Chavez, China, and the coming startup squeeze

Mark R Anderson — Mon, 25 Feb 2008 09:47:43 -0800

What do China's explosive industrial growth and Venezuela President Hugo Chavez' oil antics have in common? They may both be working against the rate of new public offerings in the U.S. If so, these focused sources of global and U.S. inflation may also be simultaneously contributing to a slowdown in American startups.

Most global economic observers today agree that the U.S. is, at least for the moment, facing a slightly different set of economic challenges than the rest of the world, as its business slump competes with increasing inflation for the Federal Reserve's attention. In Europe, more credence has been given to the inflation threat, but this may be changing in real time as Europe evinces more slowdown signals.

While there are a number of contributors to oil pricing, three clearly dominate: The OPEC cartel, political/production instability among major producers, and pressure on commodity pricing from forward contracts.

Hugo Chavez has played the first two like violins. By establishing his own man as the head of OPEC a few years ago, he started the attitudinal change from the old Saudi perspective of placating the West, to a new attitude of (carefully cloaked) defiance. "Rape and pillage" would be fair descriptors of the economic effects of OPEC's publicly stated acquiescence over today's new oil prices. Oil cost around $14 per barrel a decade ago, but is hovering around the $100 mark now.

Having set the devil of overpricing in motion, he then re-nationalized PdVSA at home, followed by nearly all the oil fields in Venezuela. When this wasn't aggravation enough to keep prices high, he threatened to cut off all oil supplies to either the U.S. or Exxon earlier this month.

China, meanwhile, simultaneously has been on a path to acquire the greatest future oil volume possible from OPEC providers through forward contracts -- done very quietly -- with the similar result of raising futures prices, and then spot prices, of oil.

Higher oil prices have a double-negative effect upon healthy Western economies: They cause gross inflation, and they slow down the economy, even as they are masked as increased GDP -- usually a good thing (oops). You think your economy is doing better, but it's suffering.

Inflation tends to drive money out of other investments and into gold and other hedges, since currency itself is being degraded. At the same time, business slowdown tends to drive money out of equities markets and into bonds or foreign assets.

The result: An equities market slowdown, fewer windows for initial public offerings, and a backup in the venture investment chain that soon leads to fewer startup fundings. Entrepreneurs themselves, seeing a drop in funding and less chance for buyouts, seem to make less effort to do startups in such a liquidity-constrained environment.

Result: If you are upset about the coming shutdown in technology startups, feel free to blame Bad Boy Chavez and Chinese bureaucrats.

Add to this trend, a softening in the growth of money raised by VCs, a simultaneous flattening in total number of funds, and the move over the last couple of years to shift venture spending toward mezzanine funding, and it isn't hard to predict that startup formation will decline over the next one to two years.

Mark Anderson is CEO of Strategic News Service (TM), publisher of the technology industry's most accurate publicly-ranked predictive letter, at www.stratnews.com. He is also CEO of SNS Project Inkwell (TM), bringing appropriate technology design standards to K-12 classrooms (www.projectinkwell.com), and Chair of the "Future in Review (TM)" Conferences (www.futureinreview.com). He is a Contributing Editor to the Industry Standard.

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