Why Capital Markets Matter

On a day when it is likely that the US stock markets will open down and Asian markets are in free fall, it is worth taking a second and talking about why capital markets matter and why they don’t.

If your business consumes capital and needs more of it, then changes in capital markets can affect you.

If your business produces cash flow and you can finance your business, then changes in capital markets are not likely to affect you.

This is one of many reasons that I like to see our portfolio companies get to break even and ideally producing cash flow.

I don’t remember when I said this, but I am glad I did.

#entrepreneurship#VC & Technology

Comments (Archived):

  1. LIAD

    The fact we are all affected to one degree or another, directly or indirectly, by the machinations of an irrational network powered simultaneously by greed, fear and stupidity is befuddling

    1. fredwilson

      I see it the opposite way. I think it’s magical and representative of humanity with all of its bad and good

      1. LIAD

        Those it has made destitute through no fault of their own probably see it differently#devilsAdvocate

        1. prceurope

          If you get made destitute by not understanding where you put your money, there is some fault attached to that.

          1. LIAD

            You can out your money in the absolutely right place and still be made destitute by the actions of others.

          2. prceurope

            If you put ALL of it there, sure. But that would be a faulty strategy.

          3. sigmaalgebra

            Some of the market crashes hurt a lot of people a long way from the markets. It happened with the crash of 2008. Likely some people will be hurt by the crash last week. No doubt crashes going way back hurt millions of people.Of course the biggie was the crash of 1929: There nearly everyone in the US was hurt, often quite seriously. Some of the pains, losses of social capital, etc. are still with us. E.g., a lot of women gave up on a marriage as a source of financial security and told their daughters to do the same. A lot of women and their daughters tried to rush into the world of work, not knowing what the heck they were doing, and suffered and, in some cases, died — in simple terms, it’s what killed my wife and seriously hurt the life of one of her sisters and somewhat hurt the life of her other sister.But that was the small stuff: The 1929 crash spread to the other industrialized countries and created both Hitler and Tojo. Now we’re talking, what, round numbers, 50, maybe 100, million dead people, with nearly none of them having ever even heard of Wall Street.For some of what a stock market crash sounds like, there ishttps://www.youtube.com/wat…Stock markets are a very serious threat to all of civilization, one of the biggest, maybe the biggest. Sorry ’bout that.

          4. Matt A. Myers

            There is no need for such risk.

          5. JamesHRH

            I don’t think that is true.

          6. Sandy

            You choose investments, based on what you believe the actions of the crowd will be at any given time.Investing is for old people. You have to get backstabbed, betrayed, and treated dishonestly in life, in order to understand why markets move as they do. Otherwise, you won’t understand why your assets keep going south.Agree with Fred that markets are magical and beautiful, because of the good and bad.

          7. Matt A. Myers

            I believe what LIAD was saying is that if you’re not getting shit on and stuck getting shit on in this magical and beautiful ying-yang machine called the universe – then yes, you can call it magical and beautiful.

          8. Sandy

            Markets are magical and beautiful, because they are a black and white version of what is fair and right. It’s a fairy tale. The little guy underdog wins. Meritocracy beats politics. Rational and logical is best. You’re a Jedi.Most of life works the opposite of that.Most of life is irrational, ego-based, political, corrupt. Conform or lose. Political lobbies and bullying assholes win. That is getting shit on. That is the Dark Side of human nature.Entrepreneurship and investing are very hard, but it’s magical that you make money BECAUSE you do the right thing. That’s boring to millennials, but that’s a dream come true to Gen X.

          9. PerceiveToBeWise

            He who risks nothing gains nothing. Stop-loss orders and alerts were created for a reason. Those who do not use them do not know how to invest. Money and emotion are enemies of each other. Never panic, never throw good money after bad, never follow the market to the bottom, or think you know the bottom before the market has determined it.

          10. ShanaC

            they aren’t enemies of each other per say – you need emotions to think logically. You’ll starve otherwise.

          11. PerceiveToBeWise

            I’m not disagreeing per se but I don’t see the connection between emotions and logical decisions. If I make a decision based upon logic, it shouldn’t matter if I am happy or sad for the logic has neither and will always come to the same logical conclusion. I’d appreciate you pointing me to where I can find information on your point of view. Here is a link to a Schwab article on the subject.http://www.schwab.com/publi

          12. ShanaC

            So this study is worth readinghttp://www.jneurosci.org/co…The amygdala in the brain is the locus of raw, unfiltered emotions. Which apparently is used by the rest of brain to create and measure somatic emotional responses in the future to a particular decision, as well as process emotional information (such as how the person sitting across from you is thinking). When you run experiments on people who don’t have normal amygdalas (car accidents, disease, whatever), they lose the ability to make logical decisions, particularly around money; in some cases, they lose even simple decisions like the ability to choose between two meals and they would otherwise starve.So literally, you need emotions to make a logical decision; that is how logic works in the brain, otherwise decisions aren’t really made, particularly ones concerning the future or multiple individuals.

