So far during this Crisis we’ve been discussing the crashing of big banks and financial institutions.
Today, the collapse of flatpack furniture giant MFI in the UK illustrates that the rot has set in on Main Street too. This has a long way to go yet.
But what about startups? These are small businesses with embryo staffing arrangements, usually depending on borrowed, credit card or venture capital funds to pay the bills.
Web 2.0 star and now a venture capitalist himself, Jason Calacanis, writing in Jason’s List — an email list for bright business folk — believes that up to 80 percent of them are on the point of going bust:
It’s my believe that the economic downturn will be much worse than it is today, and that 50-80 percent 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 percent of them off the list, because they will not make it to their next round of funding or profitability.
I know many such startups personally, particularly tech and internet businesses, and this assessment is devastating. It’s also nothing but the truth in all its stark outline.
Around six months ago, we predicted here that another dotcom bust could not be ruled out. It can’t, but there’s always hope before it happens that some features peculiar to tech startups will not be in the direct path of the storm.
The first thing to note is that the internet is a much maturer place to do business now. Many more people depend on it than back then. It’s also stuffed full of very big players indeed, companies that will ride out the crash on a large cushion of cash — Microsoft and Google, for example.
It’s the overextended startups that will splutter to a halt, fall into mothball mode, or their owners will simply walk away and do something else.
The dotcom collapse earlier in the decade had the effect of destroying the paradigm it was built on: that internet businesses didn’t need to make any money at all, just puff themselves up for an IPO on the stock market which would make the founders very rich.
It was a classic bubble that burst with an inevitability that took believers by surprise, but never fooled more experienced observers.
The problem was that entry costs, even then, were very low compared with similar bricks-and-mortar operations. The potential was obvious, but people simply went mad with the hubris of it all.
The current bursting bubble in house prices — one of the biggest asset classes out there — is apparently similar but much more infectious in that it penetrates to the very core of the financial system and affects everyone, not just a few thousand geeks who thought they had reinvented the world.
If you were involved with the online world at the start of the century you’ll know how it felt to go under with a bang. It must feel eerily similar now.
Small-to-medium businesses with no debt, some cash reserves and crucially no need for further rounds of funding — like Syntagma Media — will survive, if they play their cards right. The danger is that their server companies won’t and they find themselves suddenly cut off.
This Crisis will affect everyone in different ways. It would be a prudent move to assess any business’s configuration to determine its weak points. That could save their skin.