Falling Stock Markets and Startups

Indian stock market and stock markets across fell sharply last week and earlier this week owing to fears of recession in the US. All the companies who are listed on the bourses plunged sharply. When the whole market is going thru a bad patch with valuations going low and certain stocks hitting their 52 week lows what actually happens to the startups, companies which have just come up. Are the budding entrepreneur able to defy falling markets ?

A lot actually depends on the kind of business they are in and then the source of funding. If the company is looking forward to raise money from the market by going public a falling market is surely going to affect their valuations. Apart from this Grey market premium, which investors look for before investing in an IPO, for such stocks will also go down. A recent example in this case is the Reliance Power IPO. Two weeks back Grey market premium for RelPow was seen at Rs. 400, which is currently at Rs. 200. But even in falling markets we see stocks which defy the trend and head north wards. What makes these stocks defy a market-wide phenomenon. Some of the points to look out for are :

1. Cash flow model : This projects how the company is currently handling its funds and gives a clear picture of profit or losses made by the company till date.

2. Projects in hand : The number of projects or contracts in hand can be used by people in judging the profits the company is going to make in future. Based on the current working or the way the current projects are being handled also gives a clue to how the company is going to perform in future.

3. Long term vision : What are the long term plans of the company? How is the company planning to grow?

The positives that come out as a result of falling markets are in terms of growing interest of VCs(Venture Capitalists) in startups. When the markets are buoyant VCs tend to invest their money in front line companies which are safe to invest in. But in falling markets VCs look out for options other than those front line stocks taking risks by investing into startups.

The key to sustained growth for startups in falling markets will be not to panic when there is a credit squeeze and stick to the long term plan.