Auction-Rate Securities: No Danger to Silicon Valley

It’s like Telephone (Chinese Whispers) in the blogosphere today. First there’s a sober report on Venture Wire warning that "cracks of the economy" might affect the VC industry:

Perkins said VCs need to be aware of the "cracks of the economy" that might affect the industry, such as the failure of auction-rate securities. Several start-ups hold these obscure financial instruments, which many considered nearly as good as cash but are now illiquid after many bond auctions failed recently. Lawler said his firm surveyed his group of 60 portfolio companies and has so far identified 12 that have some amount of cash in auction-rate securities.

"Some amount of cash," of course, could be as little as $25,000, and by no means means "most" or "all" of their cash. But Penny Herscher immediately jumped to a worst-case scenario:

A very serious risk has emerged for some venture backed companies as a result of the credit crunch gripping the markets. Today some small VC backed companies have found that their cash is no longer liquid and this is the worst kind of crisis to a young company.

In turn, this was picked up by Michael Arrington, who posted a story under the ridiculously alarmist headline "20% Of Valley Startups Can’t Get To Their Cash".

Arrington’s 20% figure comes straight from the Venture Wire story: it’s 12 divided by 60. But of course Perkins never said those companies couldn’t get to their cash, he just said that they had "some amount of cash in auction-rate securities," which isn’t the same thing at all. For one thing, not all auction-rate securities are failing or illiquid.

So take a deep breath, everybody, you’re all going to be fine. Having money in auction-rate securities does involve taking a risk which most startups shouldn’t and needn’t take: this is a good warning. But things aren’t nearly as dire as the blogosphere would have you believe.

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