September 27 2011
by Todd Hixon

What the Political Crisis Means For Entrepreneurs

The recent downgrade of U.S. sovereign debt, and the ongoing debt crisis in Europe stem from a century-in-the-making political crisis, which is creating big economic uncertainty: inability to borrow could throw major countries into recession, and interest rates, tax rates, and government spending will see major change that is hard to predict. The crisis will rumble on for years, with acute problems (e.g., an Italian near default) breaking out sporadically.

These events pump up perceived risk throughout the economy.  Likely result:  stock markets that are volatile and unable to build momentum, reduced consumer confidence, slower economic growth, and more emphasis by big companies on cutting cost and preserving cash versus investing for growth.

The U.S. government must make spending cuts that will fall heavily on science, energy, education, infrastructure, and defense/intelligence/homeland security, the so-called “discretionary” parts of the budget, making it harder for start-ups to find early customers and scale-up finance here.  I expect we will see aggressive and serious moves to trim health care costs [moving beyond the “Affordable Care Act” to actually working on affordable care]: some ham-handed, but some smart ones too.  There’s no way to close the U.S. budget gap without taking on health costs.

Picture credit: The Economist

Taxes paid by successful individuals and corporations will rise.  The over-borrowed government’s best source of revenue is the people and institutions that live within their means and have built up savings.  Unfortunately, this is exactly the pool of money from which most venture capital comes.  This has to be broader than Warren Buffett, Steve Schwarzman, and their ilk; the amount of money needed goes well beyond what can be had from the top few percent.

The exit environment for start-ups will probably cool but not shut down. Folks in Silicon Valley supposedly say, “God save us from bubbles, but first give us one more.” Soon they may be asking for two more, as the current bubble will likely lose some steam.

The IPO market will become more selective:  less appetite for risk, hence stronger numbers needed to go public. IPOs are already delaying, notably GroupOn and Zynga.  Big companies will still have strong balance sheets with which to make acquisitions, but the sense of urgency will diminish as management focuses more on making current numbers and less on driving long-term growth.

There are bright spots.  Government has internalized the message that entrepreneurs are vital to job growth, and jobs are “Job 1” in Washington.  Hence, there’s opportunity for non-financial support to entrepreneurs, e.g., relaxing onerous regulations.  A real drive for health care efficiency will create big opportunities for new technologies and market disruption. Energy will continue to get more expensive, creating demand for efficiency technologies. The potential of social networking and smart mobile devices to change our lives is not yet exhausted. And a tough market tends to clear out me-too competition and bias big companies to buy versus make, enabling the best competitors to build the market and later reap the reward.

In the next post:  what can entrepreneurs do to prepare and prosper?

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