 years. If the recession lasts longer, or if exit
opportunities change substantially, this may change.

------
tk12
Very good question.

I remember that in DLD there was a session about this topic. The consensus was
that Private Equity firms (or those that invest large sums of money) will get
hit much more than VCs, and as a result the bigger the startup the more at
risk you are. I also recall that Morten Lund claimed in the panel that a
recession might prove to be beneficial (at least as far as Angels are
concerned), because according to him, it will separate the great startups from
the mediocre ones.

In my opinion, a strong recession, might cause valuation to go down, but it
shouldn't affect early stage startup too much, because their backers usually
look at a long term investment period.

------
cmm324
It is interesting to say whether it would hurt or help vc and seed funding. My
theory is that it will help. Seasoned investors have seen recessions before,
and just switch to investments that provide the best reward. I think as a
credit crunch exists, I think competition for those funds will become slimmer
because less people can afford to take the risk of a startup which means it
will be easier to get those funds.

You may actually see more funds available than normal. Could be great for our
startup, (www.propertystampede.com).

------
mattmaroon
From talking to a few VCs, I don't think they're having any problems raising
money, and even if they were, there are a lot of funds that are already set to
invest over the next few years. (I haven't talked to any in a few weeks, so
the former part of that statement might change/have changed.)

I would guess angels would be more affected. These are individuals, who might
have lost a chunk of their money in the market and/or lost a shit-ton of
equity in their homes. They might be scared more into preservation mode.

------
whacked_new
How is YEurope doing? Serious question.

~~~
enki
well, offtopic here, but in short: we initially funded two projects, one of
them died before the launch (product almost ready but delayed multiple times),
and the other one is doing well but needs to grow a lot faster (with the
founders having very different views about marketing and growth strategies
than us, tho).

Another startup that i'm a founder/coder of is about to launch in our first
city in April. But yeah, Europe is tough - you can basically ignore public
funding (just like everywhere else, but here people don't know that it would
be better if they burned that money), nor expect to find competent angels.
What we're doing is still the same: create space where hackers can meet and
projects start, and then provide advice and possibly initial funding, so that
promising projects don't die for the wrong reasons.

~~~
whacked_new
Thanks for sharing. I admire you for having gone through that whole process --
it must have been a great learning experience.

------
jdavid
you have to ask what is riskier a bunch of guys and gals fighting for their
first chance, or a bank full of big wigs that have f'd up and are trying to
refinance? Most recessions are caused by over production or over speculation
of some sort, this is different, this is about the banks (low interest) money
screwing up big. we may find that right now startups and companies are less
risking than banks and loans.

------
whacked_new
How is YE doing?

------
sabat
Last time, investments went way down -- but that was at a time when technology
startups were perceived (somewhat inaccurately) as being part of the economic
problem.

It doesn't appear that this will be an issue this time.

Even during the Dot-Bomb, some notable startups were able to mature and
flourish; the ones that come immediately to mind would be Google and Flickr.

I think all is not lost. At least not until we're all fighting over who gets
to eat the last mudcake.

------
ideas101
seed funding from the people like YC may not go down - VC funding may slow
down temporarily - but if the startup has something innovative and unique
stuff to offer then funding shouldn't be a problem ...