          13. PerceiveToBeWise

            I admit I had a difficult time reading for full comprehension as this is far afield from my areas of expertise or experience. So, I can’t refute anything for to do so would be foolish; but I do have some observations which appeared illogical on the part of the test designers.It appears that this doesn’t actually measure logic as much as risk aversion and unawareness to being deceived. For instance in the parameters of the test it is stated:”The computer does not make you lose money at random. However, there is no way for you to figure out when the computer will make you lose. All I can say is that you may find yourself losing money on all of the decks, but some decks will make you lose more than others. You can win if you stay away from the worst decks.”Thus, it is illogical to play but we’ll move past that point while keeping it in mind for I shall return to it. Since the patient is being measured to determine the results you indicate or rather the result of the study indicates, there is little logic other than money management which is a logical activity until it no longer matters due to the above. The study has to rely on the player only playing a very few times or a logical person especially one who is highly skilled in money management and odds (risk) would know the system is rigged and become flippant just to get through the test as it would appear to them as a waste of time. That didn’t even appear to be considered in the study.Also discussion using Pavlovian adjectives have violated Pavlov’s complete setup without full training. Yet, full training of those with a logical mind will soon discover they are being duped completely departing from Pavlov’s as there is a difference between desiring to eat a treat with humans (diminishing return) vs. dogs who often are shown to continue to eat until they puke. So there is an inherit limit to Pavlov’s study and humans though there is some merit as to training repetitively until repetition become habit and an unconscious response. Mind control uses such tools. But without large numbers of repetitions, this is not possible to truly be Pavlovian in describing the test. But since a logical mind will soon discover they are being duped, the whole test is ruined once the discovery is made. It may be possible to discover this point in the study or it may not be depending upon how the person reflects their inner thoughts outwardly.Perhaps I do not understand why what appears to me as a random and illogical decision to cheat on the part of the computer against the subject is relative to the study. It appears to be an unneeded and unnecessary variable which could very well ruin the study. The test sampling appeared small and it would be literally impossible without a very large sampling over many multiple tests to get similar results each time with each “normal” uninjured subject as possessing equal qualities of logic in their thinking.A random reading of the Hill comment area can tell those who think logically from those who have trouble thinking logically. Perhaps some do have damage from injury to the brain but without pun, I don’t think those who do literally have damage even come here. Even those who think logically have prejudice in partisanship discussions if they are debating with a closed mind. Arguments seldom change anyone’s mind. Debate sometimes does when both participants are equally sharing information in an honest exchange – rare here but it happens.I can see value in the measurements as to understanding some connectivity and perhaps that is all that is attempted to be shown. But, we are far more complex and do not fit simple understandings. Those who have a mathematical background or computer programming will be very logical whereas those who hated math (prejudice due to poor feedback and thus rejection or difficulty in making logical conclusions) but are emotionally based have a difficult time in thinking or even following logical arguments.So, even though I am not qualified to fully judge the study, those are my obvious objections of suspicion in questioning its validity. As to connecting emotion to reason, this is defined as a logical fallacy -http://www.logicallyfallaci…

          14. ShanaC

            Which is why the cutting edge of is to stimulate emotions, because the amgylda -prefrontal cortex system as a means of decision making path allos you to filter out a lot of junkThere are 41,600 results on google scholar just investigating the neurological pathwayhttps://scholar.google.com/…and then there is the NIHhttp://www.ncbi.nlm.nih.gov…This is pretty well established

          15. PerceiveToBeWise

            (been on vacation) – I’ll have to concede there is merit but is the stimulus of emotion advancing logic? No, though, I’d say it does compel one to action and, in humans, is a part of the decision making process. Decision making and logic do not necessarily go hand in hand. In fact, they rarely do only because of the emotional element. I concur with the finding that making a decision does involve emotion. I’d also say the best decision is done without emotion but may not be the most humane one. Emotions involving decision making may be the better view of the results of the studies than thinking it increases logical capabilities. It is well known and established that emotions cloud judgments. The expression “may cool heads prevail” is the sentiment of such a truth. Being compelled to action may not be the best or most logical path to follow.Please allow me to diverge somewhat toward the applicabilities beyond medicine and neurological sciences to where I see the benefits of your area of expertise to that of my own.The study of neuroscience and that of artificial intelligence is merging as scientists continue to attempt to create a singularity or a sentient independent thinking artificial intelligence. Part of being sentient is to “feel things”. Feelings are emotion. Attempting to understand the complexities goes onward to a complete new level of both capabilities and dangers created if in our infancy of understanding of a mix of emotions and logic we create the very means of our own demise as a race. That which is derived in a much greater understanding also gives rise to power that may become self-aware that we as an emotional race often leading to violence and destruction would best be replaced with functionality to accomplish an objective devoid of emotions. I don’t think the depressed robot in “The Hitchhiker’s Guide to the Galaxy” will be the result of emotions enhanced with logical capabilities as a sentient artificial intelligent being. Though Ecclesiastes “”Vanity of vanities,” says the Preacher, “Vanity of vanities! All is vanity.” is the logical conclusion concerning man, how would a non-human sentient being deal with such a species? I doubt it will be through emotion for without emotion, there is no vanity or humanity. For a machine, Dune’s mantra “Fear is the mind killer” would be the logical conclusion though probabilities of success or failure in experimentation and action would replace the function of fear in machines.Thus a definition of correct decision must include logic but also be based upon some level of emotional input plus memory which I believe is your point if we are to retain our humanity and select right from the wrong decision. If so, we are in agreement. Though, that debate is far from settled in the artificial intelligence community where “pain” is most often defined as loss of or setback to obtaining an objective though similar to man’s experience of learning. The similar sciences are so far afield to be understood fully enough in detail in my opinion to even make a correct decision as to how to proceed in a synthesis which is required to create the sentient artificial being; but alas, that is stopping no one from forging ahead with little oversight and few, if any, laws.My hope is the study which you are fully versed in finishes its work, if that is possible, to fully understand man before we actually achieve a true sentient artificial intelligent being. IMHO, if the reverse occurs, we will have created the means to our own end absent of annihilating one another as a species. A machine would be far more efficient at achieving such an objective as we would no longer be a hindrance to its own development and self-replication, repair, and growth in knowledge, capabilities, and thus power to overcome all known obstacles which would be the machines appetitive processes not based on an emotion of fear but logic and probable outcomes. Perhaps “War Games” had the correct conclusion “The only winning move is not to play.”.

