Silicon Valley: Middle of the Bell Curve
Posted on October 9, 2008
Filed Under Web 2.0 Kool Aid |
I’ve enjoyed watching the economic crisis unfold because the tech blogosphere has provided no shortage of amusement. For instance, TechCrunch, once the bastion of Web 2.0’s irrational exuberance, is now providing almost daily posts discussing the impact of the crisis on the tech world.
As an active trader who has been playing these crazy markets (and doing quite well as an aggressive but cautious short), it’s quite clear: anything can happen right now. I let the charts tell me what I should be doing while I leave predicting the future to Miss Cleo and Howard Lindzon.
But for those far more concerned about the economy at large than the daily movement of stock prices, there’s not a whole lot to be optimistic about. There are significant flaws in the global financial system and the monetary policies of central banks around the world have played a significant role in creating them. These didn’t come about overnight (some major wheels were put in motion nearly 100 years ago) and they won’t be fixed overnight.
What has amazed me about the crisis is that it took so long for the so many in “the industry” to catch on.
Sequoia is “sounding the alarm and asking its portfolio companies to buckle down for what could be the worst economic downturn of their relatively short lives.” According to Om Malik:
They want the companies to cut costs, to figure out way to survive and emerge at the other end of this downturn, which could last years. The speakers went through each functional area of the business and told the companies how to cut costs. By holding this special meeting, Sequoia is telling its companies to put survival strategies in place and figure out ways to outlast the broader market troubles.
Uber-investor Mike Moritiz told The Financial Times earlier this week: “It’s pretty clear that demand is going to soften across the board for every company - it doesn’t matter if you’re selling to consumers or companies.” Moritiz isn’t one to mince words, and is one of those few people who likes to get ahead of the fire and not fight it from behind.
Prominent angel investor Ron Conway is sounding the alarm as well, advising the CEOs of his portfolio companies to “lower your ‘burn rate’ to raise at least 3-6 months or more of funding via cost reductions, even if it means staff reductions and reduced marketing and G&A expenses.”
Fred Wilson of Union Square Ventures found Jason Calacanis’ recent email to be “a great ‘wakeup call’ for everyone in the startup business.” According to Wilson:
Life is going to get tougher for everyone in the US and possibly in all parts of the world that are tightly linked to the US economy. I think startups fall into that description no matter where they are based.
The obvious question, of course, in all this, is: where the hell have these people been?
It’s common sense that the global economy is in trouble and contrary to what some may believe, the writing has long been on the wall. Plenty of astute observers have been talking about the problems inherent in financial systems and monetary policies for years.
As such, it’s curious that prominent investors who never hesitate to play up their ability to provide entrepreneurs with sage advice today clearly aren’t telling any of their portfolio company CEOs anything they probably don’t already know.
And what is with all this talk of keeping burn rates low and running a tight ship? Isn’t this what good companies do at all times? Why are investors only encouraging prudent management now when it may be too late for some startups that have been run by drunken sailors?
Personally, I’d rather know how to swim before I find myself on the Titanic. In other words, companies that were well-run before the shit hit the fan have a better chance at surviving (and possibly even thriving) than the companies that are going to be forced to change their MOs in the most challenging of circumstances.
Take Digg for example. At the Future of Web Apps conference in London, Digg founder Kevin Rose spoke of the need to make Digg more meaningful to a mainstream audience, not the small circle jerk of geeks that it is dominated by now. One need ask: why is Digg recognizing just now that it has demographic limitations. What exactly has Rose been doing these past 4 years? Oh, I see. Maybe the reason Rose stated “It doesn’t feel like I’m working, ever.” is that he hasn’t been.
While Rose claims that “nothing’s changed” due to the economic landscape because Digg is “run fairly lean,” it’s difficult to call a company that has raised $40 million “lean,” especially when it plans to spend a chunk of its recent $29+ million raise on “going international.” And given that Digg relies on an advertising subsidy from Microsoft, it’s even more difficult to call Digg a well-oiled money-making machine with attractive fundamentals.
When it comes right down to it, the ongoing economic crisis has proven three things:
- At best, prominent VCs are keeping up with the curve of the general populous and at worst, they don’t know shit.
- The companies many VCs have been funding aren’t “fundamentally sound.”
