The index of leading economic indicators, a broad basket of data meant to predict U.S. economic activity six to nine months in the future, rose unexpectedly in September by 0.3 percent.
This good news — which beats analyst expectations that the index would decline 0.1 percent — helps quash the steady barrage of negative financial and economic news that continued to rock the stock markets last week.
The stock market jumped a little bit this morning, with the Dow and S&P gaining more than 2 percent, and the Nasdaq more than 1 percent. News that Federal Reserve chairman Ben Bernanke is endorsing a fiscal stimulus package may have also contributed.
However, nothing short of a significant recovery is going to placate worried venture investors hoping to profit from investments in technology startups. It’s become increasingly clear they may have trouble producing acceptable profits in coming years. More on that in a sec.
The index, published by the Conference Board in New York, incorporates a variety of data. Things like real money supply, consumer expectations and interest rates were all showing positive trends. However, things like jobless claims and building permits suggested negative pressure on the economy. The Conference Board’s economists said the index’s jump suggests that the economy, while likely contracting, is not in free fall.
This is a small glimmer of hope for startups and their investors, which are hoping for more uplifting news in the markets.
But most venture capitalists will remain under considerable strain. Even when they invested during the last down cycle of 2002 and 2003 — when valuations were lower, letting them get a larger ownership stake in companies they backed — VCs didn’t do well. The median internal rate of return (IRR) for a 2002 vintage VC fund (a fund that began investing in 2002, when the stock market was rock bottom) is -1.2%, according to PE Wire, citing Thomson Reuters data. That means they’ve lost the equivalent of 1.2 percent every year over the past six years, even though VCs have had about that long to grow the companies. With the market turning downward now, it’s unlikely that number will increase significantly, as firms may have a tough time selling companies and locking into profits.
The median IRR for a 2003 vintage VC fund is 0.9 percent.
These performances are worse than many expected. The question is whether VCs will do as poorly with their 2009 funds. Uncertainty about this will only cloud the outlook for startups going forward.
Many startups have been panicked by the presentation given by Sequoia Capital two weeks ago detailing the negative outlook, and a bevy of them have moved quickly to slash their workforces by about 30 percent. These include Sequoia-backed Adbrite and Jive Software.
Should other startups do the same? We’ll be holding a set of rountables next week to ask and answer these questions in more detail. If you’re interested in participating in the Oct. 29 event, go here and follow directions. The event will feature some of the most experienced thinkers in this area. Speakers include Kleiner Perkins’ John Doerr, and angels Ron Conway and Ram Shriram. We have limited space, so move quickly.