TechCrunch’s Michael Arrington has a very informative piece on the credit crisis and its effect on startups. Apparently, many startups are putting their venture cash in Auction Rate Securities, financial instruments that are normally very liquid…

My attitude (and answer to anyone who came up with a bright idea for the cash) has always been that our investors put the money in to fund our business, and we’re not in the financial engineering business. So the money from the funding goes into a CDs/ Commercial paper. I’d rather worry about development / shipping / customer acquisition and not about the cash in the bank.

We’re about a year into it already, the only question is just how much Keynesian wizardry is going to be tried before the markets (cash and trade, not just Wall St) shake themselves out of it. Failing entities need to be allowed to fail, and we’ll all start over and build it back up again.

Unless you think we should all keep a chest full of Krugerrands buried in the back yard for when the revolution comes, this is a problem that could have befallen pretty much anyone who worked with a financial adviser to try to find a good place to put money that needed to be accessible in the short term.”

BS. People knew that these were vulnerable to liquidity problems:

http://www.svba...urities0704.pdf
http://www.svba...urities0405.pdf
http://www.svba...urities0606.pdf
http://www.svba...urities0907.pdf

That first document was posted in 2004 and the SEC started an investigation into the market in June of that year. If that’s not ample warning I don’t know what is.

In 2005, PricewaterhouseCoopers issued an advisory stating that ARSs were not cash equivalents.

Net-net: startups should have kept their money in money market funds. The risks of ARSs were known and if they didn’t know, they were stupid or hired sh*tty financial advisors. And they deserve what they get. Good riddance!

I only shrug and nod compliantly when tech folks say the housing debacle, the credit crunch, the equity market gyrations, and other macroeconomic factors those very same tech folks proudly proclaim their ignorance of, does not effect them.
It does. An…

The number is quite low as a percentage.

> If you work at a startup that goes belly up because management put its “spare cash” into an ARS to generate a return (as opposed to using its “spare cash” to generate a return through a viable business model) then blame your management, not the Wall Street salesman who sold them on ARSes.

The problem with that notion is that Venture Capital doesn’t come in a steady stream, it comes in rounds of investment — i.e. lump sums. If you’re spending all of your cash this month, you won’t make payroll next month. So after you get your financing, you’re sitting on a pile of cash that decreases at whatever your burn rate is.

If you have that cash buried under your mattress, you receive no interest on that money, so it loses value at the rate of inflation. If you have it in a savings account, it’s generally only slightly better. So typically, you want to invest it in money market funds, CDs, or other minimal-risk, highly liquid cash equivalents.

After an unblemished 20-year track record, ARSes were believed to be highly liquid cash equivalents, even by the financial professionals who worked with them. It’s not like these companies were investing in exotic currency or real-estate derivatives — this was supposed to be as low risk as an investment not backed by the FDIC can get.

Unless you think we should all keep a chest full of Krugerrands buried in the back yard for when the revolution comes, this is a problem that could have befallen pretty much anyone who worked with a financial adviser to try to find a good place to put money that needed to be accessible in the short term.

Good luck, all. Been there, done that.

The problems with all of these voodoo securities have been well-known to people who actually took the time to understand what they were being sold. Most people, however, chose not to do any research or to ignore the risks.

The idiots who bought these piles of garbage deserve what they get. If you work at a startup that goes belly up because management put its “spare cash” into an ARS to generate a return (as opposed to using its “spare cash” to generate a return through a viable business model) then blame your management, not the Wall Street salesman who sold them on ARSes.

Wake up America. Lawyers and government cannot bail you out. Accept that you have made stupid decisions, fix your mistakes and move on.

It’s too late to protect your ARS:
http://globalec...t-your-ars.html

It’s incredible how it works too…people need to take note that their may be some upcoming liquidity issues, so everyone sells to prevent getting caught, and in the process REALLY creates a liquidity issue.

reality will change that

ARS were considered cash equivalent securities (sort of, open to interpretation) until last year when FASB clarified the definition of ARS and recommended they be removed from cash flow statements. Many investment bankers believe this may have triggered the collapse in the ARS auction market.

BestCashCow has quite a few articles on ARS.
http://www.best...rate_securities

From what Ive read it seems that over at least several decades, much of the world and its institutions have got into a situation where a large proportion of the ‘wealth’ that exists is just a mirage, and this has started to unravel over the last 8 months.

Liquidity is certainly a big issue now, I dont think its started to bite noticably in the tech sector yet but Im sure it will, given time.

Does advertising spend decrease a lot during recessions or depressions? If so then I guess that could change the face of the web and how business is done forever.

In some ways I think an era of economic woe and possible resource shortages, could find the internet even more useful to humans, and profitable to some. One of the things that makes the net attractive is just how cheaply some useful things can be done, but this advantage is often lost due the large amounts of money that seem to get spent on unnecessary things.

Part of the current economic picture seems to be that as western banks etc have money problems, they are sometimes getting partially bought by foreign sovereign wealth funds. Are there many foreign investors in English-speaking websites so far? Maybe they could come to the rescue, although its usually so easy to copy such sites and avoid all of the costs and exposure to the US consumer & dollar, that maybe this lifeline wont be available.

As the United States economy tanks, I’ve noticed quite a bit of arrogance amongst Silicon Valley types who are quick to point out “This isn’t our bubble.” Many have expressed a sentiment that the serious problems in the greater …