Founders: this is what the world would look like if the stock market went down 50%

end of the worldLast night I took the bulldogs out for their nightly constitutional and reflected on how amazing my first six months in the Bay Area have been.

San Francisco truly is the city of the future, with the most intelligent and driven minds in the world riffing on each other; while 1/3rd of the backdrop turns into Manhattan, the other 2/3rds remain the “uniquely” permissive, flawed-but-beautiful and kooky utopian kids that the Summer of Love created.

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This week at *the* poker game, the self-made Texan and the self-made Sri Lankan debated the bubble between the bad beats that were bestowed upon “the World’s Greatest.”

I started to model, “Gosh, what exactly would it look like if the stock market tanked again?” Ignore the debate whether there is a bubble, because, let’s face it, there are two distinct bubbles in the financial space that everyone agrees on: late-stage private and seed funding.

Late-stage deals are being priced at public valuations, which isn’t a major deal since it’s public investors who are buying them (and blocking out the little guy). If those big money funds lose a little cheddar it’s not that big of a deal — they can afford it.

The early-stage valuations, where I spend my time, are literally 3-5x, which leads me to say to many folks who tell me their valuations, “We’re going to pass, based on valuation.”

Of course, the good founders always ask, “What would you price our round at?” I give them the bad news: 12 weeks of progress and a two-person team? Hmmm … how about $250k for 10%?” Not surprisingly, half don’t take it — but the other half that do? Well, I spend all my time growing those companies … because I have an actual stake in them! (Note: I’ve done deals at double and triple that as well, but they tend to have something special: like a founder who has an exit or something).

And to be sure, when the market was at 50% of where it is today, the friends and family rounds were $1-2m, the angel rounds were $2-4m, and the A rounds were $4-8m. There was enough room for an angel to actually make a return, not just have the logo of a “hot” startup on their site.

Of course, don’t cry for any angel investors, because at any time they can walk away from the table and sit on their cash. Some are doing that right now, I’m seeing it OFTEN. Savvy investors are saying, “$250,000 for 1% of a four-month old company? I’ll pass and put $50k into five companies for 1%!”

Which makes a lot of sense to me: five bets are better than one.

So, what if the market dropped 50%? What would the world look like?

Well, although a certain % of people would lose their jobs and that would suck for them (my dad is one of those victims — unemployed at a recession, never to be employed again), our *society* would carry on just fine — as it did the last time unemployment went up 5-10%.

Here’s the tweet storm … I’m sorry it’s not formatted super clean, but this is the first time I’m actually trying to embed tweets in WordPress. I wonder, @photomatt, is there a better way to do this?

[ Also, why can’t I put @jason or @photomatt in WordPress and have it automatically make a Twitter link? ]