The Startup Depression Arrives

Jason Calacanis, the Bay Ridge-born Brooklyn native who founded Silicon Alley Reporter and became CEO of human powered search engine Mahalo.com, retired from blogging in July and has been sending out dispatches in mass emails on an exclusive listserv ever since. In this past Sunday’s wordy edition, Mr. Calacanis wrote about "(The) Startup Depression."

Posted in full at ValleyWag, Mr. Calacanis predicted in his email that "50-80% of the venture-backed startups currently operating will shut down or go on life-support (i.e. 3-4 folks working on them) within the next 18 months." He also recalled memories in New York from the dot com bust in the early 2001:

I went from hosting multi-million dollar conferences, doing Charlie Rose guest spots and being featured in a 6,000 word article in the "New Yorker" to not being able to meet payroll.

Many folks said I was lucky with Silicon Alley Reporter, while others said I was fraud who had finally been found out. I was broke, no one cared about my work, and my life really sucked.

… and that was just the start.

TechCrunch’s Erick Schonfeld reports venture capital firms continue to raise money and invest in startups at a healthy pace. But the results may slow down as VCs experience the trickle-down effect.

During the first half of the year, venture capital firms raised about $16 billion in 141 funds and invested about $15 billion in nearly 2,000 deals.

But it is not clear how much of those funds already raised can be counted on. Generally, the investors in a venture fund (the limited partners) commit a certain amount of cash to each fund, but only pony up the cash when the VC fund needs it to make an investment. With wealthy individuals taking losses in the stock, credit, and real estate markets (the stock market is sharply down this morning, and even hedge funds are not safet The Startup Depression Arrives), VC funds are already beginning to feel the trickle-down effects.

As investors suffer large losses elsewhere, they are not able to fulfill their commitments to the venture funds.

Venture capitalists like Fred Wilson of Union Square Ventures (featured in a recent, glowing NYT piece) say the New York tech community is used to wading through difficult economic times. "Those of us who work in the tech business are used to this sort of thing. Capitalism is darwinism and technology driven darwinism has impacted the tech industry more than any other," he wrote on his blog on Sept. 18. "We’ll get through it for sure, we always have, but it’s going to suck for a while."