Tech Bubble Capital: A Take on Mark Suster’s Advice for Startup Fundraising
Recently there has been a lot of talk about the impending tech bubble and its potential impact on the tech capital markets. Mark Suster from GRP Partners went public via his blog, Both Sides of the Table, on June 22nd in his post titled “On Bubbles … And Why We’ll Be Just Fine” to express his thoughts about the upcoming tech bubble and how it has affected start-up company valuations and the price of venture funding. In this blog post Mark predicts that the current tech bubble will burst sometime in the next 6 weeks to 18 months. He advises entrepreneurs to start planning for the capital thinning that will occur in the next couple of months or years by implementing a more aggressive outside financing strategy while capital is easier to access and less expensive due to the higher valuations. He recommends raising outside funding at “the top end of normal,” but not to exceed normal financing, as it could become a major impediment in trying to attain future financing down the road.
Mark’s advice is good and practical since it optimizes the price and attainability of venture funding; however, it is a riskier strategy as well because the company raises capital that it has yet to earmark, which can lead to a false impression of its budget position and irrational spending and decision-making. Thus, companies should evaluate their future capital needs during the forecasted capital shortage period, forecast the cost and their ability to attain this capital in a tight market and compare this risk against the risk of raising the capital early. Regardless, any company that decides to raise capital early should make sure that this growth capital is restricted to growth activities by implementing accounting controls that prevent it from being accessed for other expenditures. This will ensure that the capital is not wasted.
If you are interested in learning more about the tech bubble, I highly recommend reading Scott Maxwell’s blog and The Economist’s recent debate between Ben Horowitz and Steve Blank on whether or not we are in the midst of a new tech bubble. Similarly, if you are reading this post to help you better understand how to position your company for a market exit, then I also recommend reading my recent article on how to account for antitrust risk when evaluating market exit opportunities.