No one wants to encounter a falling knife problem with the US economy headed for a forecast-defying recession. As the tide runs out, corporate governance issues are erupting in the startup ecosystem. Venture capital has turned from being an evangelist for innovation to being mired in litigation after spectacular busts. Scrutiny of valuation rationale is also rising.
The go-go years of startup funding could be behind us. Saner counsel should prevail in a world economy emerging from the trough. Mature economies are in for an extended spell of expensive credit and investors will need more convincing about parking their money in the riskiest asset class available. Since the investment funnel has widened considerably, a different class of investors will have their own set of questions to ask startup founders. This should spread the pool over a bigger area, a process that has already begun. Angel funding is ticking along during the funding winter. But growth stage ventures face the prospect of a down round.
Regulators, too, are moving in to tame some of the unbridled market sentiment. Governance oversight is increasing along with interventions to nudge valuations into comfortable territory. Rules for startups will be different than those for traditional business, but there will be rules. Venture capitalists cannot claim a monopoly on predicting the future. Their stewardship of investor wealth has come into question. Lawmakers will want to move in as social transformation accelerates through technological advances. The current dry funding spell ought to build resilience in the startup ecosystem.
