Wednesday, March 19, 2008

Auction-Rate Freeze Affects Silicon Valley

Many Silicon Valley start-ups, already suffering from fewer opportunities to go public and an economic downturn, are now stuck holding illiquid auction-rate securities after the $330 billion market for them soured in January. Since that time, frozen auction-rate market has affected big publicly traded companies, the closed-end mutual-fund industry and even some hospitals and schools after investors shied away from the auctions thus making it harder for shareholders to convert the securities to cash.

The private companies will likely be affected more by this freeze and may be forced to dump these securities for big losses. Unlike public companies which often have larger cash reserves, start-ups often have less revenue and need immediate access to their cash and short-term investments to operate their business.

Venture-capital investors in Silicon Valley are also moving fast to ascertain their vulnerability to the auction-rate crisis and determine temporary solutions to the start-ups they have funded. Some possible solutions include taking out special lines of credit from banks or selling auction-rate securities at a discount on an emerging secondary market.

Attracted by the promise of liquidity and a slightly higher rate of return, many start-ups bought auction-rate securities at the urging of investment banks. The affects of the current auction-rate crisis is reverberating throughout Silicon Valley companies that include Internet firms, semiconductor makers and larger medical-related firms poised to go public.

However, not everybody invested in auction-rate securities. Benchmark Capital in Menlo Park, for example, says that “a couple” of portfolio companies hold the debt investments, but they do not represent a significant part of their cash. And start-ups with only a small portion of their cash in the securities may not need the money for months, or even years, so the seized-up market may not hit them as hard.

No comments: