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By: Kent Bernhard Jr
October 15, 2013
The UpTake: Senate leaders say they’re on their way to a deal to raise the debt ceiling and reopen the federal government. That’s a good thing for the startup ecosystem, where Washington infighting is causing hesitancy for investors.
Editor’s Note: This story was modified to reflect today’s developments in the U.S. House of Representatives.
A deal to end the government shutdown and raise the debt ceiling can’t come too soon for the startup ecosystem, say experts.
But it looked early this afternoon as though the wait will be longer. Though Senate leaders have come close to a bipartisan agreement to reopen the government and raise the debt ceiling, the House is in disarray. House GOP leaders this morning floated their own plan to do the same, but apparently couldn’t sell their idea to a majority of their Republican colleagues.
“You have uncertainty right now,” Barry Sloane, the chief executive of Newtek, which provides small business lending and services, told me. “If you are an investor today, looking to invest in an early stage business, you’ve got to hesitate. There’s a lot of stuff on hold.”
Add to that “stuff” bipartisan negotiations in the Senate. Senators had appeared close to an agreement, but put their talks on hold to wait and see if a plan would emerge from the House of Representatives. As of late this afternoon, House leaders had come up with a plan and a vote was slated for tonight.
The dithering in Washington led to nervousness on Wall Street, where the Dow Jones Industrial Average fell more than 188 points. An auction of short term government bonds drew scant interest, as traders weighed the risk of a debt ceiling breach Thursday.
The agreement Senators were negotiating would raise the debt ceiling through February 7, removing the threat that the government could default on its obligations as early as Thursday. It would also reopen parts of the government that have been shut down, and fund federal agencies through mid-January.
The possibility of funding drying up is the biggest impact the drama in Washington has on startups, said Erik Kantz, a dealmaking lawyer at Arnstein & Lehr in Chicago. He said a breach of the debt ceiling, because it would shake the confidence of markets worldwide, could have a trickle-down effect to the wealthy angel investors who feed startups their early-stage cash.
“It dries up the capital that’s available,” he told me.
Some of that’s already happening with the shutdown, Sloane said. He pointed out the Small Business Administration-backed lending is at a standstill because of the shutdown. And investors are already acting more cautiously.
“What everyone’s doing…you’re continuing to line up business it’s a question of whether you’re closing things,” Sloane said. “I think it’s a small but significant subset of the investment community that is doing nothing.”
And if the Senate leaders fail in their effort to get a debt ceiling deal, or that deal is rejected in the House, things could get really bad, really quickly.
“You could wake up one morning, if this is all pushed out…and the markets don’t accept it anymore,” he said. “You could have a 10 percent correction of the stock markets in a day.”
And if something like that happens, it can’t help but trickle into every form of finance, including the bets investors make on startups.
James Cassel of Miami investment bank Cassel Salpeter was more blunt.
“I think it will have worldwide long-term impacts,” he said of the possibility of a debt ceiling breach. “I think it’s going to have a devastating effect. They’re playing with fire. I think someone needs to hit them over the head with a baseball bat.”