Volatile Markets Could Dry Up Funds For Startups

Aug 11, 2011
Originally published on August 11, 2011 6:12 pm

The turmoil in the stock market could curb the spending spree that's been under way in the tech industry, making it harder for startups 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 startups. 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 Cutler-Stamm, co-founder of Vizify, a company that turns resumes into works of art.

But that was a month ago. Cutler-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 startup 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 that 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 Sack 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 startups 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 are likely to 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 startup 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 startups.

"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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MICHELE NORRIS, host: The turbulence in the stock market is worrying some venture capitalists and angel investors who had been on a spending spree in the tech industry. They have been paying top dollar for initial public offerings and otherwise spreading lots of money around. But as NPR's Wendy Kaufman reports, raising money for startups may be getting harder.

WENDY KAUFMAN: This week, a group of about two dozen carefully selected entrepreneurs gathered in a Seattle basement. They're participants in TechStars, a boot camp and incubator for startups. And by the end of the three-month program, most of them will be looking for money from angel investors or venture capitalists.

JEFF CUTLER-STAMM: A month ago, it felt like the best time to start a company and raise money in 10 years.

KAUFMAN: But now, says Jeff Cutler-Stamm, the co-founder of Vizify, it's likely to be tougher. Still, the company that wants to turn resumes into works of art is confident it'll be able to get the money it needs. Cutler-Stamm knows he might get less cash that he'd hoped for, but with bootstrapping and hard work, he thinks it'll be enough.

CUTLER-STAMM: I'm an eternal optimist. I mean, you can't be an entrepreneur and be pessimistic.

MATT OPPENHEIMER: I agree with your optimism point. I like it.

KAUFMAN: That's Matt Oppenheimer. His start-up aims to make it easy and inexpensive to send money to the Philippines using mobile phones.

OPPENHEIMER: What's made America great, is really the entrepreneurial culture, spirit and support. I don't think that disappears if the stock market crashes. I will say that if you look at especially the angel investor community, for the pie that they were giving out just got smaller.

KAUFMAN: Angel investors, explains Andy Sack of TechStars, invest and manage their own money.

ANDY SACK: They go to their bank account. They write a check. They don't have anyone to report to and they can just invest in whatever they want.

KAUFMAN: Or they can choose not to invest at all.

SACK: Individuals can be like, oh, forget it. I don't want to invest today or I don't want to invest this year - bad year.

KAUFMAN: And Sacks says when things are volatile or unpredictable, angel money tends to dry up faster than venture capital.

SACK: Institutional money has a job to put money to work.

KAUFMAN: 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.

I asked Greg Gottesman, a managing director of the Madrona Venture Group, of he was making different investment decisions this week than he would have made a month ago.

GREG GOTTESMAN: I don't think so. We're looking really over the long-term.

KAUFMAN: You hear that a lot from venture firms: We're in it for the long haul. But in the short-term, at least, Gottesman is concerned about the ability of venture-backed companies to turn to the stock market with an initial public offering.

GOTTESMAN: One of the great things that has been around for the last, you know, six months or so has been an open IPO window. And, you know, LinkedIn and Zillow and some other...

KAUFMAN: Technology firms in particular garnered huge sums from the IPOs, but that opportunity may be ending. 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.

Listen to Glenn Kelman, he CEO of Redfin, the large venture-backed real estate company.

GLENN KELMAN: When the markets have that much volatility, there are these gizzard squeezers that work in investment banks who are supposed to tell you whether next week it's a good time to raise money or next month or next year. And all bets are off. 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.

KAUFMAN: 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.

Keith Smith isn't worried. He's the boss here at BigDoor, a 24-person Seattle start-up that helps companies make their websites and apps more interactive. It recently added Major League Baseball to its list of clients.

KEITH SMITH: We look at the market and we feel like, given the amount of demand for VCs to put money into really good quality start-ups, that our prospects are probably quite good for, you know, to raise another round of financing in the next 12 months.

KAUFMAN: Smith says if a company's business plan is fundamentally sound, and it's well on its way to profit, getting money shouldn't be a problem

Wendy Kaufman, NPR News, Seattle. Transcript provided by NPR, Copyright NPR.