Why What Happens on the Stock Market Should Matter to Silicon Valley Startups

Business.com / Finances / Last Modified: February 22, 2017

Surviving a recession is incredibly tough when you’re trying to run a business, put food on the table, and pay your bills.

When the economy tanked in 2008 a lot of people panicked.

They had every right to. Surviving a recession is incredibly tough when you’re trying to run a business, put food on the table, and pay your bills.

We also felt the pain in Silicon Valley (SV). But, it wasn’t as bad as it seemed.

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The 2008 recession turned out to be a blessing in disguise. People left the corporate world and either launched or joined a startup in order to chase their passions instead of a paycheck.

The cost of starting a business was cheaper. And, there was actually more funding for startups.

Even though valuations were lower, the market turned around and those prices rose back up.

Whether it’s during a downturn, spike, or correction, the stock market does have effects on startups.

The most obvious drawback being that funding can dry-up, especially during early stages when you need that funding the most, if the market goes south.

A poor market may also force you to offer discounts and spend your money more wisely to stay afloat.

However, you’re also likely to have less competition, and as mentioned earlier, be able to start a business cheaper and recruit top talent quicker.

The thing is, while the stock market can have an effect on startups, those of us living in SV aren’t all that concerned about what happens on the stock market.

The first reason, as Matthew Waterman, an investment manager for Darkravenwind LLC, so perfectly says, “The economy doesn't matter.” He explains:

“The stock market is not an economy. It is a market of things being bought and sold. The things being sold are stocks, in this case. Most people buy stocks when they think the price is going up, and they sell stocks when they think the price is going down.”

Just ask yourself, do you think that Facebook, Amazon, Netflix and Google panic when their stock prices fall?

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While they are definitely paying attention to the market, I doubt anyone at those giants is losing any sleep over the fluctuating stock market because there’s a pretty good chance that they’re not disappearing anytime soon.

The other reason why the Silicon Valley isn’t too concerned with the market is because there are countless other factors that will determine Silicon Valley survival.

Y Combinator Paul Graham says, “If we've learned one thing from funding so many startups, it's that they succeed or fail based on the qualities of the founders. The economy has some effect, certainly, but as a predictor of success it's rounding error compared to the founders.”

He adds, “If you're the right sort of person, you'll win even in a bad economy. And if you're not, a good economy won't save you.”

Case in point, Lucas Duplan.

Duplan, a computer science student at Stanford, founded Clinkle in 2011 and raised a whooping $30 million through venture capitalist firms Andreessen Horowitz, Accel Partners’ Jim Breyer, and billionaire investor Richard Branson.

What happened next was one of Silicon Valley’s biggest fails.

Clinkle blew through millions of dollars, fired employees horribly, and imploded under Duplan’s leadership. The market had no impact on Clinkle’s failure.

The failure was because Duplan created a terrible corporate culture, enjoyed a luxurious lifestyle before having a finished product, and was simply too inexperienced to lead a company.

Of course, you can’t always fault the founders when a great startup or an great idea goes belly-up. Excellent startup ideas haven’t succeed because, according to CB Insights:

  • It didn’t solve a market need.
  • The startup ran out of cash.
  • The right team wasn’t assembled.
  • The competition did it better.
  • There were pricing or cost issues
  • There was an ineffective business model.
  • It was marketed poorly.
  • Customers were being ignored.
  • The product or service was released at the wrong time.
  • The founders lost focus.
  • There was disharmony between investors and founders, as well as friction among the team or founders and employees.
  • The startup either failed to pivot or did incorrectly.
  • It was located in the wrong place.

The final reason why we don’t obsess over the stock market, is that we entrepreneurs start a business for a number reasons.

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Whether it’s because we want to be our own boss, are passionate about what we're creating, or have spotted a market opportunity on our own, the stock market isn’t going to dictate whether or not we launch a business, nor fail at a business.

And, even if money isn’t as valuable, there’s nothing stopping us. We’ll find a way to secure funding for our idea.

Whether that’s bootstrapping, borrowing from friends or family, using your credit cards, working a second job, or crowdfunding, there multiple ways to raise money for your business outside of VC’s or Angels.

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