A few VCs shared their views on why the economic crash happened and what entrepreneurs and investors plan to do about it.
We all suffer from deregulated banking.
Credit was not properly regulated / priced. Fannie Mae and Freddie Mac were buying any notes originated, much of which was subprime. Street did not care feeding the beast, as James Anderson, President of SVB Analytics said.
Promod Haque, Norwest Ventures, believes that it is not all banks deregulation – it takes two to tango. We have become a culture of debt. Casinos, instant gratification, “have it now pay later” attitude, behavior of banks – all contributed to developing a consumer expectation that they can have whatever they want.
Storm Duncan, Credit Suisse, believes that traditionally America stands for innovation and growth and to cultivate that we need leverage. Somewhere along the way, we turned into a culture of consumption – that vs investment is what broke America. China is a vendor in US: they provide vendor financing!
The Book “Limits to growth” talks about various predictions on how the world and specifically its natural resources will be. It was predicted at the beginning of the last century that oil resources are exhausted by 2005.
Innovation and technology proved the prediction of the book wrong. They allow us to consume less. On the other hand, innovation is what allowed humanity to expand beyond our natural capacity. Population grew from 2 billion in early 1900s to 7 billion now.
For now, it is too early with what is going on to see effect in VC market.
Venture business model will change going forward. Using cash wisely seems to be a most common and natural word of advice.
Post .com companies are more capital efficient than in a before .com boom. Many companies are multinational from the way they start.
Many tech companies ie in social networking are not that capital intensive to start with.
James Anderson, SVB Analytics, and Storm Duncan, Credit Suisse
VC is puzzled now about how to solve liquidity problems in a timely manner. Moving forward, things will be funded differently. If it were a two party start up scenario before – including a tech partner and a business partner, now it will need to include a financial partner to solve all the funding issues and challenges.
In the 2nd quarter there were zero venture backed IPOs. The average venture partner has lost money. VCs expect now to get 10-12% return on their investments instead of 25-30%. Valuations have dropped.
What do you advise companies in Silicon Valley?
James Anderson advices companies to remain liquid as long as possible. Liquidity will help your company last while your competition dies.
Storm Duncan advises companies to consume less and innovate more.
Promod is hopeful about what VC and entrepreneurs can do together. Anything will get demonetized. He advises entrepreneurs to focus on innovation, rather than about product or service ideas that are not innovative and are simply an efficiency improvement of about 20% more of an already existing product or service.
A possible venture scenario will be something like this: a VC will take a start-up, group of entrepreneurs, and buy out an existing similar process or service applying the entrepreneurs’ innovation. Existing business will bring the necessary infrastructure. Entrepreneurs + existing business = current business model.
Advice to small companies: you cannot go public, you have 20M – let’s go buy something that is 10M, grow a larger company and then go public.
The word is “Caution”.
