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@William - thank you for having the nutz to write such a post. While nobody denies that we and rest of the world are suffering through these times; its refreshing to see your position. Again, tough times are ahead. But, for venture capitalists to sit on the sidelines with cash to help finance the next generation of companies would be a contribution to further gloom and doom scenarios that are in the headlines. Yes, some of your existing portfolios may go out of business, others will merge and some will prosper. But, most companies I've started take "years" to get to any scale that is considered a stand alone "real business" anyways. That said, these are the times to invest in companies that will create jobs and help lead our country out of this fiasco. Most VC's I spoke to in 2001 completely suffered from market paralysis and probably rightfully so, as we ALL thought the internet was just a fad.
Maybe I'm being delusional but SBIC VC's and the feds should immediately look to create programs to finance start ups in this environment. Such a program would push NON SBIC VC funds to remain active. As we all know the VC is a herd mentality (nobody wants in and then one says yes, they all jump).
1. Real Money - At least $15 trillion of asset value has been lost in the US over the last 12 months at least with $8 trillion in losses coming from the stock market alone. The continuing decline in real estate prices will comprise additional trillions of dollars in asset value declines over the next 12 - 24 months. The continued decline in real estate values will exceed any possible gains that might come from the equity markets.
2. All of the current and potential losses have not been accounted for by the banks - The lenders in investors of MBS still have no idea of their true value - They are selling for pennies on the dollar.
3. The Subprime Mortgage Mess in Only the Tip of the Iceberg - The Alt A/Prime Option Arm problem which has not even hit will dwarf the mess of the Subprime market (which has not nearly even been worked through yet). The Prime Option Arm mortgages begin to reset to higher rates where homeowners who hold these mortgages will have monthly payments that will double and even triple in some cases. This process begins en masse at the end of 2009 and does not peak until Aug/Sept 2011.
4. Mortgage Modifications will be a long & drawn out process - The author understated the legal structural and financial complexities of mortgage modifications. First in the case of mortgages packaged into MBS the legal covenants provide for very strict terms on modifications which then require the servicer to reach out to all the bond holders to get them to agree to the modification a herculean task at worst. Second the write downs will be complicated lenders and owners of MBS are not going to write down the principal unless they are going to capture most if not all of the upside. As a result you will have a situation where millions of homeowners, who if they are able to modify, will essentially be renters. When prices rise they will not get the benefit of refinancing and taking out equity that will go to the lenders who will be trying to be made whole. As a result the consumer spending engine will dry up.
5. Recession Decline in Corporate Earnings/Increase Unemployment/Vicious Cycle - Asa result in all cases corporate earnings will decline unemployment will increase which will lead to even more defaults.
Bottom Line - It will take 3 - 5 years to just begin to work our way out of this mess and then we will possibly be in a period of low growth after that. Although the author makes some good points I don't believe he has a real understanding of the situation. For his sake I hope he is right so that when he tries to make a Capital Call to LP's to make his next investment the money will be there but don't be surprised if it not, unless the call is coming from Sequoia or Kleiner.
Even though this time there will be more vetting, banks will begin to "trust each other" and we will be on our road to recovery. Your 3-5 year project is ridiculous, people like us (angel fund) we continue to lend to "smart ideas" because we know it will pay off for us in the long run.
fair point if you are investing for the long haul with a time horizon of at least 3 years and possibly 5 then yes i agree with you logic. returns for both private investing and the stock market should be decent and could be exceptional. as a investor in vc type companies your issue will be getting your company past this 3 to 5 year hurdle as capital retrenches, even though there will be investors, it will get much more difficult to raise money i believe for at least the next 12 - 24 months and possibly beyond.
second although we have entered a financial crisis, with luck and government coordination it appears that will be resolved. however we are starting a real economic downturn that will last for some time followed by a period of slow growth. of course some new revolution say in clean tech could come along but i am not sure. consumers will have less money and will cut back they have too much debt.
third, re the housing market here is a chart listing the growth (unfortunately i cannot upload my data to this comments section but search "option arm reset schedule")
http://bayareahousingreview.com/2008/06/10/opti...
http://www.therealestatebloggers.com/2008/09/23...
there is a serious problem here it is now another whole segment of us consumers, ones with good credit, who will either 1. be cutting back on expenditures because their monthly mortgage payment has increased by 50% - 100% 2. and a number who cannot afford the reset and will go into delinquency, 4% - 8%.
on top of this you now have about 1 in 6 homes that have no or negative equity and these delinquencies in this category will further depress housing prices (NOTE housing market are hyper-regional but overall this will be the case)
for these reason that is why i think this problem will take 3 - 5 years to work out and could lead to a significantly weakened economy in that time frame. i am not saying we will be in recession the whole time but as a consumer demand led economy the principal source of most peoples' wealth and credit lines to fund purchases has just evaporated.
one more thing - smart investors will make money in both private and public companies. in private companies there will be less competition, less overfunding so if the business has real potential it will attract investors.
in the case of public companies the stock market, although up today, will be very volatile i believe for the next 3 - 6 months. as a result there will be buying opportunities.
the reason i believe there will be money to be made is because the values drop so much it does not reflect the the actual business fundamental and will lead to a quicker recovery for those individual companies.
that being said with respect to the broader markets i believe we are in 3 - 5 year period of very slow growth at best. i hope i am wrong.
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