Yesterday, an early stage tech company -- which does not want to disclose its name -- saw one of its key angel investors pull out of a critical round of financing. The reason: the angel is an employee of Bear Stearns (NYSE: BSC).
True, this is a unique situation. But with the extreme turbulence in the financial markets – as well as the slowing economy – there is some anxiety in the tech startup space.
So what are some of the takeaways? Let's take a look:
"Hunker Down." Based on some recent conversations with VCs, there is certainly negative sentiment brewing. In fact, the economic slowdon may easily last a year or more -- and that means entrepreneurs need to be quite cautious.
Actually, things could be particularly tough for those companies that rely on online advertising. After all, this week eMarketer announced a downward revision to its online ad forecast for 2008 – from $27.5 billion to $25.8 billion.
What's more, the issues may be really painful for those ventures that are focused on social networking and video – which are still in the experimental phase. For example, in a recent report from Dow Jones VentureSource, there appears to be a slowdown in VC fundings for Web 2.0 deals. While such firms raised $1.34 billion last year, much of the financings were concentrated in a few deals, such as the $300 million transaction for Facebook.
Valuations: Except for a few notable deals – such as AOL's $850 million deal for Bebo – the M&A market for tech has been mostly lackluster. Moreover, the IPO market has been virtually nonexistent.
This is definitely frustrating for VCs, who need to eventually get liquidity on their investments. And if history is any indication, VCs tend to pull back on fundings six months or more after the economy begins to falter.
Oh, and with the volatility in the public markets, there is much more pressure on the valuations. Just take a look at the stock plunges of top-tier operators like Google (Nasdaq: GOOG) and Apple (Nasdaq: AAPL).
"VCs are going to take public valuations into account in their negotiations," said Tim Vanderhook, the CEO of Specific Media, told us in an interview.
Time to start a venture? Ironically enough, this may be an opportune time to launch your startup. In a challenging environment, you have an easier time with competition and you have time to develop your strategy and product. Besides, the need to get and keep customers is not as urgent.