Friday, July 15, 2011

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.

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