          16. Mario Cantin

            He’s talking about people who build good, perfectly legit endeavors who get crushed by a crisis that was not of their making, but that are created by the greed of others.

          17. PerceiveToBeWise

            Both are equity perspectives but one is looking at it as an investment and the other as their “business” that they have ran and built. Fair enough. That is true. Happens all the time when a big corporation closes down a factory in a small town even when times are good and the big corporation is just moving overseas or to a different area. All the small entrepreneurs get hurt.

        2. PerceiveToBeWise

          If so, and I do know many cases which you could use as examples, it only demonstrates that one should not invest unless one understands investing and one should never speculate unless one is willing to lose everything. To do the later without the former understanding is truly a recipe to poverty.

        3. Mario Cantin


      2. Jess Bachman

        Right, it is indeed an accurate representation of humanity. It’s just not magical or worth lauding.Like Michael Bay movies.

        1. Mario Cantin

          Well said.

      3. LE

        And actually even the bad, the greed and stupidity leads to good. Advances that came out of fear of Nazis and the Soviet Union are good examples.

        1. Mario Cantin

          Give me a break. Good can come out of anything. It doesn’t change the fact that stupidity and greed are what they are and should be pushed hard against.

      4. Matt Zagaja

        Though kind of crazy that we all seem to bear the risk of the downturns while only some share in the prosperity of the upturns.

        1. David Barnes

          If this were true most of us would be worse off than our ancestors. We all share ups and downs. Perhaps the downs hit the masses harder and faster.

      5. Twain Twain

        Magical and democratic until this happens:”Somehow the genius quants — the best and brightest geeks Wall Street firms could buy — fed $1 trillion in subprime mortgage debt into their supercomputers, added some derivatives, massaged the arrangements with computer algorithms and — poof! — created $62 trillion in imaginary wealth. It’s not much of a stretch to imagine that all of that imaginary wealth is locked up somewhere inside the computers, and that we humans, led by the silverback males of the financial world, Ben Bernanke and Henry Paulson, are frantically beseeching the monolith for answers. Or maybe we are lost in space, with Dave the astronaut pleading, “Open the bank vault doors, Hal.”As the current financial crisis spreads (like a computer virus) on the earth’s nervous system (the Internet), it’s worth asking if we have somehow managed to colossally outsmart ourselves using computers. After all, the Wall Street titans loved swaps and derivatives because they were totally unregulated by humans. That left nobody but the machines in charge.”* http://www.nytimes.com/2008…Maybe the machines aren’t as representative of humanity as they could be.When the capital markets work fantastically, great companies, inventions and infrastructures get built (hospitals, schools, roads, transportation) and employment and personal value boom.It’s this version of capital markets that’s for the greater good — not any potential repeats of 1929 / 2008 versions.

    2. pointsnfigures

      In sum, the network is rational.

      1. Cam MacRae

        …unless the network is in Shanghai or Shenzhen.

        1. pointsnfigures

          those are rational too. they have different constraints because of the communist party, but in sum, supply and demand curves are rational.

          1. Cam MacRae

            Granted, my reply was glib, but let us set aside both Shanghai and Shenzhen for a moment.”In sum”, you are barking up the wrong tree. That result simply doesn’t hold in a network; rationality does not have aggregate implications. SMD aka ‘anything goes theorem’ (Sonnehschein, 1973) in effect says that adding two or more rational consumers together produces an irrational market.

          2. pointsnfigures

            We 100% disagree. Passive investors did better post 2008 crash than active investors. Fama’s EMH holds. Cliff Asness has spoken very eloquently about this. Demand curves slope down, and individual people act in their own best interests. It’s why free markets allocate resources the best, and most efficiently. They always work better than centralized planning.

          3. JamesHRH

            Do you mean individual investors more likely to sell at bottom, where as passive investors never sold?

          4. Cam MacRae

            Sure. Of course given that SMD has flummoxed neoclassical economists for well over 30 years, should there be any rational (geddit?!) basis to your disagreement you’re pretty much guaranteed the Nobel Memorial Prize in Economic Sciences. Easiest 10 million kronor you’ll ever make!Back to Shanghai and Shenzhen and my glib little reply; neither market is empirically efficient (even under weak form EMH as it prohibits asset prices from exhibiting autocorrelation).

          5. pointsnfigures

            Shanghai and Shenzen aren’t really free markets are they? Run by commies. I wouldn’t trade them with anyone’s money. The US market is skewed enough by bad regulation and structure. China is another ball of wax. I think a discussion over neo-classical economic theory versus Keynes is probably too big for the comment section here. The Chicago School is a much better way to think about economics in my opinion. They value individual liberty over government control. Keynesians see markets as puppets, pull a string and make something happen-until it doesn’t.

        2. ShanaC

          it is an overdue correction. A way overdue correction.Long term some of the stuff will be very valuable in the end

    3. Mario Cantin

      I was thinking the same but didn’t manage to weave it into the comments –glad you did.

  2. James Ferguson @kWIQly

    The opposite is also true:”Markets come and goBad companies go”It is only a question of when, and who they take with them.

    1. Al Mazzone

      Great point. Thanks.

    2. fredwilson


  3. Al Mazzone

    Like the daily WEATHER. Sometimes the temperture goes up, some days it goes down. Yet we are continually amazed when the direction changes.

