The Debt Ceiling Matters To Startups

I love living in D.C. Architecturally, it is one of the most distinct cities in America, and there is nothing like taking a jog in the morning among memorials that folks travel thousands of miles to visit. The downside, unfortunately, is that even though I don't work in politics, I am a bystander to the blow-by-blow of our political system. It's what people do, what they talk about, and what's always on TV (it also seems like every taxi I get in has NPR on).

Over the last two weeks, that blow-by-blow has centered around the debt ceiling. Without getting in to the politics of it, the fact is not raising the debt ceiling would be a disaster. It is the mother of all no-brainers. If you don't understand why - then I encourage you to read any commentary, interview, or OpEd by anyone that actually knows what they're talking about (Ben Bernanke, Bill Gross, or Tim Geithner would be a good start).

It seems like one of the few things all politicians can agree with (in theory), is that no one wants to do bad things to small businesses, startups, or entrepreneurs - the so called "job creators". Nothing scuttles any idea in Washington like putting "job-killing" in front of it. Unfortunately, where the small business and startup community have gone wrong is not speaking up on this issue.

If you look at technology startups, in particular, they are one of the bright spots in our economy today. While the unemployment rate in the U.S. has continued to hover above 9%, Silicon Valley can't find enough good engineers. Investment in startups is at an all-time high and valuations are going through the roof. However, the piece on which all of this hinges is that investors expect the IPO market to be strong. IPO markets provide strong returns to investors, which drive more investment, which drive more jobs...and round and round we go. The venture business model is somewhat of a "feast or famine" business model - and the feast cycle is driven by the strength of the public equities market.

And this is where the debt ceiling comes in. Next week, we will know if we have a workable solution on raising the debt ceiling. If we do not, the world won't end - but a few things will happen:

• The U.S. credit rating will be downgraded, increasing the borrowing cost of the federal government - which will trickle down to higher borrowing cost for every business and every person in America
• The equities market will respond negatively to higher rates - so stock prices will likely plunge (despite the fact that corporations are reporting record profits)
• The rise in borrowing costs and uncertainty around the entire credit climate will further halt investment and hiring
• Prolonged weakness in the stock market will ultimately close the IPO window

Clearly, entrepreneurs should be most focused on getting their product to market and building their teams - and not be concerning themselves with the machinations in Washington. But Silicon Valley and the broader small business community have a vested interest in this getting resolved quickly and efficiently. It's time the thought leaders in those communities made their voices heard.

The problem with Silver Spring

Yesterday, Silver Spring filed their S-1, announcing a $150 million initial public offering. With over a billion dollars in multi-year contracts, the Company has been a rumored IPO candidate since 2009. However, even today, it faces some significant challenges:

• No line of sight to profitability
• A hardware play with 79% negative gross margins, and no clear walk to positive gross margins
• Revenue recognition issues
• A market that is seeing increased competition from the "dumb meter" companies such as Itron and Landis+Gyr - which are winning more of the new awards
• Long sales cycles with customers that are questioning the value proposition of the product

Many of these issues can be resolved, and having backlog of over a billion dollars is a huge confidence builder in the business model. But there's a saying: "you can only go public once". If you go too early, your investors will get burned and the public markets will not be quick to buy into your story again. Public markets are also fatigued with cleantech manufacturing plays that are gross margin negative and burning hundreds of millions of dollars of cash - as evidenced by the performance of A123, SemiLeds, and others.

So why not wait?

Well, after raising $400 million, Silver Spring has likely tapped out it's ability to raise private capital. The Company is using the public market as a source of venture funding. The IPO is less a way to get an exit for its investors (although that is also at play here), and more a way to fund the company to profitability when no one else will.

I want Silver Spring to succeed. It will be good for everyone (cleantech space, smart grid companies, cleantech VCs, etc) - which is why I'm dismayed at the bankers/investors pushing another IPO which will be facing an uphill battle from the get-go.

Time will tell - and as always - I could be completely wrong.