Homeowners hate to sell their houses for less than they paid for them. When prices fall, instead of adjusting to the new reality, they sit on the house — and liquidity dries up in the market. After many months, they adjust their expectations and the market begins to clear again.
The same thing is about to happen in the startup world. In theory, startups should be insulated from the current macroeconomic headwinds, caused by massive deleveraging. Venture capitalists don’t use debt, and they have to spend the capital they raise. And few startups use debt.
But as valuations of consumer Internet companies have come down by 25% or more, and the IPO market completely shuts down, exit multiples will decrease accordingly. And just like everyone else, VCs are like sheep: If everyone is putting their heads down and bracing for the worst, they will do the same, and hang on to their money.
Because there are still a few crazy deals happening, like Slide raising money at a $500 million valuation or Bebo being acquired by AOL for $850 million, startup owners haven’t come to grips with what’s about to happen.
But they will: Valuations are about to come down, and few deals will get funded for 12 months. Eventually, the need for cash will win and deals will start happening — but at much lower prices.
So what can you do with this knowledge? Raise as much cash as you can (even if it’s not at the valuation you dreamed of) and be extremely careful about spending it. People with cash will be in a much stronger position in 12 months than those without, and should be able to buy companies and advertising at much lower prices.
Your greed versus fear dial should be turned to the fear side right now. Pay attention.