Benjamin Kuo’s Blog

These are dour times — just look at the continuing carnage on Wall Street — with a lot of question marks in the air and some visceral fear in the markets. However, it appears to me that much of the high tech industry — and particularly, startups — is in rampant denial about how an absolutely disastrous economy might impact high tech companies in general.

Unfortunately, I’ve seen this before — in the period which followed September 11, 2001 and which preceded the “dot com” nuclear wasteland. High tech companies, and particularly, venture-backed startups, have been spared from the overall bloodbath in the economy because of one reason: venture money.

Venture money is great, because it makes it possible to start great companies and create awesome technology. In fact, I think venture capital is an essential ingredient in creating the next big technology and company breakthroughs. However, there’s one problem which occurs when it’s a lousy economy and environment: it insulates entrepreneurs and executives from economic reality.

One thing I’ve noticed over the years is that there is a prolonged delay in how the high tech market reacts to the economy. The reason why, is because there’s a buffering effect that deep pocketbooks have on startups. Number one — there are plenty of startups where they are not making any money from customers, and are living in the sheltered world of venture capital cash; and number two — the presence of venture money tends to fund secondary business (servers, software, advertising, marketing, etc.) at related and other startups.

In some cases — and the dot com bust was an example — what happens is that several months (often, six to nine months) after the rest of the world start seeing issues, the high tech world finally starts seeing some impact. That extra bit of dollars flowing into startups via venture capital is enough to keep things going even if overall business conditions are non-ideal–but only lasts so far. Eventually,  you hit not a slowdown but a cliff, when things pull back dramatically and adjust to the environment.

Does this mean we’re set to go off a cliff, or crash? No. There’s plenty of market opportunities where startups are ideally positioned for in bad economic waters — areas where faster, better, cheaper will rule, and where customers looking to save money or do more with less will be eagerly waiting. There are areas with very long lead times (biotech and clean technology come to mind) which will be in “build” mode for years yet. Plus, as is often repeated, starting a company in a bad economy (against the cycle) often results in stronger, better, and more successful companies.

However, I believe that the great faith of “Google-AdSense-advertising-will-pay-for-everything,” and the recent shifts towards focus on consumer Internet-only investments have more vulnerability to the economic environment than most startups believe. Plus, the “we’ll figure out our business model later” attitude ramps the risk up further (if you can’t figure out a way to make money and a business model when times are good, how are you going to make money when times are bad?). In the words of Wall Street, there’s a lot of risk out there.

I hope I’m wrong.

This entry was posted on Tuesday, September 16th, 2008 at 8:40 am and is filed under Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.