    1. Vasudev Ram

      Ha, good one. Like another: I’m always amused when I hear people say this: when it is raining and they/we are walking or driving, and we move from an area where it is raining to an area where it is not (the transition happens within a few feet), and they say (surprised, like): “oh look, it’s raining there but not here.”It has to stop/start somewhere, right? otherwise it would be raining all around the world at the same time. We just happened to be crossing the boundary of the rain/no-rain area, and noticed it. Nothing to be surprised at.

  4. Mario Cantin

    Unfortunately, some good, but nascent companies will also be washed away in the debacle…

    1. JamesHRH

      They are only as good as their ability to find good investors.

      1. Mario Cantin

        The survival of the fittest.Of course, you are 100% correct.The fact is, though, it is easy to pay lip service to such “truisms'”, except that when you are no longer the “fittest” and it’s your turn to go to the chopping block, the reality of what you’ve been dolling out for years will finally set in.Be careful what you wish for… 🙂

  5. William Mougayar

    But I think it is safe to assume that this contraction shouldn’t affect early stage startups because you need to fund them in good times and bad times.For others, winter is coming. And there may not be enough blankets or heat for every company that needs it.

    1. fredwilson

      I think the entire stack is affected. When the tide goes out it takes all the boats

      1. William Mougayar

        But smart investors need to continue investing, no? You pointed previously that Twitter & other successful startups were funded during downturns.

        1. prceurope

          Everything’s relative, so it would appear.

        2. fredwilson

          yes, good investors invest through cycles. but they actually make up a much smaller portion of the entire capital markets than you might think

          1. PhilipSugar

            Could not agree more.

          2. JamesHRH

            Same goes for good businesses.

        3. pointsnfigures

          Today is a good day to watch. Wait until the dust settles.

          1. William Mougayar

            The Bloomberg news page headlines are not pretty. I’m on the train, and hoping it won’t crash either in sympathy with the markets.

          2. pointsnfigures

            US West Texas crude will trade well below $30. Don’t pay attention to headlines today. If you want to hear some rational financial news, watch tastytrade.com. Fin News today is full of clickbait and no informationI don’t have a lot on, tried to buy them last night (didn’t work) and today I will nose around for puts to sell in stocks I think could rally.

          3. kidmercury

            WTI is a favorite of mine to stock up on in this decline. i’m looking to buy at support at $33.

          4. pointsnfigures

            Friends of mine in the oil business say $30 for sure.

          5. Richard

            Anyone believe that Lower Commodity prices are a problem?

          6. pointsnfigures

            Depends on your perspective. If you are the CEO of Exxon, yes. If you are the CEO of American Air, probably not!! A lot of the commodity price drop isn’t due to demand, but due to a stronger US dollar. Everyone is devaluing their currency relative to US Dollars. Looks like to me commodities have a little room to run to the downside (in general). But, as KidMercury says, there is a spot where you will have to step in a buy em with both hands. People gotta eat.

          7. Richard

            WFM not too shabby as well. A bet against this market is a bet against the millenials innovating and bay boomers spending.

          8. jason wright

            but at what price do i dare buy bitcoin sans xt?

  6. Russell

    Funny timing … this morning I got this note from a friend in HK!The downmarkets musical accompaniment…Soul Asylum – Miseryhttps://www.youtube.com/wat…REM – It’s the End of the Worldhttps://www.youtube.com/wat…David Guetta – Down Down Downhttps://www.youtube.com/wat…Jay Dean – Downhttps://www.youtube.com/wat…Midnight Oil – Beds are Burninghttps://www.youtube.com/wat…Bon Jovi – Livin on a Prayerhttps://www.youtube.com/wat…Europe – Final Countdownhttps://www.youtube.com/wat…

  7. Tom Labus

    When Drexel, Bear and Lehman died from being locked out of the capital markets and a nasty way to go but fast.

  8. kenberger

    If your business produces cash flow and you can finance your business, then changes in capital markets are not likely to affect you.But if the changes affect your clients, then such changes affect you.

    1. prceurope

      Data indicate strong correlations between stock market trajectory and consumer confidence. It really does depend on your industry, margins, and degree of government protection / failsafes.

      1. ShanaC

        consumers have been bouncy

    2. Donna Brewington White

      The big mistake I made early in my career was to develop too narrow a client base. Of course there are some changes that you can’t fully hedge against because the impact is so broad, but I’m trying to work out the strategy.

      1. Matt A. Myers

        I’ve seen some smart people building relationships in co-working spaces – people who are ripe and on the verge of greatness, or at least attempting to point themselves in that direction.

    3. pointsnfigures

      Hence, positioning yourself as a partner versus vendor is big. If your customers think they can’t make revenue without you, then you are a partner. Think anyone is thinking of ditching Salesforce today?

      1. kenberger

        that’s a very powerful yet subtle concept. Thanks.

      2. PhilipSugar

        Yes, some are thinking about Zoho and some about SugarCRM (favorite company name)

      3. awaldstein

        Interesting as I don’t think I’ve ever defined it.I don’t think that holds for me though.Everyone can make money without you as they simply replace you.You are a partner when you collaborate on touching the customer. Salesforce is not a partner, whole foods or any ecommerce platform like Amazon certainly is.If you are share trademark presentations, training another force then you are a partners.If you are using an essential tool, not really, you are simply a customers.

        1. pointsnfigures

          what if there is no replacement for you? or, the replacements don’t bring the same amount of value?

    4. TeddyBeingTeddy

      If you’re customers get hurt, they’ll stretch payables. If you’re cash flowing your line of credit can float that working capital gap. Competitors without a strong line will lose customer, who will flock to you because you’re a “partner” (their bank). As Chris Dixon would say, the flight to safe companies will happen slowly then suddenly.

