Benjamin Kuo’s Blog

There’s been lots of gloom and doom and dismay in the last week over the economy. There are many people rethinking their plans, worrying about their future, and wringing their hands over the financial crisis.

On the other hand, if you look at the history of technology, whenever the world shifts like this, opportunity beckons. When the world is changing, those who are able to capitalize on those changes are the ones who end up creating the next great big companies.

These shifts happen all the time, but some of the ones that come to mind include:

• Mainframes to PCs: The shift from mainframe technology to personal computers, which made such firms as Apple and Microsoft but nailed a coffin in DEC and other mainframe computer firms.
• Silent movies to the to talkies: The advent of talkies in the 1920’s rapidly put silent film actors out of work, launching a new era of movie stars and films
• Horse and buggies to automobiles: The shift from the horse and buggy era drove an entire industry — focused on horses — out of business, and created the huge American automotive industry, and launching companies like Ford.

In this case, the world of finance is where things are shifting today, and as an industry (investment banking and finance) is shaken to the core, undoubtedly there are huge opportunities which will emerge out of the rubble. There are other areas, outside finance, where things are also seeing world-changing shifts — think about music and Hollywood with the shift to online, print media (just ask the newspapers), and probably other areas where the next huge and successful companies will appear. Sure, these episodes usually destroy entire industries, put lots of people out to work, and are very painful–but over time new industries are created, and great companies are built.

Are web startups finally paying attention to the economy?

Jason Calacanis, CEO of Mahalo.com and oft-cited and followed technology pundit, just emailed out to his email list an email titled “(The) Startup Depression.” Calacanis says:

It’s my believe that the economic downturn will be much worse than it is today, and that 50-80% of the venture-backed startups currently operating will shut down or go on life-support (i.e. 3-4 folks working on them) within the next 18 months.

Make a list of every Web 2.0 startup to raise an A or B round and cross 80% of them off the list, because they will not make it to their next round of funding or profitability.

Update: Willan Johnson (COO at SocialVibe, former VP at Yahoo) has a good perspective on this here.

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.

Howard Anderson, a venture capitalist at Battery Ventures and a professor at MIT, has an interesting post on GigaOM about 5 Reasons To Move Your Startup Out of Silicon Valley.

Anderson doesn’t mention Southern California–maybe because we keep beating New England in venture funding, or because his first point–that cities where the weather sucks are good for keeping people at work–doesn’t apply. But, he does make a good point:

All tech startups need just a few ingredients to germinate: sophisticated money; first-rate technology universities; and a few template successes (a Google or a Facebook, and so on) to encourage founders to get off their duffs.

Here’s in Southern California, that first-rate sophisticated money includes both a good pool of venture investors (not to mention lots of transitory money from Sand Hill Road); lots of technology universities (Caltech, UCLA, USC, UC Santa Barbara, UC Irvine, UC San Diego, Harvey Mudd, etc. etc.); and lots of “template successes” over the years (Qualcomm, Broadcom, MySpace, Overture, LowermyBills, Pricegrabber, JAMDAT, Proflowers, and literally hundreds of others).

One of our regular readers emailed me this morning, asking about what was a fairly sparse early morning email (and corresponding short list of items in our RSS feed), asking me if there was some kind of slowdown in the news, and if that was related to the economy.

It’s always tough to tell real time, however, the last two weeks of August are historically slow news weeks. It’s the tail end of summer vacation, some folks are probably already looking towards labor day for their last summer hurrah, and most companies are looking towards the upcoming fall conference schedules for major releases and announcements.

Based on email bounces alone, a good chunk of our regular email readers are off at the beach, up in the mountains, or otherwise somewhere else except sitting at their desks. It’s always like this, as far as we’ve been sending out our newsletter.

On the other hand, slow news weeks also are the hallmark of a slow economy. During the dot com bust, the volume of news items in our newsletter went from something like 10-15 major news items on big days (go-go bubble days) to maybe 3-4 items, many fairly minor. It’s just a reflection of how much economic activity there is out there. Last year, there wasn’t nearly the normal summer slowdown you see in August; but then again, there wasn’t the long parade of bad mortgage and credit news, store closings and layoffs, and overall bad economic news you have been hearing lately. Today is quieter than a typical Monday, but the key will be news volume when everyone’s back in September.

On the “when will the recession hit the Internet front”: today, Westlake Village-based ValueClick announced it was reducing second quarter estimates due to a drop in Internet advertising — specifically, lackluster growth in display advertising and a steep dropoff in lead generation advertising. Despite what seems like boom times in technology today, it’s pretty clear that subprime mortgage loans, record setting foreclosure levels, runs on the bank, gas prices and (maybe the most impactful on the technology pros out there) the closure of Starbucks stores everywhere — that the economy is not in a happy place. The question is: how far and wide will dropping CPMs and lackluster retail activity hit online businesses?