Hard economic times are already having a noticeable effect on the tech blogosphere, with bloggers dividing into camps split between negative (doom and gloom) and positive camps. We’ve been covering both sides here at The Inquisitr, sometimes with interesting results, particularly in the comments. Here’s some key points on the economic downturn and the web industry, and the positive and negative takes on each.
Funding/ end of the bubble
- Negative: funding will dry up, causing an end to Web 2.0
- Positive: this only affects companies who are not profitable and require more funding, or who don’t already have funding. Profitable companies will continue trading.
Startup Fail rates
- Negative: the economic crisis will cause more startups to fail
- Positive: there is no evidence yet that more startups will fail because of the economic crisis. Startups that would have failed may fail more quickly
- Positive: there will always be funding for new startups, and the end of the last boom actually delivered better quality startups
- Negative: Early stage funding is going to be thin on the ground as VC’s become more conservative (supported by Sequioa’s presentation) New startups will not replace failed startups, causing a shrinking industry overall
- Negative: startups are already cutting staff, and as more fail, and few replace them, unemployment in the Valley will rise significantly
- Positive: the contraction in job opportunities will reduce the scarcity of talent problem and drive wages down (the Valley already having some of the highest tech wages). The result will be more affordable and better qualified talent for those companies that remain. The affordability may actually increase some employment locally, as the benefits of outsourcing work to India are financially less
- Negative: non-tech companies going out of business or in crisis will see a decline in advertising that will hit startups reliant on advertising for revenue
- Positive: internet advertising will continue to grow during the recession, just at lower rates than previously expected, unlike advertising in heritage media which is expected to contract. Some analysts have said that companies will spend more on internet advertising as a portion of their overall spends because online offers a more efficient and trackable alternative than mass market, offline campaigns.
The “Cyprus video”
There’s a lot of discussion around the video of startup founders and employees partying in Cyprus earlier this week. The negative line is that while Rome burns, these people were living it up. The positive says that this was a holiday booked months ago, and everyone is entitled to a holiday.
I get the positive line, and certainly they were entitled to a holiday. The problem is that the exposure of the holiday (by their own doing) shows extremely poor judgment. People in attendance may in a matter of weeks or months be putting off staff, or even in a worst case scenario, shutting their startups. How do you relate to staff the need to tighten belts, or worse still tell staff they no longer have a job, when you’ve been living the high life on holidays, for all the world to see. Leadership comes from the top, and if there’s belt tightening needed, it should be demonstrated from the top down. Those that demonstrate that they are willing to take cuts with the rest of the team will always have an advantage over those who don’t.
The bubble is over, and no amount of positive spin can change that. It’s over because of the cash crisis: there isn’t going to be the same level of venture capital available in the coming year, even if we don’t know how much less that is yet. Marginal startups who would have taken additional rounds aren’t going to be able to raise as much, if any funding at all. Early stage startups may not be able to raise early stage funding at all. As startups fail, less new startups will take their place, and that’s the key in calling it over.
Just because the bubble is over though, doesn’t mean it’s an end to web startups and the broader industry. The wipeout is not going to be as bad as what we saw at the end of Web 1.0. Startups today have lower amounts of funding, are less over-inflated in their valuations and have not gone through IPO’s like the last time. Some even have real business plans and are making money. The lessons from last time may have not been fully learned, but enough of them were so that this time, the web and startup space will continue. For those left in business, less competition will result in increased user rates, increased opportunities for advertising (less overall inventory is always a good thing), lower staff costs, and a solid basis to ride out the broader economic crisis that will radically alter the landscape for offline companies.