Although some called it a bloodbath, Monday's 554-point free fall of the Dow Jones Industrial Average hardly raised a cocky eyebrow among Silicon Valley's venture capitalists and soothsayers. Start-ups may find it a teensy bit harder to drum up cash, but basically the Daddy Warbucks who make or break their own net worth by predicting the future say the tech industry isn't going to be rattled by a little thing like a crash in global markets.
"It's healthy - it gets the froth out of the market," said Tim Draper, partner at the venture-capital firm Draper Fisher Jurvetson, of the 7 percent drop in the Dow. Like his peers, he speaks of the ease with which start-ups have been raising "incredible sums of money" and says that while available capital and company valuations may shrink a bit in the short term, it will only force companies to grow leaner and meaner, and ultimately more profitable.
"Companies we have seeded that might have been bought in two or three years would be bought out or go public in five," he said, explaining how a severe crash might affect his business. "But when they did, they'd be much stronger and worth a lot more." In other words, a thrashing of the market might actually be a good thing for the monied crowd, always looking to increase the return on investment.
That drive to make a buck has had VCs pouring money into any start-up with half a fighting chance. While the VC crowd isn't exactly forthcoming with admissions of their own over-funding of tech companies that burn through millions of dollars in a quarter, many now point a directionless finger at the oversupply of capital in the market.
"The track we were on was clearly unsustainable - valuations were moving away from any real metrics," said Bill Gurley, a partner at venture-capital firm Hummer Winblad and a former market analyst. He added that now is the time to "clear the decks" and weed out companies "with very little revenues and 100 employees."
Joanna Strober, an analyst at Bessemer Venture Partners, would agree. "It's been so easy to go public," she said, adding that the financial risk assumed by VC groups was seriously reduced by the ease with which the companies they funded could return the favor. "We have been able to count on public markets to do what late-stage venture capital would normally do," she said of the long-running bull market that has hastened the speed with which a lot of venture funds recoup their investments.
Calling yesterday a momentary blip, Mark Jensen, head of Arthur Andersen's technology group in the Valley, said the Dow's dip presages a lull in the IPO market. "It hasn't been that strong since 1995, when you could take a Kool-Aid stand public," he said, adding that now it may all but dry up. Still, if the market doesn't plunge much further, he doesn't foresee any ugly impact on the tech industry. Instead, he pointed to the burgeoning mutual funds and all the retirement money aging baby boomers are pushing into the market, and said "there's never been a time when this much money was available."
While a kind of superstitious caution did permeate the air, few were willing to see any real doom in the day's fallout, pointing out that it was far from the 22 percent drop in October 1987. "It portends almost nothing," said Steven Weber, an expert in technology economics and professor of political science at University of California at Berkeley. "Tech stocks always get battered because they are leading edge - when the market goes down, people think of safety and look to less sensitive things."
Peter Schwartz, chairman of the future-thinking Global Business Network, an economic/technology think tank, chalked the big drop up to a lot of anxiety. "I wouldn't make too much of it yet - if tomorrow and the next day continue to drop another 5 or 10 percent, then it might be something to worry about," he said. "Oh, and I'm buying stocks."
Draper, the VC, agreed that the market's dive made for "a major buying opportunity" and said that if prices drop low enough, his venture firm would consider investing in the public market. Then, with a laugh, he gave the whole disaster and the market's penchant for October crashes a little philosophical spin. "We were an agrarian society, with a harvest every October," he said. "It's like [people are gripped by] a fear of going into the hard winter - and this kind of brings us back to our roots."
