Financial Crisis has been on everybody's mind and mouth in the last few days and weeks and also Venture Capitalists felt the need to analyze the impact of the financial crisis on their world and to spread the word with portfolio companies and co-investors via emails, newsletters, forums, slideshows and blogs which have then been chain forwarded and contributed to spread some kind of sense of urgency but also in my view some further unnecessary panic.
While it is clearly wise to carefully ponder issues and implications of such crisis on our environment and initiate actions, I found many of the views expressed (also from highly reputable investors/firms) far too extreme. Parallels have been set with the previous financial crisis and in particular with the 2000 "dot com bubble" implosion and some concluded that given that this crisis is likely to be longer and more pervasive than the last one the action to be taken should be even bolder this time.
While we agree on the vaster scope of this crisis versus the last one I encourage to consider that while 8 years ago our ecosystem was the cause and not the victim, here the epicenter of the seism is probably as far away from us as it could possibly be. In fact:
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Neither our funds nor our portfolio companies are leveraged (they never have been). Hence credit restriction have no direct impact on valuation and riskiness of our assets
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Our shareholders are (typically) long term investors who have set aside capital with a 10 or 12 year horizon. Ourselves and (hopefully) most of our peers hold reserves to support our portfolio companies in difficult times.
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Our companies are very early on in their life cycle and plan to grow at 30- 50% year on year. Hence a very minimal part of their growth assumptions can depend on sheer GDP growth.
All the above applies to private companies in early stage of development. Portfolio holdings in more mature companies already public or closer to exit will of course suffer as much as others.
Of course chain effect exists and they are always difficult to predict and if the word falls apart it would be naive to believe we're all in a safe heaven. Our reccomendation therefore is to:
Increase reserve allocation to portfolio (to decrease for example reliance on co-investors whose liquidity might dry up) Raise more money rather than less if possible Request prompt scenario planning to portfolio companies Variabilize cost as much as possible Defer increase in spending until scenario is clearer
At the same time, at least for the moment, we also recommend no panic, no massive layoff (except for situations in which "fat" was already there pre-crisis) and no complete generalized and across the board spending/investing freeze. We must be aware that if we dismantle fragile early stage organizations to prepare for the worse we might find nothing good is left once the crisis is overcome.
