Attention Web 2.0 Start-Ups: Party May Be Ending

Who says Wall Street firms are always bullish?  According to Reuters, Merrill Lynch published a report today suggesting that housing market woes could drag the economy into a recession and that, if it does, investors can expect a drop in the S&P 500 of at least 30% from the peak.  Even if there is no recession, and the market just does a head-fake, we should expect a drop of about 20%.

How will a public-market stumble affect Web 2.0 start-ups?  The same way the market crash in the fall of 2000 did, albeit to a lesser extent:

• Money will get harder to raise.  (Because VCs will be feeling pressure from their clients, and exit valuations will be lower).

• Financing and exit valuations will be lower.  Because the stocks of acquirers and comparably public-market companies will be lower.

• Investors will get impatient for start-ups to develop businesses instead of "products" and "communities."

• The growth rate of online advertising will slow dramatically.  In tough times, advertising is one of the first expense lines to get cut (by big businesses and small).  What's more, some start-ups that are currently buying advertising will cut back or cease to exist. 

In short, being a Web 2.0 entrepreneur or employee may soon get more difficult and less fun.  Hit the bids while you can!

UPDATE

Oh, well.  Merrill Lynch's economist David Rosenberg just blasted Bloomberg for mischaracterizing his report and said he is merely suggesting that we could have a "growth recession," meaning that the economy's growth rate could slow, and this only if the Fed doesn't cut interest rates.  So that's still bullish.  For what it's worth, I am calling for a real recession, in which the economy shrinks and the stock market tanks, regardless of what the Fed does. 

Comments

[Still Inside]

In my experience VC funding for start-ups is pretty much recession-proof.

Most firms are jammed full of cash commitments that will take them into the next century, and a recession makes all kind of things cheaper.

A VC-backed company is supposed to be a rocket or doesn't get funded. VCs are not concerned with the absolute speed of the rocket (viz. a 30% slower rocket is still a rocket), but rather are concerned whether the thing will blow up on the launch pad, or it will speed toward a planet nobody cares about, or a planet that MSFT or GOOG or CSCO already inhabit and have taken over.

All of the things you mentioned happened in 2000 did indeed happen, but that was because of a hysterical souring on the .com hysteria, not macroeconomic factors per se.

Note here that I am talking about brand new start-ups. These are the companies that aren't expected to go public for 3-5 years. Clearly bridge and B/C/D rounds track the market closer as the get closer to the market.

SI

[King Troll]

Henry, should i try to get funding for my company or just keeping growing it at a steady pace on my own? Talk to me bro. What you think.

I'm taking over the leases of some of the DEMO stores (owned by PacSun.)

[Rick]

Yeah, it's coming. It's so 2000 right now.

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