Tuesday, June 5, 2012

Silicon Valley Legend, Y Combinator's Paul Graham on What the Facebook Flop Means to Start-ups (FB)

From Y Combinator's Hacker News:
Paul Graham's Letter to YC Companies
Jessica and I had dinner recently with a prominent investor. He seemed sure the bad performance of the Facebook IPO will hurt the funding market for earlier stage startups. But no one knows yet how much. Possibly only a little. Possibly a lot, if it becomes a vicious circle.

What does this mean for you? If it means new startups raise their first money on worse terms than they would have a few months ago, that's not the end of the world, because by historical standards valuations had been high. Airbnb and Dropbox prove you can raise money at a fraction of recent valuations and do just fine. What I do worry about is (a) it may be harder to raise money at all, regardless of price and (b) that companies that previously raised money at high valuations will now face "down rounds," which can be damaging.
What to do?

If you haven't raised money yet, lower your expectations for fundraising. How much should you lower them? We don't know yet how hard it will be to raise money or what will happen to valuations for those who do. Which means it's more important than ever to be flexible about the valuation you expect and the amount you want to raise (which, odd as it may seem, are connected). First talk to investors about whether they want to invest at all, then negotiate price....MORE
HT: Wall St. Cheat Sheet's "SUPER SCARED: Silicon Valley Elite See Facebook’s Dark Cloud"

Paul Kedrosky also weighs in, via peHUB:
Kedrosky: First the Warning, Now the Fallout
In ways, it feels silly, comparing an alarmist email about the market by Y Combinator’s Paul Graham to the 56-page slideshow produced by Sequoia Capital in October 2008.

While both were designed to warn their portfolio companies of tough sledding ahead, an email is no carefully conceived PowerPoint. And Graham’s email is a direct reaction to Facebook’s IPO, which has negatively impacted a very small circle of people; Sequoia Capital’s slideshow was a response to a deep global financial crisis precipitated by some of the most dramatic days that Wall Street has ever seen.
Still, instinct tells me Graham’s message will pack more of a punch than even he is willing to concede. (He told AllThingsD today, “I never thought anyone would care enough to treat this as news. The email is mostly fairly technical stuff about what to do if the funding market turns bad.”)

Economist Paul Kedrosky, who I caught up with a bit earlier over the phone, seems to agree. His reaction to Graham’s email, edited for length, follows:
There’s already been an impact.
There’s been this rapidly expanding bubble, in terms of people getting excited about this whole domain of social, and social media, and social media on mobile. And as hedge fund guy recently said to me, ‘Having Facebook s**t the bed’ [forces a lot of the air out of that bubble].
It’s causing a whole bunch of things to happen at once. First, people who were on the margin, those who were thinking of bringing new money to market in terms of funding startups, are now reconsidering. It doesn’t take much to [spook] them if they were at the margin. Then a bunch of people who were counting on pulling money out of Facebook, including secondary traders who might have cycled their capital back in to the market, have less money than they thought they would right now. More, they’re newly convinced that this marketplace is shakier than they’d thought. ...MORE
Y Combinator March, 2012
"Frighteningly Ambitious Startup Ideas"

Sequoia, Nov. 2008
Venture Capital: From the Valley Comes a Warning