Share market crash: timing is everything!

In the midst of a major bear market, with global economies faltering and a worldwide credit crunch, it’s hard to see the future--I just witnessed a record one-day point drop on Asian markets and saw 12 IPOs cancelled indefinitely.

A couple of years ago I was starting the first day of a roadshow and the front page of the nation’s major financial paper read “Biggest one-day point drop since 911.” When it turns it turns fast. Everyone runs for the exit but there is no sign of an exit. It’s an ill wind that blows no good for someone. Let’s be realistic, some investors made far more on the 2000 market crash than most made on the rise--shorting stocks and the beneficial tax consequences created massive wealth for many--though not me unfortunately ;-).

For entrepreneurs, economic downturns can be good. Obviously if you are in the middle selling or IPO-ing your company, then it’s bad, but if you are fund raising it can be exceptionally good. Of my six startups, all but one was founded in either a recession or significant economic downturn--these are great times to start companies inventing and/or developing products that will come onto the market in a year or two. Established competitors are downsizing and slashing R&D to appease a falling market, while you are investing venture dollars on a far longer timescale than next quarter.

In a recession, everything is cheaper--employees are better and easier to recruit, materials are more available, and suppliers are eager to help you if you have money ... so how do you get money in a recession? It’s clearly not a great time for bootstrapping (unless your friends and family have nerves of steel)—it’s human nature to think the sky is falling once markets slide, and everyone fears for their future. Think back to 1999 and the ease of raising capital; 20 companies were funded in the same space when five years before two would be lucky to launch.

Unfortunately the size of the market didn’t really support 20 startups, and customers used the abundance of competition to drive down prices and force most of those startups out of business. Ironically, when the so called tech wreck hit, funding stopped and many companies hit the wall especially in internet and telecom. However, new areas won big, and many VCs kept investing – cleantech was born, solar cell companies were founded, and social networking found its beginnings.

It’s true that many VCs downsized their funds from $1 B to $0.5 B but they kept investing, this time in a manageable number of deals. Seven years later, VC funding has finally exceeded its 2000 peak--will there be a pullback similar to equity markets and real estate? Sure, but it wont stop, simply the quality of investments and entrepreneurs will get better. If you have a great idea, and a market exists in the two-year time frame, you will get funded, and by the time you come to market today’s bear will be a bull again.

A corollary to this “timing is everything theme,” is, when they pass the hors d’oeuvres, make sure you take two--I have never met the CEO who saved his business by avoiding dilution, but I know a lot who went through bankruptcy proceedings because of failing to raise sufficient capital. If you waste too many cycles on negotiating a term sheet trying to angle a better deal, the market can move past you and you end up with nothing.

VCs can be predatory in bad times, but they also get preyed upon in good times--if you can find an investor who will treat you fairly, and you believe you can build a strong long-term relationship it’s often a good long term decision to give on valuation in favor of the intangibles. You will be together for a long time, and markets will undoubtedly get bad at some point in your relationship--a good foundation and history can often carry you through when others fail … and sure, your VCs can help too ;-)

Next Time – “The deal that died”