Financial.com

In 2002, in the darkest days of the .com nuclear winter, after many companies collapsed loads of software engineers were left hanging out at Starbucks.  Big company executives who imagined immense riches as part of the next Netscape packed their bags and left the Bay Area.  Some made it back to the East Coast and become mortgage brokers.

Around the same time, the glory days of financial engineering started heading to new highs.

How times have changed.  In 2008, the start-up world is humming again, fueled by venture capital funds raised on liquidity events of 2006.  Meanwhile, the financial system that created massive bonuses for traders, bankers and hedge fund managers, seems on the brink of collapse.

Why the dichotomy here?  Conventional wisdom is that venture capital investing lags the real economy by 6 months or so.  This is because VCs typically don't directly feel how bad things are until results start showing in their portfolios.  At that point, they have to increase reserves for follow-on investments and plan to sit longer on boards of companies that can't sell or go public. 

If you're planning to raise money, do it now.

The current financial crisis is much bigger than the .com fallout.  It affects every corner of the economy.  Banks rely on the trust of consumers to keep their money safe.  Banks also rely on the trust of other financial institutions to maintain liquidity.  There were lots of charlatans who thrived in the .com boom, but it's becoming clear that the scale of the mortgage-backed house of cards is larger than anything Enron invented.

How low will we go nobody knows.

Comments

[Phil K - Local Online Marketing]

Brian,

Having sat through the past 50 odd days since Sept 17th, do you still think this is a time when angels and venture capitalists are going to be liquid?

Or are we already in the low that you reference?

PK

[Brian Goffman]

If the investors and angels Im talking to are a guide, I dont think were at the low. Unfortunately, the pain of companies running out of money is just beginning.

A lot of companies with questionable revenue models were funded by angels over the past few years, hoping to be the next Facebook, and many wont make it. As in the last cycle, angels will likely pull back. When liquidity (IPOs and acquisitions) starts again, money will come back into the system. Until then its going to be tough to get money.

[Geoff Entress]

Brian,

"If you're planning to raise money, do it now." Prescient advice on September 17 and even more relevant today. With fewer investors out there willing to write checks, best to take all the money you need now. In hindsight, the money may look expensive, but only if things get better sooner than we all fear.

Geoff

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