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Startup Boom vs. Economic Bomb

Update: Ottawa-based Shopify, which offers an ecommerce software platform, announced today it has raised $15-million in series B funding from Bessemer, FirstMark, Felicis, and Georgian.

There is fascinating and potentially troubling dichotomy happening within the Canadian and U.S. startup landscape these days.

On one hand, there has been a flurry of small, medium and large startup investments. DropBox and Twitter have raised major rounds, while Tumblr, which has no real business model yet, score itself $85-million. North of the border, we’ve seen a deals unveiled on a regular basis – GoInstant, Paymentus, Wave Account, Achievers.com, SavHome, gShift, Guardly, etc.

It’s encouraging to see so many startups getting financed but, at the same time, it is difficult not to be somewhat uneasy about the uncertain economic climate, particularly the possibility that we’re heading into another recession.

On one, it is a positive to see companies getting the financing to develop an idea or business, and the capital will take them through an economic downturn. That said, a recession will impact spending so it could impair the ability of these startups to make revenue.

As much as it is an exciting startup marketplace, it is difficult not to see dark clouds on the horizon that could ruin the party.

Fred Wilson has had some sobering food for thought in a blog post called “What We Are Seeing” for Business Insider. While he sees the high number of startups raising money as a good thing, he said inbound leads are coming from everywhere:

“It is not just coming from entrepreneurs. It is coming from angels, seed investors, VCs, lawyers, accountants, friends, aunts, uncles, you name it. I’m waiting for the guy who sits at the front desk in our building to pass me a business plan on my way into the office.”

This statement reminds me of living in Hong Kong during the early-1990s during a tremendous stock market boom. In hindsight, you know the market was about to crash when the first thing taxi drivers wanted to talk about was investment idea.

For startups able to raise capital, I would advise to operate as smartly as efficiently as they can while still being focused on seizing the opportunity in front of them. Times may get rough economically but if a startup can manage its cash and resources in the right way, it has a good shot of coming the other side of an economic downturn while some competitors fail to make it.

For any startup with money on the table, I’d take it as long as the terms were acceptable because it will give you ammunition to grow and, if need be, survive.

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