The writing is on the wall. No startups will receive angel or series A funding before March 2009.
I know it’s not what we (entrepreneurs) want to hear. We’re optimists. We can visualize that term sheet coming next week. We can each personally justify why our specific venture is more attractive than any of the others out there and why this rule doesn’t apply to us. But it’s just not likely. And this time, when I say not likely, I don’t mean it in the entrepreneurial “not likely – but we’re really smart so we can make it happen” sense. I mean it’s just not going to happen.
Why? Two reasons: Investors are scared and investors are in control.
(1) Investors are scared. They’re scared about the economy which is suddenly, tragically, totally unreliable. You’ve spent months building your business plan showing great statistics about how big your market is and how fast it’s growing. But with the financial crisis, your market projections are either slightly-exaggerated or completely-ridiculous, and nobody knows which it is. (So, you say that doesn’t matter? Your company saves people money, so you can still succeed by taking market share from entrenched competitors?) Well, there’s also a less rationale fear at play with investors: the fear of being seen as careless, gullible, or naive by their investor peers. This is nothing new. It’s one of the reasons investors have always liked to share deals. Just now it’s magnified and a tougher hurdle to clear.
(2) Investors are in control. It’s well known that money isn’t getting thrown around like it used to and that means there’s less risk of losing a deal to someone else. This means more time for due-diligence. More time for feet dragging. More time to let the entrepreneur test their business model on their own and give the investor a reason not to invest. Seriously, why decide today if you can get more information and decide tomorrow? (Except for the fact that without funding some good businesses will die from starvation)
So, these two factors, combined with the fact that we’re approaching the holidays, where vacations and other distractions create further delays, provides the obvious conclusion. Even if an investor really likes your deal today, even if you think you’re on the verge of a term sheet, they’re probably going to drag their feet till the election, leave town for thanksgiving, lose focus until Christmas, and then start fresh in 2009. Typical due-diligence should cost you 2-3 months and then it’s March.
So, if you’re an entrepreneur shopping a business plan around, it’s time to think very seriously about supporting you and your team for the next five months. Either find a way to start taking customers money, move in with your mom, or start looking for a job.
Now go buy a shirt and keep this entrepreneur in business.
Tagged: Financial Crisis, Funding, Investors, Series A, Startup