Credit Crisis Reaches Venture Capital
TechCrunch’s Michael Arrington has a very informative piece on the credit crisis and its effect on startups. Apparently, many startups are putting their venture cash in Auction Rate Securities, financial instruments that are normally very liquid and provide better yields than typical bank savings/checkings accounts. Unfortunately, the perfect storm of the current credit crisis has put a freeze on the ARS market and startups are finding a difficult time to access their cash.
What really surprised me from the article was that many startups were putting their cash in ARSs without the knowledge of their venture investors. I’ve always believed that early stage ventures should outsource their CFO functions. Good chief financial officers are difficult to find and oftentimes startups’ finances are not complex enough to warrant a full time CFO. Spending decisions should absolutely remain the domain of the entrepreneurs and executives that are closest to the market and know at an intimate level the costs of competing. But investing and financing activities can be handled by an outside expert, at least until the enterprise meets success and its finances become more complicated. Most technology entrepreneurs, especially the ones in software, are not necessarily well-versed in finance.
My previous startup, a venture-backed software company called mediaFORGE, employed an outfit called CFO Solutions. Many venture funds have hired the folks at CFO Solutions to help manage the financing activities of their portfolio companies. I think Silicon Valley Bank (SIVB) provides some of these services but could do better advertising.
Of course, I’m sure few could have predicted the credit crisis and its damage to the ARS market. The concomitant recession fears will also put a damper on the availability of venture funding. The current market environment will not be very receptive of initial public offerings, one of the major exits for venture-funded companies and their venture investors. Startups currently in fundraising mode should try and raise more than they think they need because VCs are going to be rather tight in the near term future. It’s a strategy the PayPal (EBAY) guys implemented when they foresaw the need to ride out the dotcom crash. I have yet to decide if we’re going into fundraising mode at my new startup, SocialOptimize.
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This is silly.
Please read this post for a further explanation of how overblown this issue is and how much of an idiot Arrington is for not actually reading the numbers on the report himself:
http://www.portfolio.com/views/blogs/market-movers/2008/03/11/auction-rate-securities-no-danger-to-silicon-valley
When it comes to wall street, best to read financial blogs not tech blogs.
Yeah, the TechCrunch article is a little overblown. The majority of my post concentrates on the management of finances from a startup standpoint and the idea of outsourcing financial management to a consultant trusted by entrepreneurs and VCs. Thanks for the link to Salmon’s post refuting Arrington and Herscher.