It’s what everyone’s talking about. Whether you’re an investor, a private equity firm, or a startup trying to find your way, the financial crisis on Wall Street is hitting home. But beyond the large-scale layoffs and reorganizations, what will be the true impact in innovation circles?
I spoke this week with a few investors in the Seattle tech community about the economic downturn. Before the events of the past week, in fact, I had a chat with Bill McAleer, co-founder and managing director of Seattle-based Voyager Capital. I asked about the unique challenges he’s facing as a technology investor these days. “The macro challenge is what the economy will do,” he replied. “Seattle tends to be aligned a bit more with applied technology. If buying slows down, that could affect companies here.” McAleer added that there are “way too many companies funded on advertising models”—particularly if the economy gets worse.
Well, it’s gotten worse in the past few days. Michael Butler, chairman and CEO of Cascadia Capital says, “I think exits will be at a premium because the IPO market is closed…The debt markets are closed—that probably hits clean tech and alternative energy hardest and if they remain closed will present a problem.” Nevertheless, he says, deals requiring private equity, growth equity, and venture capital “are still getting done.”
And yesterday, I caught up with Bob Felton, former McKinsey director and an angel investor in about 10 West Coast tech startups. Felton had some interesting perspective on the financial crisis and what it means for startups and innovation. “The way Wall Street made money the past 10 to 20 years just died—it’s in the bay, belly up,” he says. “The second thing is, a lot of the money for smaller tech companies comes from angels and smaller VCs. I have to think at this point they’re pulling back. In the near term, I’d be careful, if I was running a small company, not to raise money unless I have to.”
Not surprisingly, he predicts it will be very difficult to raise capital—which clearly affects companies’ business models. “There will probably be relatively low interest rates, but money will be very scarce. All these banks have to rebuild their balance sheet around a lower level of debt. Guys that do have money will go after the most distressed assets,” he says. “Collateralized mortgages, at some point they’re an attractive buy. There’ll be good buys in real estate. Even subprime mortgages become good… So the little tech company won’t get anyone’s attention.”
What’s his advice to entrepreneurs? “I think the answer is, if you’re a small company, be very careful conserving money. For investors, everyone’s portfolio is ragged, they’re not going to want to be putting money here,” Felton says. “I think everyone will be cautious. The whole private equity world was built on cheap debt. I wouldn’t build a business model in the next 6 to 12 months based on raising equity or debt money… I’m not an expert, but I don’t think anyone knows what’s going on. These are certainly unprecedented times.”
In terms of concrete steps, Felton says, “I’d look at burn rates, find ways to cut corners. You can’t base your business on raising money. I’ve been saying to my companies for six months to be careful. The one I’m most exposed to is really close to raising money now—angel money, then institution money. We’ve got soft commitments, and if things come together, we’re fine. The others are OK, they’ve kept burn rates down.” If there’s a glimmer of hope, it’s that startups with solid revenue streams should be able to ride out the killer wave. “Of my companies,” he says, “nobody’s calling in a panic saying, ‘Send us money or we die.'”
