Why the Public Stock Markets Will Affect Your Funding Round Even if You Can’t Perceive It

Last night I wrote a post about how the fall in the stock market over a 3-day period may affect the venture capital markets. If you’re an entrepreneur or VC who wants somebody else’s view on that you should read it. This morning the US stock markets are rallying. So now what?

Let me give you the quick summary of what I said yesterday:

• Public markets affect venture funding. Full stop. When they’re bullish venture valuations go up, LPs put more money into VCs, more angels want to get involved, new entrants (hedge funds, mutual funds) feel they’re missing out and the overall venture market goes us.
• In a period of “uncertainty” about the future venture capital rounds take longer — particularly later-stage deals. Mostly because VCs want to wait to see if a “new reality” has set in.
• If markets pick back up venture funding will return as it was before the 3-day, 10% correction but if the VIX goes up (a measure of expected volatility in the stock market) then expect rounds to take longer. If the markets continue to go down expect less funding.

Equally importantly

• Long before the markets corrected my smartest professional trader friends and limited partners were telling me that many people in the market were telling me that all eyes were glued on Sept 16–17 when the FOMC meets to discuss interest rates. It’s a sign of the Fed’s views on our economy. If they’re seeing good signs they should raise raised 0.25–0.5%. If they’re concerned or neutral they may leave rates alone.
• People said “buy, buy, buy” yesterday on Twitter. They said stocks were a bargain. I said “I’m not so sure. Let’s wait and see. I urge caution.” People didn’t like that. Pragmatism doesn’t sell.

So were the market bulls right and I was wrong to say “stay pragmatic?” Maybe. Too early to say. They may have gotten into the best buying opportunity in a year. Or it could be that after 3 days of the market roulette landing on red it landed on black for a day. And there may be more red days ahead. I don’t know. Neither do you. That’s why I urge caution.

And it doesn’t change the fact that our late-stage venture markets are over-valued relative to public markets, so either

• public stocks go up and privates can grow into IPOs; or
• private valuations go down (slowly because they only adjust at funding intervals or M&A); 0r
• private companies grow so quickly that their metrics catch up with their valuations

I’m betting on the middle option but time will tell. So final thoughts if you’re a CEO, I believe now as I did before the minor correction

• keep your burn rate under control relative to your balance sheet (ie how much cash you have) and your income statement (how much cash you’re burning)
• start raising early
• be humble enough to know that a 1 is better than a 0 and sometimes optimizing for maximum valuation doesn’t pay off in the long run. I’m not saying don’t try. I’m just saying understand the trade-offs and risks of not getting a round done

Finally. I said in my last post I was heading off to watch Fallon. He wasn’t on so I watched Cramer instead. I don’t often do that. He was mixed on the market saying it may go down further but saying fundamentals in the US looked strong. He said one thing worth repeating. He said US stocks traded at about 13.8 P/E which is totally normal relative to the over-valued markets of the previous crashes which is why he didn’t believe it was time to be overly worried. There. I said that.

Updated: Well, well, well. What started as a banner day ended up EVEN LOWER than yesterday. Roulette table spun red now four days in a row. Maybe it will be red tomorrow. Maybe black. That’s my point. Don’t gamble your money pretending you know and don’t gamble your startup expecting that valuations go up forever. They don’t.