Three months ago I asked what the recession would mean for start-ups.
Since then, we sort of know what has transpired. The wholesale funding model (which provided an ample supply of credit) has died and VC investment activity and exits have fallen off a cliff. According to Mike Butcher, an 81% decline in M&A activity to the first three months of this year. And that was before the nasty real-world collapses of the past six months. There is no doubt that tech is in the toilet (and likely to get worse if Google doesn’t beat estimates.)
Calacanis was in sombre mood and Techcrunch has argued that firms with less than $25m will probably fail.
But I am with Fred Wilson who argues:
I don’t think we are in a “depression” in startup land. We are in a down cycle driven by a bad global economy. I think the web and information technology is one of the few bright spots in an overall gloomy economic outlook. So if you are working on a web technology company, be happy that you aren’t working for a bank, a brokerage firm, an automobile company, or in many other industries. The tools and services that are made in the web technology business are only going to increase in demand over the next five years. But we are going to have to service that growing demand with leaner and more focused businesses and it’s time to start thinking more about profitability and how you are going to get there.
During the last start-up winter I witnessed the business model for my start-up, esouk.com, an incubator, dry up within a few months. It was always a shaky business model, in hind sight but being in the seed game when seed investing was expensive is ugly when bigger VCs have to focus on their existing investments.
I then joined a deep-tech firm which suffered from a dot-com hangover. Albert Inc had a dotcom bubble burn rate just as our enterprise customer’s IT spending was heading down to zero. It took as a year of restructuring the focus the business on a single proposition and start to rebuild credibility with customers. The company has survived and developed a niche serving medium size organisations.
You can’t deny that conditions are bad. Europe is heading inexorably for a recession. And many governments were over-extended due to lavish spending and inadequate tax revenues (Portugal, Belgium, Spain). The ECB/Eurozone area has never had its structures strained to the extent of the current banking crisis and it isn’t clear–given how little control of monetary policy they have–how well national governments can formulate appropriate responses. The ECBs only real offering is to unleash inflation and decimate the far-too-strong euro.
But set against this: it is cheaper to do business. Wage costs will come down. Secondary cost drivers (like property) are also on the way down. Large companies will stop innovating, but consumers and businesses will still need innovation. And the switch to digital businesses will continue apace.
In almost every sector, the digital business model is more effective than the bricks and mortar one. In retail, online stores have lower costs and better inventory control. In publishing businesses, online plays can attract and target audiences without the physical costs of printing–and those which use peer-production (blog aggregation and the like) can eliminate the costs of content production. Because of the economics of abundance that is inherent in many web businesses, companies can gently feel their way through to business models that work.
But start-ups will have to do so and be much more parsimonious. Every belt will tighten. And that means watching the burn rate and doing nothing that you don’t absolutely need to do. Now, more than ever, is the time to keep the main thing the main thing.