With tech stocks getting pummeled by investors over the past week, some startups may be wondering what it means for them. Here’s a comprehensive list of the various ways startups are impacted:
That’s the answer you’ll hear from many founders. To a certain extent this perspective can be pretty accurate. When you are grinding on an early-stage startup, the stock market is the last of your concerns. You won’t be exiting anytime soon, you may not be raising any money, and the only thing that really matters is whether or not you can get customers. If you have customers, you have a business, and everything else will work out well. Or at least that’s how it goes in theory!
Funding Is Dependent On The Market
In theory, when the market goes down funding tightens. We witnessed this during the last downturn. Sequoia capital released their “R.I.P. Good Times” presentation and investors quickly tightened access their coffers. Typically in each of these cycles investors over-adjust. So if the market really tanks, you’ll see investors slow their investment pace as their ability to raise institutional money becomes more challenging.
Fortunately for startups, funding is not 100 percent dependent on the market. If you have customers, you can raise funding. If your numbers are based on future projections though, raising funding is almost impossible during downturns.
WhatsApp for $19 billion, Oculus for $3 billion, all of these valuations were based on the fact that Facebook’s stock was soaring. Now the stock is 20 percent below its peak and could easily drop an additional 10 percent or more. High stocks increase public companies’ willingness to acquire others at what appears to be ridiculous valuations. Later stage investors also turn to the public companies when coming up with valuations for the private ones.
Facebook’s valuation is $140 per user? We’ll invest in your company at $10 per user and flip it to Facebook! If you are trying to raise funding, the past couple months were the best time to raise. If the market keeps dropping, there’s no way around it: startup valuations will drop.
Exits Are Lower
Valuations for investments drop and so do the final acquisition prices. Obviously there are always exceptions but generally speaking, acquisition prices will go down and same as IPO prices.
Cash Flow Resolves Most Worries
All that being said, startups operate inside somewhat of a bubble. Founders either push the company forward or they let fundraising hiccups and others kill the company. If your company is hiring beyond its cash flow, don’t be surprised when you get the boot. Cash flow is the ultimate life-blood of a business.
In a business that’s printing cash, managing the twists and turns that the market throws your way is much more manageable. Know of other ways the stock market impacts startups? Let me know in the comments and I’ll update this post!