危 wēi  danger

Investor psychology swings from euphoria to depression and we’re in the middle of a pretty dark depression.  Private equity firms and hedge funds are closing their doors for good and the VC industry is in a period of ‘retrenchment’ (read: terror).

机 jī opportunity

Y Combinator, a VC firm recently set up by Silicon Valley veterans Ben Horowitz and Paul Graham, have a different take.  They have bullish plans to ‘take advantage of the recession’, choosing to invest in 60 start-ups this year versus 40 last.  Their view is that ‘while existing companies contract, the next generation will expand’.  After all, Apple and Microsoft were founded in the last deep depression, the mid-70’s.

This approach makes sense, Y Combinator are about developing solid technology businesses (ready for the next upturn), they should face less competition and in many ways the opportunity cost of their cash will have dropped (given lower interest rates or returns of other investment types).

How about…

• Investing in new businesses in downturns with the aim of capitalizing on an upturn

• Remembering to factor in opportunity cost when making investment decisions – if there are fewer investment possibilities the required return should drop