Tech Start-Ups in a Cyclical Market

Sarang Ahuja’s latest post:econ cycle

A recent article in the New York Times ends with the following quote from Bill Gurley, a prominent venture capitalist, regarding current tech start-ups. “Lots of founders today weren’t around in 1999, and they don’t know a thing about financial markets beyond what’s happened in the last 24 months…. To them that’s how this game is played, money is cheap and everything goes up. That’s why we have cycles.”

The cheap money comment deserves further discussion. The fact is that a lot of current tech start-ups have existed mostly or entirely in a period of economic growth, during a time when investors have been forthcoming with funds. “Over the last few years, start-up share prices have gone up nearly every time a private company has raised money. Investors were largely optimistic and generous because they assumed that a variety of factors – including low interest rates, a strengthening American economy and the growing Chinese middle class – would keep the markets positive. Spending more to help a start-up grow into a huge company seemed like a reasonable bet.” It’s worth noting the factors leading to optimism mentioned in that quote. Low interest rates are not something that will go on forever, and raising the rate has been discussed in the financial press a lot lately. The strengthening American economy is going through it’s first major hiccup in a couple of years. The Chinese middle class, while still growing, now finds itself in a country with a slumping economy.

Ultimately, start-ups that have been smart with their money, have solid business plans, and show clear paths toward profitability will still attract capital and will remain strong. The ones that don’t won’t. It’s obviously impossible for every company to grow continuously, and those that have striking weaknesses, though they may be able to hide them during a time of growth and general prosperity, won’t be able to during a down cycle. It’s called an economic correction for a reason.

from Sarang Ahuja http://ift.tt/1KL4IpE

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