May 16, 2013 Mate

Liquidity: A wading game.

These days my wife and I are teaching our 2 year-old daughter how to swim.  We ALL are having a blast!

A few days ago BusinessInsider.com had posted comments from a CNBC exclusive interview with Marc Andreessen about the current attitudes of private company entrepreneurs and how its effecting the broader investor market.  Marc’s comments on this topic are very insightful.  You can read the full article here It’s no question, nor secret, that an IPO is a way for early investors of private companies to obtain liquidity on their investments.  Its one of a limited amount of successful end-games.

Today investor society is stuck pondering the “old-school” approach of investing and thus scaling back the funding of private companies.  The valley is calling it the “Series A Crunch”.  On the flip-side private companies are finding it more difficult these days to raise a second early-stage round. Why?

Incentives drive results.  An investment market with no incentives is like a swimming pool that has just enough water to get your feet wet but not enough to go swimming?  There is no risk/reward opportunity?

For a second if you will, put yourself in an investor’s shoes.  Would you jump into a pool if you knew that there’s a good chance of breaking some bones?  Unless your a 2-year old, no offense, I think not.  The water in the pool would need to be at an encourage-able level before you’d jump in.  Right?  For this reason investors are being more cautious.  Private companies are now being asked to prove revenue models instead of providing a plan for one before getting early-stage funding.

Reverting back we ended up buying a kiddie pool for my daughter.  Her eyes light up with excitement every time we fill it up.  Filling the private investment market “pool” with incentives will provide that glitter in investors eyes.  They will be excited again to provide funding to more private companies.

Market regulation, or more to the point, deregulation is the water valve on “open” that will fill the pool and attract investors.  Currently, yes, there is hesitation by private companies to go public and in turn deterring investors from jumping into the pool.  The risk/reward opportunity is slim.  I don’t know about you but its hot outside.  Lets go swimming already!  Oh, and don’t forget to bring some buds. 

Cheers!

-Mate Zgombic