In July of 2018 I warned my founders "in my estimation there is a 20-30% chance we could have “an event” in the near term (the next two years)"
.. and gave this advice:
"When the stock markets corrects, most of the time it simply bounces back, but sometimes a contagion will occur and it will impact everyone from hedge funds to angels, and the venture capitalists and seed funds in between."
Here is a basic rundown of what happens in the case of “an event”:
1. Event occurs (Black Swan or anticipated)
2. Stocks sell off, a series of head fakes occur around recovery, selling continues until a bottoming out.
3. Venture Capitalists decide not to make capital calls to their Limited Partners, sometimes as a courtesy, other times the result of a directive. They know their LPs have been heavily impacted by the market collapse and don’t want to stress them more.
4. Fight to qualify: Portfolio companies that are profitable have opportunity to get additional funding to deploy in the down market to capture market shares.
5. Portfolio companies that are close to profitability are forced to take a haircut on financing rounds — if they can even get them (think down rounds, warrants and multiple liquidation preferences).
6. Struggling portfolio companies are left to figure it out for themselves.
7. Seed Rounds Plummet: New startups will get funded at half to 1/3rd the price of similar companies the year before (i.e. $2-5m compared to $4-15m today).
8. Costs to acquire customers (ads), talented employees and M&A all plummet — allowing the strong and well-funded to become unstoppable (think Netflix, Google, Facebook and Amazon).
After a crash, the stock market tends to recover in a couple of quarters (think three to six).
The startup market, however, lags two or three years behind the public market recovery because angels and LPs who lost all their money will swing from being greedy to fearful.
You can follow @Jason.
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