When Will Auction Rate Securities Blow Up The Valley?

So when's the Great Auction Rate Securities Panic panic going to hit Silicon Valley? ARS are bonds that were once sold as "cash on steroids" but are now seizing up. And this Financial Week story says the ARS fiasco is already a problem here, because startups that thought they had easily accessible cash don't anymore: "As many as 20% of start-ups could be holding now-failed auction-rate securities on their books, according to some local counts."

Which makes you think you’d think entrepreneurs in the Valley are running up and down Sand Hill Road, hair on fire, screaming “CASH! I NEED MY PRECIOUS CASH!”

Not from what I can see. In fact, I've heard more from New York about this startup “crisis” than I have from anyone in the Valley. In an informal poll of a dozen investors, startup advisors, and entrepreneurs, I got a mostly uniform response, which in a fragmented market like venture capital is pretty rare.

That response: Yes, it’s a huge problem -- in theory. But there are very few concrete cases where a startup is really in a bind over this. When these deals were being peddled, a lot of startups and their investors just passed on them. Not surprising, since this is a culture that prides itself on not using debt, even when it's being described as the equivalent of a money market account.

If it is a problem, I'm told, it's for weaker companies. After all, this is a liquidity issue, not a credit issue, and it should be short-term. And most smart companies bulked up on cash heading into the downturn. If your payroll is locked up in one of these credit facilities and you have no other way to meet it, odds are you’ve got some other issues.

One disclaimer: VCs love to say they aren’t seeing a problem directly, even when they are. In 2001, it was de rigeur for firms to say, “We didn’t really do the whole dot com thing,” yet someone was sure funding all those companies. Still, I’m guessing the big fallout could be felt at Comerica, where a lot of the problems seem to be arising. From what I hear, Silicon Valley Bank—the gold standard in startup banking—was “pretty clean.”

See Also: UBS Hoses Clients, Marks Down Auction Rates Securities

SAI contributor Sarah Lacy has been covering finance and high tech in Silicon Valley for nearly a decade, most recently as a staff reporter for BusinessWeek. Her book on the rise of Web 2.0, Once You're Lucky, Twice You're Good, will be published by Gotham Books May 2008. She is co-host of Yahoo! Finance's TechTicker and writes a biweekly column for BusinessWeek.com called "Valley Girl."