    5. PhilipSugar

      Agree totally.That it is why it is important to strive to be not just break-even but actually profitable. We saw this in our business which served hospitality companies after 9/11. We were profitable, but slipped to back to breakeven, and had to put off new hires and projects. (proving your point) After watching two competitors die we started ramping back up serving displaced customers.

      1. kenberger

        And it does depend on your company’s orientation. This post’s advice may perhaps be most implying a venture-funded consumer internet company (huge user base, each paying nothing or small amounts).I was answering more on behalf of a services company (smaller client base, each engaging in contracts). When market shocks happen, the news alone spooks many CFO’s, and suddenly deals that were supposed to close get postponed.

    6. ShanaC

      hence – nervous. Try to get cashflow oriented clients, I supposed

  9. sigmaalgebra

    With some general view from 100,000 feet up, I can see why the equity and bond markets can matter.So, there get investment bankers, C-corps, BoDs, SEC rules, golden parachute CEOs, merchant bankers, Wall Street analysts, index funds, hedge funds, Markowitz, Black-Scholes, Brownian motion solutions to the Dirichlet problem, etc.As a startup entrepreneur, not 100,000 feet up but right down on the ground, I don’t see a role for the financial system for my business efforts:For some small business loans from a local, commercial bank, when my business has some good financials to show, then, okay, maybe get a business loan, say, to buy some servers, to borrow some against my accounts receivable, or to get a mortgage on a building. But, again, need some good financials, so good that such loans, except maybe for the mortgage, are maybe more trouble than they are worth. E.g., for servers, some simple arithmetic can show that keeping a $2000 server half busy 24 x 7 can generate $100,000, maybe $1 million, a month in revenue. So, really, after a few weeks of such revenue, why even drive over to the bank and talk about a loan; instead, just wait until the ad networks do send their first few checks and f’get about bank loans for servers.For equity investments, again, I’m not seeing it: Common advice on the Internet, including from some sources with a lot of credibility, is:Just remain 100% owner.For more, common advice is that for an equity investment(1) Have the business addressing a huge market and have traction significant and growing rapidly, e.g., from comScore or Google Analytics numbers, and revenue, positive free cash flow, and good pre-tax earnings and after-tax earnings.(2) Wait for VCs to notice your company and call you and tell you all the great reasons you should sign their term sheet and other papers, e.g., their business acumen, “business experience,” deep domain knowledge, business contacts, executive recruiting (hmm …), contacts with later stage investors, etc.Then suddenly I go from being 100% owner to being 0% owner with a vesting plan where over four years I might get back to 40-60% ownership if the BoD doesn’t fire me first.My time? I have to run the business as usual but, now, also entertain the BoD, which, really doesn’t much understand my business (it has some crucial, advanced, original, core technical internals). Hmm.Money? I have to pay for the BoD lunches, dinners, etc. Hmm.The BoD, does it do good, new derivations in applied math, e.g., for ad targeting, queuing network optimization in my server farm, evaluations of server farm reliability architecture, server farm scalability architecture, server farm and network monitoring for anomaly detection (I published, likely and apparently, what is still the world’s most powerful paper on how to do that), help me select good applied mathematicians, even just write good code? Ah, I thought not.Net, it looks like by the time the VCs are interested in me, I won’t be interested in them, that is, we don’t have any common ground, that is, with either starting now or success later, the reach across the table is or will be too long to connect. Or, I don’t get it.Then I look around at much of what I’ve seen in business, say, good enough to buy a house, support a family, get kids through college, …, have a 60 foot yacht, own a King Air, etc. In the US, coast to coast, crossroad towns to big cities, there are millions of such businesses, and I’ve seen dozens of them from fairly close to much closer. There I see essentially no sign of any equity investment. These businesses are the usual suspects — big truck/little truck, 10 gas stations, each with a convenience store, 10 fast food restaurants, etc.E.g., growing up, the father of a friend my age became beer distributor for a big corner of a major state. A cousin became a leading private label seller of industrial janitorial supplies for a major state. The guy next door and his several brothers and a sister collected old auto water pumps, alternators, starting motors, etc., cleaned them, repaired them, put them in new boxes, and sold them to auto parts stores, eventually in a big way across several states.For my startup, it’s based on Moore’s law, lots of infrastructure software, the Internet and also mobile, ad networks, some applied math I derived (users will not see), and is addressing a huge market — these features should just be advantages and not reasons for funding different from, say, some big truck/little truck business. Indeed, I need less in capex than even an auto body shop, auto repair shop, or pizza carryout.Net, my business will work or not, but either way I don’t see any significant role for finance, not equity and not even bank loans.Meanwhile Wall Street can do what it wants. If my business generates some huge volume of cash, maybe I’ll call up an index fund or some such. Maybe.

