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VCs Say Startups Wants to Stay Private

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Tonight I attended an interesting panel discussion that featured three Bay Area venture capitalists discussing the impact that today’s recession based economic conditions are having for startups and their fund raising processes. Two things from this discussion jumped out at me.

The first being that all three of the VCs agreed that if you can bootstrap your company and or drive to profitability with taking very little money, then do it! This isn’t what you would expect to hear from a VC, but when you consider that most VCs are “businesses” that are structured to do large deals, this makes sense. Smaller business opportunities exist all around us that could be grown to a $10M-$50M exit. Most VC’s can’t invest the time into those opportunities when these entrepreneurs are looking for under $500k of investment. Those are the deals that a few dedicated entrepreneurs could bootstrap and grow by staying focused and end up with a very nice payout with the majority going to the entrepreneurs.

The other topic that jumped out at me (but by no means surprised me, I agree with it) is that fact that most entrepreneurs or managers in startups and small companies don’t dream of taking their company public anymore. There is so much overhead and pain involved with being a public company today with regulations, requirements, and value being driven by those who don’t focus on long term fundamentals of a company that it isn’t really worth it unless you are large enough or have a unique and defensible enough value proposition. Add on top of this the increased public distrust and angst toward senior executives of public companies that the reasons for being an executive in a public company are far out weighed by the headaches involved.

On that same thread, I find it amazing how some very large companies who are sitting on Billions of dollars of cash are completely abusing their employees right now in order to increase their stock price. I have heard some scary stories as of late that take cost cutting to new highs and lows, and employees are having to take some of these cost cutting measures directly to their bottom line. It’s one thing when the company is fighting for it’s survival, but another when the company is sitting on Billions in cash and has growing revenues. The reason for this in my opinion is that stock prices currently are not being valued based upon the fundamentals of the company. Yet the senior executives of a public company can’t follow their best business sense to do what’s right toward their employees and customers because they have to cow tow to wall street analysis and fund managers who are are influencing their stock priced based on the macro economic situation.

Who wants to be a public company CEO in this climate?

(Though with the right company, right now is the time to invest with these artificially deflated stock values…)

Best Analysis Yet of Financial Crisis

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This morning I was listening to This American Life which aired one of the best layman’s analysis’ I have heard yet of the current financial crisis.  Back in May I mentioned their Global Pools of Money and Sub-Prime Crisis show.  Today’s show, Another Frightening Show About the Economy, was a continuation of that program but focusing on the current Financial Crisis and the Bailout Package.

Every person in America needs to list to today’s show!  (the link seems to be getting a lot of traffic, so be patient…it’s worth it.)

The net-net that I took away from the show was that we are where we are today because of too much borrowing and greed of exotic financial creations that didn’t create any real value but were just gambling.  This show talks about the credit market for businesses and how it’s freezing up over the past two weeks has raised awareness of this crisis.  Those credit markets are linked to the large financial institutions that we all know by heart now.  And how these financial institutions (and others that we may not have heard of, yet) were writing Credit Default Swaps (CDOs) to show greater profit on paper without any knowledge of what other CDOs where out there.  Essentially creating a financial house of cards all based on bets.

Now this financial bail out package that the government has been debating over is the government spending our money to fix a problem that they helped create.  The issue is that the bailout package that we have all been hearing about is the US Tax Payer giving these financial institutions money to buy their worthless debt that has created the freezing of the credit markets (we are left holding the bill with the greatest risk of never seeing any of our (borrowed) money again).  This is the same package that most economists in the country publicly got together to say was a bad idea. What I found surprising from the show is that apparently there was some subtle language added at the last minute by someone that gives the option of not just buying the debt but of making the US Taxpayer stock holders in the companies that we take the the debt over from with front priority of getting our money back.  Just because this option exists, doesn’t mean that it will be exercised; but I am much more hopeful that someone somewhere is pulling the right strings behind the scenes and that Tax Payer might not get as screwed in all this when the look back at this 1, 3, or 10 years from now.  (and the last 7 years will be talked about for the next 70…)

Personally, I believe that we are in for more rocky times ahead and that things will get worse before they better.  That being said, now more than ever each person needs to education themselves on the financial markets that shape their everyday lives (even more so considering the elections coming up).  On that token, I regularly browse the Planet Money blog on NPR and Investor Insights blog.  I also read John Mauldin’s Outside The Box financial newsletter (goes into some hairy details, but also good for just picking up the hot topics).

Educate yourself on how this stuff works so that you can call shenanigans on the rhetoric that is getting tossed out there on both sides.

Global Pools of Money and Sub-Prime Crisis

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I heard a great story yesterday on NPR’s All Things Considered. It was a story that analyzed the sub-prime mortgage crisis from the aspect of “why did this happen, how could bankers ignore their core tenants when giving out loans”. Global Pool of Money Got Too Hungry was created by in conjunction with This American Life, so they take an interesting view on the entire situation. Well worth the 13 minutes to listen to this report.

Update 20080520: The original story, which is much more expanded, was aired this weekend on This American Life. In my opinion, the story The Giant Pool of Money is something that every American should listen to if they want to understand why banker’s forgot their principal rules of loaning money: make sure the borrower can pay the loan back.