Good morning from New York.
This year will be tough for many startups that need to raise financing. The word 'recap' is being used more and more. Unfortunately, I am explaining this to a few founders myself.
For the purpose of venture capital, a pretty good definition of a recap is:
Recap is a financing technique used typically by private equity investors to invest in privately-held businesses that allow the existing owner to restructure the debt and equity of their company to obtain new capital for future business growth.
At the time he wrote this, Bill could not or would not have predicted that it would be six more years of liquidity mania and that The Fed would help create 10 Theranos (a guess on my part) and 100 Softbanks to fund them.
The 'recaps' that Bill worried about was kicked down the road and I don't think anyone will be able to guess what the real damage is now that the cost of capital has risen so dramatically.
Take the time to read Bill's post if you are a founder or investor.
The last couple of paragraphs really sum it up well...
MO MONEY MO PROBLEMS
Perhaps the biggest lapse in judgment for all of those involved is the assumption that if we can just raise “one more round” everything will be fine. Founders have come to believe that more money is better, and the fluidity of the recent funding environment has led many to believe that heroic fundraising is a competitive advantage. Ironically, the exact opposite is true. The very best entrepreneurs are relatively advantaged in times of scarce capital. They can raise money in any environment. Loose capital allows the less qualified to participate in each market. This less qualified player brings more reckless execution which drags even the best entrepreneur onto an especially sloppy playing field. This threatens returns for all involved.
The reason we are all in this mess is because of the excessive amounts of capital that have poured into the VC-backed startup market. This glut of capital has led to (1) record high burn rates, likely 5-10x those of the 1999 timeframe, (2) most companies operating far, far away from profitability, (3) excessively intense competition driven by access to said capital, (4) delayed or non-existent liquidity for employees and investors, and (5) the aforementioned solicitous fundraising practices. More money will not solve any of these problems — it will only contribute to them. The healthiest thing that could possibly happen is a dramatic increase in the real cost of capital and a return to an appreciation for sound business execution.
The cycle is doing its thing.
Now the messy part which will bring about the seeds of the next growth cycle.