  10. JLM

    .What is happening today is not purely “capital markets”, it is a vote on the perception of all things financial and the capital markets — public stock markets to be accurate — are the bat entrails in the bowl we are watching.The world has had anemic growth since 2007 and we are in the midst of an unhealthy, spindly “recovery” which is a skinny little, flat-chested, acne pitted sister of its substantially more robust ancestors.We have allowed ourselves to be tricked — knowingly, mind you — by pretty boy numbers such as the faux bit of cleavage reported as U-3 while ignoring the cancers of U-6/7 and the labor force participation rate, bubbles, the price of oil (both up and down), and the unsustainable exuberance of economies like China.Add a bit of international tension and we have an economic mix that demands we spend a few months at the rehab clinic relearning the importance of things like deficit spending, the national debt and the cost of our self-inflicted welfare state while sorting out the mind numbing considerations — financial primarily — of immigration.Nothing in the world is disconnected any longer and the Internet makes the connections visible, obvious, and well-communicated. We wake up today knowing more about what happened in Shanghai than what happened in North Dakota.We are waking up after a monumental drunk and we are getting ready to have one Hell of a hangover.Good news?It requires the same bit of magic that has always cured such things — bit of more enlightened governance, better policies, bit of sunshine on our problems to get rid of those zits, go to the gym and revise the tax code, and get rid of some of the fat.This too shall pass and we will repeat it again and again — that is also how markets work. The constant repetition of a cycle, an unending cycle.Like they say in the Oil Patch, “Please, God, one more boom. I promise not to piss this one away.”Be strong.JLMwww.themusingsofthebigredca…

    1. JimHirshfield

      You lost me at “flat chested”

      1. JLM

        .That is an inappropriate sexist comment — might also be racist, will have to consider that — intended to inflame and provoke. It is absolutely not PC, something I strive to always be.Such terms will flow from my keyboard from time to time as will apologies shortly thereafter.Nonetheless, they paint the right picture and I am nothing but a finger painter at heart.Next time I will say something like “ball less” to even the playing field a bit.Tell me where you are and I’ll try to give you directions to the real world.JLMwww.themusingsofthebigredca…#flatchestsmatter

        1. JimHirshfield

          Thanks, I’m more of a treasure chest kinda guy.

        2. Matt A. Myers

          Don’t get into the trap of being derogatory in the opposite direction to try to “balance” things out – it just perpetuates it.It’s same as Fred using “her/she” more instead of picking a neutral “them/they” – which is perfectly acceptable use for an individual.

          1. ShanaC

            grammar nerds are still in flux about what to do here…

          2. Matt A. Myers

            The English language should keep evolving

          3. ShanaC

            it does

        3. Matt A. Myers

          #peoplematter – no need to less broad than that.

        4. LE

          You left out “red hair” btw.

        5. PerceiveToBeWise

          Depending upon your political ideology determines whether you see PC as being good or bad. In reality, PC is nothing but deception for appeasement. One should abandon such deceptive and false concepts but not abandon decorum which is always appropriate.

          1. JLM

            .Sheesh, Mom, I thought we had agreed you wouldn’t read my blog posts. I’ve been flossing every night like I promised. Come on.JLMwww.themusingsofthebigredca…

          2. PerceiveToBeWise

            LOL – now that was funny. I didn’t read your blog posts per se just read an article and commented but I did forgot about our agreement. I’ll attempt to do better in the future. Carry on.

      2. Matt A. Myers

        I thought perhaps he was going the non-muscular route when he mentioned flat-chested, and then saw “sister” …

    2. prceurope

      Didn’t think I’d ever have to reply “wtf?” on this site.

      1. JLM

        .There is also an English version, third gradish, available. Bit condescending, I am sure.JLMwww.themusingsofthebigredca…

        1. prceurope

          You mean “skinny little, flat-chested, acne pitted sister” isn’t the puerile drivel version?

          1. JLM

            .Well, yes, now that you mention it — it is. Most folks don’t actually understand “puerile drivel” to be sure so it is really a treat to meet someone who does.JLMwww.themusingsofthebigredca…

    3. William Mougayar

      When the toilet is full, you need to flush.

      1. JLM

        .I suspect this is going to end more like a broken pipe — uncontrollable.Whenever you have a bad Friday and all weekend to think about it and Monday starts out bad, the pipe gets broken.Bit overdue, I suppose.Safe travels.JLMwww.themusingsofthebigredca…

        1. LE

          Whenever you have a bad Friday and all weekend to think about itNot to mention that it’s an August and so whatever is going on is somewhat muted and would most likely be greater if it happened at a different time. [1][1] How much who knows but being at the end of a big vacation month does have some impact.

          1. JLM

            .Because so many people are on vacation in August, small moves are magnified out of all proportion.JLMwww.themusingsofthebigredca…

        2. Richard

          This market is like the political market, Everyone loves their representative it the other persons who they are worried about.

        3. Richard

          Machines generate earnings. Smarter Machines generate higher earnings.

    4. Tom Labus

      The US second Q growth is about to be moved up, a lot. This one is not on us (like 08) but all that stuff just doesn’t disappear. It lingers in economy a long time.A .25 or less rate high should not be cuasing this much panic. Jesus, order some chicken soup or a least a couple of beers

      1. JLM

        .Tom, I am tempted to agree with you but I think that Q2 is a “dead cat bounce” in which Q1 — bad weather in the country, etc — was so bad that Q2 was just the rebound from that.The basics are so weak that I am afraid there is no more toilet paper available to clean up the mess with. I have my eye on WTI which is down almost a dollar already.I think this gets very dicey and I think it is a much bigger problem — meaning not just economic. I think there is trouble afoot in Korea, China, and that Russia is going to be so hard pressed on oil that they may do something stupid.We are nearing the perfect storm.JLMwww.themusingsofthebigredca…

    5. Matt A. Myers

      The universe, the world, and society is homogeneous. The situation in reality is that capitalism is in perhaps its teenage years, rebelling against a society that most of is stuck in an parent-child or abuser-victim role – instead of society taking an adult stance and being in a healthy relationship with capitalism.

      1. JLM

        .”The universe, the world, and society is HOMOGENEOUS.”I could not possibly disagree more with a statement than that utterance. The world is “all the same”?The world is heterogeneous, no?JLMwww.themusingsofthebigredca…

        1. Matt A. Myers

          I was more thinking at the fabric level, we’re all made up of the same stuff. We bleed, we feel.

