The Games’ They are a Changin’
Reading about bailing out illiquid mortgage backed securities tiring you out? What the fuck does all of this have to do with startups? Here is what I think the most direct connection will be:
- Leverage has frozen
- The next shakeout will be hedge funds who have highly levered positions
- The carnage in that respect is already under way.
- Still doesn’t matter? Well Apple and Google are two stocks who are owned wide and far by most hedge funds. These hedge funds will soon be forced to liquidate their positions. That’s why that even though AAPL is falling like a rock, there will be more pain as more funds are forced to sell.
- This has nothing to do with the quality of Google and Apple but rather the dynamics of supply and demand in AAPL and GOOG. The first wave of selling is driven by the ‘deleveraging’ of the overall financial system. That means that firms that could borrow money cheap, can’t any more.
- The second wave of selling will be hedge funds who will be forced to close down due to investor redemptions.
- That will leave the leaders in the tech industry, Google and Apple, with sharply lower valuations. This will cause a systematic reevaluation downwards of all Internet companies like Yahoo.
- This will cause all public Internet firms to rethink their M&A strategy now that their valuation is sharply lower.
- This will cause an even bigger logjam of VC liquidity, with companies now unwillingly to give Youtube like exits to any startups.
- This will freeze VC investments.
This is likely to take at least 12-18 months from now. In the meantime, VCs will continue to tout the fact that their funding sources are secure and that they thrive during down times (true, but they thrive on the upswing from the bottom, not the downswing to the bottom). And then the pin will drop once the sequence above is satisfied.
All that too negative? Another external force that I believe will be a positive to startups will be the remaking of the private equity industry.
The industry thrived on leverage and was able to increase its power and influence to something like that of the early 80s renaissance period (when they were called leveraged buyouts).
Because of said logjam of startup exits, I believe these firms will now refocus on recapitalizations of mature startups that have an alphabet soup of financing rounds behind them and no M&A or IPO on the horizon. They can hold them for 2-3 years and then sell them to strategic players or the public investment markets once they have inevitably recovered.
Just my $0.02.
