Out & About: Entrepreneurs Talking About Recession- Are Angel Investors In Trouble?

By Tom Foremski - April 3, 2008

Recession, what recession? That's what it feels like in and around Silicon Valley. There is a lot of VC money being poured into startups so it feels as if we are recession proof, recession is what happens on the TV, somewhere else and not here.

That's what it might feel like but that's not what is potentially lurking below the surface. In conversations with local entreprenuers I'm hearing more stories about funding problems because of the recession, the real estate market slump, and the investment banking crisis.

In one story, a startup that had $7m in funding promised by large angels (arch-angels) lost much of it because the investors had lost money in real estate. Also, some angel investors have lost money because of Bear Stearns and now have less to to fund startups.

Angels gone?

The loss of the angel investors is potentially a big problem because Silicon Valley VC firms have outsourced much of the seed investing to the angels. The angel investors are a more important generator of the next wave of startups now than ever before, this could hurt Silicon Valley. [Please see: Jeff Clavier.]

I was at Lunch 2.0 at Ogilvy PR on Tuesday and I ran into James Hong, one of the founders of Hot or Not, a tremendously succesful web site. Hot or Not was sold in February to private equity firm Avid Life Media, for a reported $20m. He said fears of the recession were the prime reason Hot or Not was sold. "I'm telling all my friends to either get out now or buckle up for the long term."

"I'm not going to plan my next venture until it is clear what is going on with the economy," he said. I pointed out that Silicon Valley always produces its best ventures in a recession, Hot or Not came out of the recession. He nodded but said that with a new venture it is important to know how the economy will play out.

Jeff Nolan, a former venture capitalist and now at Newsgator, said that a lot of money moved away from VC funds and into hedge funds. Now, the large institional investors will be rebalancing their portfolios and more money will come into VC funds.

James Fisher, a local entrepreneur says that M&A in the valley is going to be disrupted by the turmoil in the investment banking sector. Investment Banking Crisis Will Freeze Silicon Valley M&A Deals


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By Tom Foremski - April 3, 2008 | Permalink | Category: Trend Watch
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Comments (3)

Mat:

This theme is coming up a lot in meetings.

I think that a recession is a chance for web-based businesses to thrive.

For consumer oriented apps with an add revenue model CPA and CPC advertising revenue will hold up best.

For business oriented apps with a SaaS subscription model, the pay-as-you-go, nothing upfront, rapid deployment, rapid ROI model has huge appeal to businesses needing to tighten their belts.

If a company has bootstrapped (like we have done at ProofHQ.com) then a recession could be a great opportunity.

Posted: April 4, 2008 10:08 AM

Tom Foremski:

Mat: I think you are right. It does depend n your business model and how wise you've been in spending investment capital and bootstrapping.

Short-term economic uncertainty shouldn't affect Silicon Valley too much, but in actual fact, it does have a large effect.

Posted: April 4, 2008 3:02 PM

Anthony Kuhn:

Tom: I think there will be a 2000/1-esque fallout in the angel and VC funding world with this being the beginning of the storm. I also think that there is a bit of groupthink or bandwagon effect at work with regards to the speed of the recession. The more news there is about the recession and people losing houses or startups losing funding, the more people will lose houses and funding. Maybe I'm wrong, but I can't help but notice the many, many stories touting the coming financial apocalypse.

Posted: April 7, 2008 11:56 AM

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