- VCs are increasingly admitting (in their own ways) that they had either been promoting bad behavior (excessive burn rates and free spending, hype over revenue, etc.) or tolerating it.
Of course, not everyone wants to believe this.
In a recent post, “social media expert” Aaron Brazell suggested that all we need is a little leadership and inspiration:
We need leaders. We need people who are going to step up and instill confidence. Fred Wilson did this yesterday and I want to see more from a fiscally minded individual like him (he’s a VC). Scoble is still trying to process it all, and that’s expected, but I hope he will come to grips and start inspiring people at some point.
Let’s make it clear: Fred Wilson is a venture capitalist. Not a central banker. Not a prominent economist. Not a hedge fund manager. Not a respected trader.
He may be a smart guy (I don’t know him), but I could argue that the teller at my local bank is just as “fiscally minded” when it comes to this topic. Do I care what he thinks about the global economy? Of course not. To be fair, however, Wilson did attempt to instill confidence by buying Google at $400 share catching a falling knife. Hasn’t quite worked.
And I hate to inform everyone, but traders in the pits of stock exchanges around the world don’t know who Robert Scoble is. Amazing, isn’t it?
The reality is that people like Wilson and Scoble are not leaders. And while there may be quite a bit of misplaced fear and irrationality in the markets today, there’s still not a whole lot to be inspired about. The A-list personalities of the tech blogosphere are not going to change that. This is far bigger than the circle jerk of the blogosphere.
So what are those in the world of startups to do?
For those who that have been relying on hype and bullshit, one word: pray if you haven’t already found greater fools. For those who have real businesses that make real money: things may get ugly but if you know what you’re doing and act wisely, you have as good a shot as any at seeing your business through.
And for everyone else sitting around playing with their pricks, there’s Twitter. That’s right -according to Mark “Rizzn” Hopkins, all we need is a little technology:
We have a responsibility to be encouraging to our fellow social media denizens (and our real life compatriots). We all have the tools at our disposal to carry ourselves through whatever economic crisises come our way.
If only Tom Joad had a Twitter account.
Print This Post
Comments
3 Responses to “Silicon Valley: Middle of the Bell Curve”
Leave a Reply
Sponsors
About
Drama 2.0 spikes the Web 2.0 kool aid by providing critical analyses of Web 2.0, its people, its startups and its impact on the world of media. Other topics are explored when Drama 2.0 has been drinking too much 1975 Dom Perignon. Read more about the Internet's version of Keyser Söze and find out what people are saying.
Ads
Drama 2.0 by Feed
uh oh - you included mark and mashable in the same post!
don’t you know that stock traders on the floor keep saying “if i just had a moment to twitter this and friend that guy on facebook, the market would rebound” ?
Wilson and Scoble? Leaders? Wilson is at least readable, but this is the man who said “the future consists of everyone broadcasting all their thoughts and experiences to the Internet” (that’s from memory but I’m not far off). Now that might have been hyperbole, but there’s good hyperbole and bad hyperbole. Good hyperbole is when you express your liking of cats by saying “Sometimes I prefer the company of cats to humans”. Bad hyperbole is when you say “I’m going to slaughter the entire human race so the world can be overrun with cats, starting with you”. Wilson scares me. If he was leading me anywhere I would stay at least six feet back so I could see what I was getting into, and have a rope tied to my waist.
As for Scoble, no comment required other than pointing to that post where he took pride in finding Twitter more important than his infant son. I don’t go in for the media’s theory that a man’s private life is a 1:1 scale model of his leadership qualities, but really.
I have no idea what sort of “leadership” Brazell thinks business executives are supposed to provide. Tell everyone that it’s all OK? Anything they say on that will either be insipidly obvious (”the market moves in cycles”) or totally wrong (”all we need is confidence to return and the bailour will provide that”). Set an example by building great businesses? Back to “what were they doing before” again. Maybe he means that executives should act not just in the interest of their business, but in that of the wider economy. As destructive and immoral as that is, the tone of some articles calling for more money to be invested in Silicon Valley companies not because they’ll succeed, but because without it they’ll fail, certainly comes across like that. Now that really would make this downturn permanent.
[…] of my readers forwarded me a tweet from one of my favorite VCs, Fred Wilson: Thinking that the FCC’s ‘white space’ decision means broadband internet in cars […]