There’s been a lot of speculation lately about what the recent downturn in the public markets will mean to the unicorns (the name used to describe private companies with over $1 billion valuations) and how they might alter their operations based on the possibility of future venture capital being more difficult to raise.
No one should lose sleep at night over whether Uber is able to raise another billion dollars. But lots of entrepreneurs are wondering on a more personal basis what the stock market turbulence could mean for them. Should a startup founder do anything differently in September because of the Dow’s performance in August?
First, nobody knows whether the stock market will go up or down over the short term. It’s true that a significant correction in the stock market will affect the private equity markets, and not in a good way. If the stock market goes down appreciably and for a sustained period of time, there might be less public offerings. Even if there aren’t less public offerings, public companies may find it more difficult to use their stock to buy large private companies.
M&A activity ultimately drives the entire venture capital business. If large private companies are less likely to be acquired, then they might slow down on their acquisitions of mid-tier private companies. All down the funnel, acquisition activity could slow until it gets to the earliest-stage startups. Venture investors who were expecting a liquidity event may have to wait longer to get their capital back. If this happens, venture capitalists may use the capital they have to support their portfolio companies that are furthest along instead of investing in new companies.
I remember when the dot-com bubble burst in 2000, venture financing was hard to come by for a long time.
So what does all this mean for someone building a startup? Probably nothing! It’s far from clear that we’re in a bubble, and even if we are, there’s nothing any of us can do about it continuing or popping. People with entrepreneurial spirits choose to embark on startups because they each have a dream — whether it is to execute against a specific vision or simply to be their own boss. Startups are a risky proposition. For founders in the earliest stages of building a business, getting profitable probably isn’t an option.
Startup founders are collectively in the business of building product, releasing, interpreting results, and then iterating. Sometimes the appropriate course is to pivot. Startups work at laser speed, so even if they knew that the stock market was going to crash, there probably isn’t a speed correction called “faster.” I rarely meet a startup founder who is waiting to raise cash. I find that most founders who haven’t raised cash yet or haven’t raised as much as they want to haven’t yet achieved metrics or validation or momentum necessary to raise cash. In other words, lack of financing is rarely a choice.
This means that for most founders, the right course is to simply tune out what’s happening in the public markets. These founders should continue to operate at laser speed and always be looking for capital.
The volatility in the public markets might persist through September (or longer), but early-stage founders should continue with business as normal regardless.