Why the startup market is like the real estate market

Homeowners hate to sell their houses for less than they paid for them. When prices fall, instead of adjusting to the new reality, homeowners keep their price expectations hoping that their house will sell. In the short run, they don’t need the money and patiently sit on the house. As a result liquidity dries up in the market. After many months, they adjust their price expectations and the market begins to clear again.

The same thing is about to happen in the startup world. In theory, startups should be insulated from the current macroeconomic headwinds. The current economic slowdown is caused by massive deleveraging around the economy. Venture capitalists are not funded by debt and cannot afford to sit on all the capital they raised for too long. Likewise, startups for the most part have no debt. However, as public valuations of consumer Internet companies have come down by over 25% across the board (and in some cases much more than that) and the IPO market has shut down, exit multiples are likely to decrease accordingly. Moreover, VCs, like most people, are like sheep. If everyone is putting their heads down and bracing for the worse, they will do the same and be much more careful.

Because there are still a few crazy deals happening, like Slide raising money at a $500 million valuation or Bebo being acquired by AOL for $850 million (a good sign we are at the top of the market), startup owners have not yet realized that this will affect them. Valuations are about to come down, but like homeowners, startup owners take a while to adjust to the new reality. Few deals will get funded for 12 months. Eventually the need for cash will win and deals will start happening at much lower prices. In fact, valuations might fall by more than they “should” if you have hundreds of deals that have to get funded simultaneously coming to the market.

People with cash will be in a much stronger position in 12 months than those without and should be able to buy companies and advertising at much lower prices.

Conclusion: Your greed versus fear dial should be turned to the fear side right now. Raise money now (even if not at the valuation you dreamed of) and be extremely careful with your cash burn.


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  • Another question for you:

    How do you decide how much to spend on marketing (Google ads, I presume) per market? I suppose this a function of size and depth of market — but all things being equal, let’s say olx.com is hot in country A but not so hot in country b — do you increase marketing in A or B?

  • I would spend as much as I can in the hot market without bidding against yourself and increasing your own costs. The reality is that there is only so much you can invest if you keep a close eye on the ROI. If country B is not working after you really tried, give it up.

  • Fabrice,

    I am just wondering, but from this blog only, you provide excellent advice to aspiring and current entrepreneurs. You have excellent connections in technology, media, VC.

    I am wondering what your take is on something like a YCombinator? Would you ever consider starting something like that yourself. NY is a perfect place for this as there is a large gap in early stage investing with only 2-3 VCs involved in this space.

    I remember you posted an article where you did not want to be involved in the VC space since you are never sure if something will work or not. But Ycombinator usually invests something like 20-30K to kick around ideas. What is your view on it?

  • Mike:

    I have been impressed with YCombinator. I am shocked that entrepreneurs are willing to give up so much for so little – and what they have been able to do with the little they get.

    I would definitely consider creating an early stage fund if I ever sell OLX. We’ll see when the time comes, but it’s definitely not for the near term. OLX is not viral so it’s going to take a long time to build. Moreover, as long as I think I can build a multi-billion dollar company and it’s best for the company to remain independent, I am not selling it!