Volatile Markets Could Dry Up Funds For Start-Ups

Aug 11, 2011

The turmoil in the stock market could curb the spending spree that's been underway in the tech industry, making it for start-ups to raise capital.

Money was on the mind of a group of about two dozen, carefully selected entrepreneurs gathered in Seattle this week.

They're all participants in TechStars, a boot camp and incubator for start-ups. By the end of the three-month program, most of them will be looking for funding from angel investors or venture capitalists.

"A month ago, it felt like the best time to start a company and raise money in 10 years," says Jeff Culter-Stamm, co-founder of Vizify, a company that turns resumes into works of art.

But that was a month ago. Cultler-Stamm believes he will still get money, but it might not be as much as he had hoped for. Still, he says with bootstrapping and hard work it will be enough.

"I'm an eternal optimist; you can't be an entrepreneur and be a pessimist," he says.

Matt Oppenheimer, whose start-up is called Beamit, says he's optimistic too.

"What's made America great, is really the entrepreneurial culture, spirit and support," he says. "I don't think that disappears if the stock market crashes."

Less Generous Angels

But he adds the amount of money angel investors in particular will be giving out has probably shrunk.

Angel investors, explains Andy Sack of TechStars, invest and manage their own money. "They don't have anyone to report to, and they can just invest in whatever they want," he says.

Or they can choose not to invest at all. And Sacks says when markets are volatile or unpredictable money from angels tends to dry up faster than venture capital.

Venture firms exist to make investments. They get money from foundations, endowments and others who expect a tidy profit. And if the venture funds don't invest in companies that get acquired or go public in the stock market, that doesn't happen.

Greg Gottesman, a managing director of the Madrona Venture Group, says his firm makes long-term investments in early-stage companies and will continue to do so.

But in the short term, Gottesman is concerned about the ability of venture-backed companies to turn to the stock market with an initial public offering.

"One of the great things that's been around for last six months or so has been an open IPO window," he says.

Now that opportunity may be ending. Earlier this year, investors paid top dollar for initial public offerings of companies such as LinkedIn. And lots of money was being handed out even to start-ups with no proven product or business model. But the mood is shifting — the wild gyrations in the stock market have prompted at least eight of the 11 firms slated to go public this week to cancel their plans.

'A More Rational Approach'

Glenn Kelman says right now, all bets are off. The CEO of Redfin, the large venture-backed real estate company, describes what he calls "gizzard squeezers" who work for investment banks and are supposed to tell you when it's a good time to raise money.

"They can't tell what's going to happen, and so that's when everyone steps back and says let's just watch and wait," Kelman says.

No one is saying the investment pipeline is freezing, and there is still lots of money available, but the days of investors practically throwing money at just about anyone with an idea will likely be replaced with a more rational approach.

Still, Keith Smith isn't worried. He's the chief executive officer of BigDoor, a 24-person Seattle start-up that helps companies make their websites and apps more interactive. His company recently added Major League Baseball to its list of clients.

He says venture capitalists want to put money into really good quality start-ups.

"Our prospects are probably quite good for raising another round of financing in the next 12 months," Smith says.

He says if a company's business plan is fundamentally sound and it's on its way to profitability, it should have no problem getting the cash it needs.

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