Finance / Investing / Startups

How would a stock market contraction affect startups?

Stock markets are down. Are Brooklyn tech firms likely to weather the storm?

Watching the markets. (Photo by Flickr user reynermedia, used under a Creative Commons license)
Updated with additional comments. (8/24/15, 2:04 p.m.)

Monday morning started off with a bang in the financial markets. Minutes after opening, the NASDAQ, Dow Jones Industrial Average and S&P 500 were all down more than 6 percent, sparking fears of a big-time market correction. During the day it has recovered, but markets are still facing 2-3 percent declines.
If a downturn occurs, people have mixed reactions as to what could happen to the tech world.

One founder, who spoke on the condition of anonymity due to the sensitive nature of the topic, had just gotten off the phone with his investors Monday morning.
“They were saying that they personally are not going to lose too much money, because [although] they’re investing in high-risk startups, all the rest of their investments are in low-risk stuff,” he explained. “They said the startups that are trying to grow really fast and have bloated and hired tons of people, that as soon as that funding dries up, they’re going to go out of business, if it turns into what it looks like it’s turning into.”

For the first time in years, the next round of funding could end in startups being valued less than the previous round, said Brooklyn business magnate and angel investor, Norm Brodsky.
So I think that what’s happening is valuations got a little crazy in the non-public sector,” Brodsky said. “I think there’s going to be a revaluation and a lot of people going for a second or third round of funding are going to have a tough time with it and might even see a downturn round which hasn’t happened in many years. There’s going to be a lot of unhappy investors. I think you’re going to see that happening very quickly. That doesn’t mean they’re not going to get money but they’re going to have a tougher time convincing investors their valuations are worth what they say they’re worth.”

The financial market downturn started last week. On Wednesday, the Dow fell 0.9 percent, on Thursday, 2.1 percent and on Friday 3.1 percent. Such a significant downturn had many primed for a huge upturn in the market come Monday.
Etsy is the only publicly traded tech company in Brooklyn. Since the opening bell, its stock price has fallen more than 24 percent.
When asked if he’d heard of companies preparing for a potential economic downturn, Brooklyn Chamber of Commerce President Carlo Scissura said he hadn’t.
“Not really, no,” he said. “I think people are so focused on building their business and making things. That’s really all they can do right now. Keep on trekking, and let the market play out, there’s nothing they can do about that.”
Ron Quaranta is the CEO of a fintech company in New York. Prior to that he was the head of exchange trading for Thomsen Reuters, where he worked for almost a decade.
“I think we are in the midst of a correction, though not a full bear market,” he wrote via email:

In truth, from an equities perspective, I think we were in a bit of a price overshoot for many securities, so a pull back had to be expected. We live in a market environment of artificially low interest rates. … The VC’s that I deal with are not so directly impacted by market declines like what we are currently seeing. Most of them are playing a long game, looking for startups, particularly in fintech, blockchain technologies, etc, that can fundamentally change how markets operate and/or are true disruptors. So I suspect that while it may be a bit tougher to secure funding, sound business models with strong start up teams will continue to garner interest.

Companies: Brooklyn Chamber of Commerce / Etsy
Series: Brooklyn

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