          1. JLM

            .Fair play to you.JLMwww.themusingsofthebigredca…

        2. Stephen Voris

          Perhaps “fractal” would be a better term (it’s the one I use, anyway): that is, there are both commonalities and intricacies no matter how closely you look.Put another way – there are rules of thumb to be found everywhere, and exceptions to those rules also to be found everywhere.

    6. Richard

      I don’t doubt the story you tell I don’t however think the market is dealing with this at this time.

    7. Twain Twain

      Da Vinci: “Principles for the Development of a Complete Mind: Study the science of art. Study the art of science. Develop your senses- especially learn how to see. Realize that everything connects to everything else.”So…after 2008…while Satoshi created Blockchain+Bitcoin in response (@wmoug:disqus @fredwilson:disqus), I wondered about a whole other issue to do with tech and data and whether the machines are intelligent enough to model us and our behaviors.The low-hanging wins would be to go work in a hedge fund and apply Markowitz, Black-Scholes, Kalman et al as @sigmaalgebra:disqus says on this thread.The harder (and much more fun thing) to do is to follow Da Vinci’s reasoning and connect the dots…and then invent.

    8. ShanaC

      interestingly, it might create a second wind for tech after a shakeout. MOney needs returns

  11. pointsnfigures

    This is more than just market fluctuation. It’s bad policy coming home to roost. Ironically, I am seeing pundits talking gold, but I think it will be better for Bitcoin as people lose confidence in central banking bureaucrats. Fred’s correct, top line revenue leading to bottom line revenue is the best form of venture capital. It’s why marketing matters as much as engineering.

  12. William Mougayar

    I think the other message here is for those high flying startups that are raising loads of money from the private markets, when there’s a capital markets downturn, PE money into startups dries up because it’s discretionary spending, whereas VCs need to continue deploying capital, so they will be there for you.

    1. pointsnfigures

      I am not sure all VCs will be there for them-depends on their history, relationship and ability to tolerate down rounds. Later stage companies are going to learn who really believes in their business, and who was just along for the ride.

      1. William Mougayar

        Of course assuming all things being equal. But today, there are startups being funded earlier by PE money at valuations that reasonable VCs aren’t touching.

        1. Matt A. Myers

          PE money = pre-evaluation money?

          1. William Mougayar

            No, private equity sources.

          2. Matt A. Myers

            Oh. Thanks.

          3. Vasudev Ram

            Private Equityhttps://en.wikipedia.org/wi…It’s an asset class, and an interesting one. I’ve read over the years in business magazines about some big PE deals done in India now and then (including by both domestic and FII (foreign institutional investors), and find it interesting, not so much or just because of the size, but because of the approach, the goals, the techniques used (not just to acquire the company but to influence or manage it after acquiring, change the direction of the acquired company for the better, etc.)

          4. Vasudev Ram

            Interesting, the Wikipedia article about PE, says that VC is a broad subcategory of PE.

        2. Vasudev Ram

          >But today, there are startups being funded earlier by PE money at valuations that reasonable VCs aren’t touching.Why?

          1. William Mougayar

            Why to first or second part :)1. Some startups are greedy and think that raising more money at higher valuations before proof points is a good thing.2. Reasonable VCs will not fund them, so they go and raise from private equity and ask for bigger rounds so that participation is also at higher levels.These are bad things for the ecosystem. You can’t rush markets and technology propagation with more money. Adoption and value from adoption have to go hand in hand, gradually. The gap between promise and delivery cannot be so wide for too long, or it crashes.

          2. Vasudev Ram

            I thought there was only one part, i.e. one sentence, as in:”there are startups being funded earlier by PE money at valuations that reasonable VCs aren’t touching”Your second paragraph above – starting with “These are bad things for the ecosystem.” is clear, and makes sense.My question, though, was more about why PE players are funding them when VCs aren’t.

          3. William Mougayar

            I can think of 2 reasons: PE is an alternative funding source when VCs aren’t biting for a variety of reasons. PE investors with big portfolios decide they want to diversify and play the VC game with their big checks, just because they can.

      2. PhilipSugar

        I have to agree with you here. Sure there are some VC’s that have made their bones and will be there. Fred is a good example. He has a great track record, his current fund has probably returned more than was invested he doesn’t have to worry about raising the next fund.But there are some that will be quaking in their boots watching their returns they so carefully calculated evaporate. That’s when panic and flailing sets in.

        1. LE

          he doesn’t have to worry aboutBig mistake for Fred to think to think “don’t have to worry”.You always have to worry, the monster is never dead as I found out when I trapped a bat in my house. Don’t forget all of those slasher movies (starting with Halloween 1978 with Jamie Lee Curtis for example).I whacked a bat flying around that had slipped in (because the contractors had been leaving doors open left and right) with a broom then managed to suck it up with the vacuum. It certainly seemed dead. However by the next morning, when the animal control officer arrived, (paid for by shit high local taxes) it had crawled out of the vacuum. Where it went I do not know. Luckily I had moved the vacuum to the garage. Only because my wife told me to. I was going to leave it in the quarantined kids bedroom overnight. I had forgotten the lesson myself!Below are pictures to drive the point home. The animal control guy took the vacuum apart, no bat in it it was still alive…

          1. PhilipSugar

            Worry might be a wrong word, but have confidence might be better.

  13. Sandy

    Fred or anyone, what do you think about this consensus of concern? Market tops aren’t marked by concern like this.I sold all of my public market investments at risk over the past several months, but I wonder if I sold too early.An old genius investor friend said he has seen this worry at a market top, but only once several decades ago. It was the last downswing of a longer term cycle, followed by a glorious boom. He said right now feels the same as that.

