The case is being argued again that entrepreneurship and venture investing are insulated. The turbulence that happens in markets (and otherwise) apparently does not matter, (although the good things that happen in technology, and otherwise, apparently do). Almost as if in direct response to the bubbly argumentation, almost as if to demonstrate that everything in actuality does matter, that everything is related and codependent, Standard & Poor’s has downgraded the long term debt of the U.S. Treasury for reasons both external and internal to it. The rating downgrade itself (or its consequences) is for purposes of this discussion less interesting than the rationale and the litany of issues raised by the analyst institution.
Here is a sampling, in no particular order: There is concern about the effectiveness of management, there is concern about the realization of financial assumptions, there is concern about future funding needs and market receptivity thereto, there is concern about the veracity and reliability of historical results, and there is concern about the relative quality of the asset in comparison to its peer group. In addition, the possibility has been raised that certain entities that are dependent upon the risk profile and wellbeing of the U.S. Treasury will, through a sort of domino effect, also be downgraded. These same institutions, by the way, happen to be many of the usual and customary limited partners (LPs) of venture funds and other private investing vehicles. It’s all connected you see…
Which brings us full circle back to entrepreneurship and why capital markets (and many other things) do matter. Even if it were the case that an enterprise is fully funded and is as a result no longer subject to outside whims and flows of capital sources, an enterprise functions in a broader context and is reliant on an economy for revenues, the levels of operating expenses, and the very nature of operations (technical & otherwise). Capital markets are not only a reflection of all these things, but impact them directly. Much more critically, however, an enterprise is rarely if ever fully funded. Not even the U.S. Treasury is so, apparently, let alone a seed- or venture-stage project.
This drives the argument straight to the core of where the risk and potential disingenuousness lies, of insisting that entrepreneurs should not bother about capital markets. (And we are all entrepreneurs, really; even, apparently, the Secretary of the U.S. Treasury.) As long as a business is funded by external capital â€“ to some extent, of course, all capital is external – the markets very directly matter. Whether in relation to immediate or longer-term investment sources, whether in relation to the mood and liquidity of current investment sources (remember the Sequoia slides?), or whether just as a means of anticipating the behavior of a customer base that is itself pushed and pulled by all of the same issues, fund flows and market swings are critical. Paying attention to these, even if outside of any direct sphere of influence, is not only necessary but one of the principal criteria by which an entrepreneur (of any stage) should be measured.
Why some would insist that the capital markets are irrelevant to entrepreneurship, and especially as these are sophisticated investors making such claims, is frankly baffling. These are not investors who can guarantee the permanent funding and wellbeing of an enterprise in a manner independent of external variables. As we now understand, “guarantee” is a strong word, and no investor can firmly stand behind such a commitment in a “risk-free” manner, not even the U.S. Treasury. Investors of lesser stature ought to be more cautious handing out advice that is at best careless, and at worst cavalier swagger. There comes a point when lack of planning catches up, even for the most advanced and solid of startups.