A couple of days ago, Fred Wilson made a relevant post about his near escape from the auction rate bond market. Its an interesting read, with more detail on how these bonds usually function and how the recent malfunction developed. From what I understood, these bonds don't lose all their liquidity overnight. After they lose their "primary" liquidity (by failing an auction), there is a secondary market that kicks in because of the high interest rates that the bonds are contractually required to offer once they fail an auction.
Fred says he got a call from his broker saying "your bonds have not yet failed an auction but you should know that the risk of it happening has gone up". I imagine that a lot of startups must have got a similar call, but perhaps the founders were too focused elsewhere to pay attention. Or maybe the smart ones did listen and were able to avoid this sorry mess.
Why on Earth would ANY startup want to play "Treasury" like a large corporation? Using the KISS Principle an 'normal' bank account is much better. We all have better things to worry about than an extra 1% return on 'cash'.
As Warren Buffet says, if you don't understand it not invest in it.
One wouldn't want to be "miss out" on "greater returns for 'virtually' no risk" because they were "too stupid or cowardly to understand it..." according to your VC.
These things were seen as no-risk, basically like money market funds. Some startups have raised 8 digit numbers of money, and they have a CFO, and that CFO would be neglecting his fiduciary duty if he left millions in an account that earned 0.25% interest.
I was saying that safer alternatives to money market funds (i.e. checking accounts) pay 0.25% interest. I guess it came out a little unclear. These were seem as just another kind of money market fund, 100% safe. To keep money in a checking account rather than putting it into a perceived safe investment that paid a higher rate without sacrificing liquidity, would be neglecting fiduciary responsibilty.
one VC, speaking off record, said that some of their portfolio companies would likely fail because of this. When I asked him why he wouldn’t loan the companies money, he said that perhaps they wouldn’t make the investment decision again given where the companies have gone, and that the fact that there are other VCs investing makes it hard/impossible to figure out who should pay how much.
You've just described the current crisis in the credit markets. The crisis wasn't so bad when it started with higher-than-expected defaults in subprime credit markets, but people are panicking a lot more now that liquidity is drying up for high-quality assets. Many firms' business models are based around having access to sufficient liquidity, they aren't built to buy and hold.
Fred says he got a call from his broker saying "your bonds have not yet failed an auction but you should know that the risk of it happening has gone up". I imagine that a lot of startups must have got a similar call, but perhaps the founders were too focused elsewhere to pay attention. Or maybe the smart ones did listen and were able to avoid this sorry mess.
http://avc.blogs.com/a_vc/2008/03/our-run-in-with.html