    1. Richard

      Like this sage advice, but not sure I get your conclusion

      1. Sandy

        His point was that at rare times in history, public pessimism at a top can actually be right. The conclusion is that one should not hold assets at risk in those rare times.If there is a real market correction, he said that solidifies the public’s distrust in stocks for a generation. The public (especially the millennial generation) refuses to invest in stocks for life. That’s how the public misses a few decades of a glorious boom in stocks.He is short term pessimistic, but he is long term more optimistic than he’s ever been. I absolutely agree with him.

        1. Richard

          Earnings, Earnings, Earnings. Find me a pessimistic millenial.

          1. Richard

            Unless the gray bands take turn into the while bands and the while bands into the gray bands, we are just fine

  14. Matt Zagaja

    I’m not an investor but looking at the sale today might be a good day to become one.

    1. JLM

      .Wait until Thursday and until Pres Obama gives us a speech telling us everything is going to be fine.JLMwww.themusingsofthebigredca…

      1. Matt A. Myers

        Everything will be fine, though – the more things break, the more people will start relying on each other again and not these big machines and systems they have no real part in.

        1. JLM

          .Things are not “breaking”; what is happening is that people are waking up to the realities.One of the hidden jewels here is that after a precipitous 1000 point drop in the Dow at the open, all systems are working and the markets realized they had oversold and it rebounded quickly.That shows the big machines and systems are working just fine.JLMwww.themusingsofthebigredca…

          1. Matt A. Myers

            Their current perception of reality is “breaking” ;)The mechanisms of the big machines are working, not the qualitative values they should be helping thrive.

          2. Richard

            Remember the broken housing market that didn’t exist, the broken auto business that didn’t exist, the broken tech market that didn’t exist, the broken debt market that didn’t exist …..

          3. Richard

            High frequency algorithmic trading is a tax on the public markets

    2. ShanaC

      yup. I was thinking that next week would be even better depending on the shakeout of today. Way overdue

  15. TeddyBeingTeddy

    A cash flowing company probably becomes more valuable in a turbulent cap markets environment; for the same reason people flock to bonds and gold – the flight to safety. Fred you’ve been way ahead of this, pleading with companies to focus on profit. The day has come, your prophecy is turning to reality, and those swimming freely without swim trunks will soon have their junk revealed.

  16. Daniel Petz

    Fair point. However, the market changes will definitely impact those startups that plan to go public in the coming months. You can generate positive cash flow, you will still feel the impact…To me, capital requirement of your startup is only one piece of the puzzle, and your life cycle and IPO plans are another one…

  17. LE

    In a couple of deals that I am working on the market tanking is actually good. I will use it to get reticent sellers to sell by stoking fear uncertainty and doubt as far as what their options will be going forward. This technique has worked in the past. The timing is quite good. No doubt if this had happened earlier it would have made certain things that I had to do much easier. Likewise I am thinking of buying another car. If I decide to do so and the market keeps dropping no question I will get a larger discount at the luxury car dealer.On the sell side I had actually dumped a large amount of product to the Chinese during a period about 4 to 6 months ago. No question today with the exchange rate (not to mention there was a bubble that has burst which I knew was going to happen) that was a good move.

  18. jason wright

    we’re all happy to play the game of musical chairs so long as the music keeps playing….

  19. ShanaC

    Ha!Yes, I’ve been watching the news. Bloodlettings are about to happen.This makes me nervous.

  20. davidhclark


  21. PhilipSugar

    Spoken like somebody that has gone through it :-)And you are right if you are not at least breakeven you are going to leave a lot of blood on the floor to get there.

  22. LE

    It impacts your customers when they’re no longer in a buying mood, and that puts a “wait and see” drag on your pipeline.Well at least with respect to your product, bread, as my cousin who used to own supermarkets always said to me, “people gotta eat”. So the impact is certainly less of course the guy who makes your bags perhaps might want his money sooner if his stock holdings drop and he gets nervous because he has to pay for his kids college.Anyway for most others of course it does have an impact. Mood and perception mean everything reality is not anywhere near as important. When people feel rich they spend money. When they don’t feel rich they spend less. And the impact is felt everywhere. Has always worked that way.

  23. Richard

    food is not price inelastic

  24. LE

    Actually a good point with respect to Charlie’s bread. It’s not at my local market yet so I don’t know price wise where it sits relative to the competition. No question the potential higher price of his organic product (paid for by his desire to pay his employees fairly and perhaps at a higher wage than his lower priced competition) could definitely affect the demand curve and have an impact.Noting that Charlie also has moved or is also moving to a new bake facility with presumably bigger overhead.

  25. Richard

    Market is looking for an organic low carb bread and willing to pay for it.

  26. Richard

    superlow carb, 1-3 grams of carbohydrate after subtracting the dietary fiber

  27. PhilipSugar

    We completely agree. See my comment, if you are profitable and have money in the bank you have the option to try and ride out the storm.If not, you have to do what you have to do, and that sometimes is quite ugly.

  28. Richard

    there are a few conventional breads that are <4, but I think organic is for the taking, it may be out of the news but there are still many low carbers out there

  29. Dave W Baldwin

    Rich is right. If you could get down to 8 would make big difference.Somewhere the % of us type 2’s that fight with diet will grow where it needs to be

  30. Richard

    Might have some approaches for you, I’ll look you up.

  31. Mario Cantin

    I’m one of them.

  32. Dave W Baldwin

    It is a tough call. Restaurants giving a low carb option would be great. We’re in cycle of sweet potato fries as option in several. A push needs to happen.