Digital Prophet Jason Calacanis Predicts Economic Troubles
Perhaps one of the more amusing aspects of the ongoing economic clusterfuck is the fact that some of the startup world’s most prominent personalities are suddenly realizing that this “crisis” is going to have a big impact on startups.
Not only have I been discussing the fact that the economic system of the United States was little more than a ponzi scheme for some time, I noted, of course, that Silicon Valley is not a “walled garden” separated from the economy at large.
But apparently my ability to read the writing on the wall put me ahead of the curve.
In an email to his mailing list this weekend, Calacanis wrote:
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.
Calacanis is quite the prophet, no?
According to Calacanis, the economic crisis took everyone by surprise:
Everyone I talk to is feeling confused, paralyzed and anxious–many are in full-blown depression. People are scared, and they should be. This could be the start of a very difficult time for our country and the rest of the world.
Apparently Calacanis hangs out with the deaf, dumb and blind.
But enough of my self-indulgence.
What are Internet entrepreneurs to do? Fortunately, Calacanis is as practical as he is prescient.
He reveals the why startups fail: bad ideas, poor execution and external factors (like, say, the global economy).
And then he goes on to provide some incredibly insightful advice to entrepreneurs trying to survive in these dark days:
- Execute better.
- Grow the talent you have.
- Fire average people.
- Cut spending everywhere you can.
- Find a revenue stream and ride it.
- Focus on your profitable clients.
- Make your top 10% better.
- Hold an optional off-site breakfast meeting on a Sunday and see who shows up.
- Build marketshare.
- Raise money.
Let’s go through each one:
- Execute better. Execution is always crucial to success. Serious entrepreneurs are focused on execution at all times.
- Grow the talent you have. Investing in recruiting and developing talent is something that smart startups do instinctively. It’s part of the culture.
- Fire average people. Let me put it this way: good companies never reward mediocrity.
- Cut spending everywhere you can. Smart entrepreneurs don’t cut spending because the economy is in the shitter – they always spend frugally because they know that wasteful spending never resulted in a profitable business.
- Find a revenue stream and ride it. Most successful businesses were started to exploit a revenue opportunity that was identified.
- Focus on your profitable clients. As opposed to what? Focusing on your most unprofitable clients?
- Make your top 10% better. Translation: strive for constant improvement. Another no-brainer.
- Hold an optional off-site breakfast meeting on a Sunday and see who shows up. Calacanis believes this enables an entrepreneur to determine who is dedicated and who isn’t. Note to Calacanis: tuned-in entrepreneurs already know who is willing to go the extra mile.
- Build marketshare. Isn’t this one of the things that well-run startups are focused on everyday (profitably, of course)?
- Raise money. While I don’t necessarily disagree with this (funding requirements vary from business to business), the bottom line is that if you don’t have a viable business in the first place, acquiring capital to survive an economic downturn isn’t going to do much for a startup except ensure that its employees don’t find themselves in the unemployment line.
Frankly, Calacanis’ email is quite revealing because it demonstrates just how out of touch the startup set has been with its “fund and flip” mentality of the past several years.
Not a single item in Calacanis’ list is anything more than Starting a Business 101. In my opinion, this indicates that Calacanis knows that most of the entrepreneurs that run in his circles aren’t building businesses. They’ve simply been having a good time.
At the end of the day, serious entrepreneurs don’t focus on executing, cultivating talent, spending wisely, etc. because the economy is going downhill – they do it because these are the fundamentals of building profitable businesses.
From that perspective, what Calacanis is saying is: the party’s over, kiddies. Building a real business is for grown-ups.
The only problem, of course, with this is that Calacanis has been one of the kiddies and his startup, Mahalo, is an overfunded SEO play (that I hope is generating over $9,000/month).
That aside, if Calacanis is right and 50-80% of VC-backed startups go bust within the next 18 months, it will tell us a lot about the type of startups that have been created and the type of people that the startup scene has attracted over the past several years.
And, of course, it will also tell us something about the VCs who fund startups.
