Recovery?

So there is a feeling of light at the end of the tunnel at present, some even have a "phew, its over" kind of feel. The Open Table IPO with its 60% rise made Rosetta Stone not just a flash in the pan, and the market is sensing that maybe it's not as bad as we thought. This reminds me of 2002 when the Nasdaq had collapsed from over 5,000 to around 3,400 and we all dived back into the market thinking it was just an adjustment, then over the following months it slowly but surely slid all the way down to 1300 ...

I don’t think that is happening here, i.e., the “dead cat” bounce, but it's going to be very rocky when Q2 and Q3 numbers come out and are pretty flat. I think the market has gotten ahead of itself. There are some positive indicators; FAB utilization is flat to up slightly in some niches, and generally slowing to flattening in the broader market. The real estate market has stopped collapsing and seems to be stabilizing after an average 40% loss; sales are moving again and not just foreclosure driven short sales. But a lot of this is because interest rates have moved so low. This looks like a long slow flat, not a recovery. There is an economic theory that predicts a massive recession in 2012 and I’m wondering if this was just a test; it's astounding how quickly the markets can unravel and it feels like the sky is falling in.

The underlying economic problems have not been solved here--there is a massive imbalance of trade, deficit, and the US dollar is being artificially propped up as a reserve currency. We are printing money to feed stimulus which should lead to substantial inflation but instead interest rates are falling again due to artificial pressures to try and stabilize the housing market. There are a lot of VCs here who badly need exits, there is a backlog of companies, and the rest of the financial services industry badly needs the work ... this could restart the engine and drive confidence.

If this happens I think we should take advantage of itwhile we can and try to raise funds sooner rather than later--despite brutal terms I’m sensing regaining confidence here or at least greed overcoming fear again. My concern is that this will all be short lived because the fundamentals haven’t actually been fixed, and we will see another crash or a continuation of the current one ...

So for entrepreneurs, don’t rush out expecting great terms again, you’ll get creamed--but perhaps this is hope to hang in there and don’t give up on getting funded just yet. What’s good about any recession is that it highlights a bunch of genuine pain points in the system and true entrepreneurs jump in to fix them; their customers are more receptive because they badly need the fixes and this tends to get the ecosystem moving again. Even VCs can help ;-)

What’s interesting is that VC focus gets shifted away from incremental changes to order of magnitude changes--i.e., a solar company in a bubble would have been funded if they could increase efficiency by 1%, but now its gotta be 10% ... but the solar ecosystem badly needs all these incremental improvements because there are a lot of (little) inefficiencies that together add up to a lot. What’s truly great about entrepreneurs is that despite the reluctance/fear/inability for VCs to share/fund their vision, they somehow, someway get through, keep the company going and flourish in the recovery (some even in the downturn).

The key for the ecosystem is for exits to start happening again, especially the big splashy IPO kind, because then the VC LPs will start believing in the VC model again and funding the VCs, and then they will fund you. I’m writing another blog about the (much needed) culling of the VC industry, assuming I don’t get culled ;-)