Unfortunately, everyone will use the economy as an excuse for failure. But the reality is that the economy will have only sped the demise of these worthless startups and the fairweathered “entrepreneurs” behind them. Make no mistake about it: most of the VC-backed startups Calacanis believes will fail would have failed anyway.
Be careful with congratulating yourself too soon. We’ve yet to see the financial crisis’s real effect on the tech sector. Jason’s predictions of calamity are the same predictions he said were around the corner last year, and never came to pass.
Most importantly, while you may be right about your economic analysis, looking for validation in Jason Calacanis…
… well, do I need to complete that sentence?
Mark: you sure know how to misread my posts.
Nothing I wrote here sought validation from anyone. What validation is necessary? The situation is quite clear and it has been for some time, as I have pointed out for quite awhile. I simply find it amusing that people like Calacanis are rediscovering reality. Kapish?
As it relates to my self-indulgence, I guess you haven’t figured it out – when your entire economy is based on a fiat currency and a banking system that most closely resembles a ponzi scheme, the final outcome isn’t in question.
Right now, the only question is whether your government is going to let the system correct itself or whether it will sacrifice the dollar and its credit over the long term to perpetuate an inherently flawed system.
I’ll trade either for profit.
Finally, I think you missed my last paragraph:
In case you didn’t put two and two together, Calacanis’ email has a lot more to do with finding an excuse for the inevitable failure of the startups in the industry he’s hyped than it does with his concern over the economy.
VCs have been acting pretty much like mortgage companies the past few years: giving money to people who will never have enough revenue stream to reimburse initial investment.
While Washington has decided yesterday to grant a 25 billion dollars bailout to Car companies, I hope they will never imagine a bailout for VCs.
Drama:
I actually have a business question- we are running a bootstrapped company, and it’s relevant for us.
Why is the typical remaining lifetime of a funded startup 18 months?
Let’s do some back-of the envelope calculations:
Assume they have raised 50m in rounds A-C (perhaps 3m in A, 7m in B, 40m in C). They now have about 30-60 employees each consuming $120,000/yr (with overheads), so the burn rate is somewhere around 5m/yr.
Naively, with this burn rate, they could last at least 5-7 years, assuming no revenue at all.
Now, I know that they will probably not last that long, judging by the 2001 fallout. But can you explain why? Is there a mechanism for VCs to take the remaining money out typically?
As far as I understand, founders in such a company would now hold about 20-35% common stock, employees 20%, and VCs about 40-50% preferred. The board would say have 3 VCs and 2 founders, so the company is VC-controlled. What are the mechanisms that will shorten the lifespan to 18 months?
“Fire average people. Let me put it this way: good companies never reward mediocrity.”
Interesting idea… but how does one explain the highly-rewarded corporate and banking leaders who got us all into this mess? Or the highly rewarded VCs who fund so many stupid ideas?
In small companies and startups it’s easy to see who is pulling his or her weight. However at bigger companies it becomes more difficult and leaders tend to reward people who tow the company line and those with different ideas aren’t rewarded.
Look at the demise of some pretty big companies in the area like eBay (despite their mediocre former CEO’s high profile and even higher personal financial rewards). The valley is littered with smart people who were pushed out of companies like this. They weren’t mediocre, they just may not have fit the corporate culture or perhaps didn’t play their political cards right.
My point is that one needs to be careful how “mediocrity” or “high performance” is defined or you’ll quickly squeeze out potentially valuable alternative viewpoints and skills and end up with a bunch of yes-men and a boardroom full of clones.
Duke: The banks knew from the beginning of this particular mess that they would never be allowed to fail. When you have a win-win business model, where you either coin it in on high-risk investments or get bailed out by taxpayers’ money, employing people with intelligence and/or integrity is an unnecessary overhead.
yeah anyway, vc backed companies are only 1% of all companies who seek funding
so no idea on total stats, but even if there are 100,000 companies who pitch to vc’s each year and less than 1% get any backing the rest plus the tens of thousands who never seek funding or get it in other ways are the backbones, not vc funded companies. They are not bellweathers.