Syntagma Digital
Editor, John Evans

Silicon Valley and the credit crunch

Doubt and Fear 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.

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Is another dotcom crash underway?

Continuing the uncharacteristically gloomy series of posts in Syntagma over recent days, I’m impelled to mention Greg Linden’s plausible post on the “coming 2008 dotcom crash”.

He writes : “The crash will be driven by a recession and prolonged slow growth in the US. Global investment capital will flee to quality, ending the speculative dumping of cash on Web 2.0 startups.”

The VC’s will go into damage limitation mode : “Venture capital firms will seek to limit their losses by forcing many of their portfolio companies to liquidate or seek a buyout. … Startups that managed to get cash before the bubble collapses will have a cash horde [sic], but will find little opportunity to rest on it. Most startups will find their revenue models were unrealistic and will rapidly have to seek change.”

A contrarian view was taken by Irwin Stelzer on last night’s BBC Newsnight. He felt the Sovereign Wealth Funds (see this post) would ride in to the rescue like the US Cavalry — as they have done so far. His tone was a shade too optimistic for my taste, much as I admire his opinions. The image of King Canute rose unbidden to the mind’s eye.

Back to Linden, who compares the current situation with the 2000 dotcom crash : “[It] was a much smaller crash without the fuel from broader problems in the US economy, but we still had investment capital shut off for a few years, most startups shut down, and the remaining startups shift business models.”

I believe the crash is already underway. I’m sensing a number of ad networks reassessing their operations and even closing down some programs. We can’t be immune from the wider economy.

Businesses that can live on short rations may ride this out through belt-tightening measures. Anyone with debt that needs to be renewed periodically will find their position precarious.

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How to launch a Web 2.0 business for peanuts

Well, $12,107 to be exact, but believe me that is peanuts for a working, potentially-profitable business. What’s more, the owner, Guy Kawasaki, is also promoting it in the process of explaining how he did it. It doesn’t get much better.

The deal is to cut out as many operators as possible, with the exception of the tech guys to design the site, and some lawyers. Without those, it could have been done much cheaper, but probably not without anxiety.

Here are a couple of his 26 bullet points that caught my eye :

* 0. I wrote 0 business plans for it. The plan is simple: Get a site launched in a few months, see if people like it, and sell ads and sponsorships (or not).

* 0. I pitched 0 venture capitalists to fund it. Life is simple when you can launch a company with a credit-card level debt.

* 4. I learned four lessons launching Truemors: There’s really no such thing as bad PR. $12,000 goes a very long way these days. You can work with a team that is thousands of miles away. Life is good for entrepreneurs these days.

So-called Web 2.0 businesses can be set up for peanuts — we did that with Syntagma Media because we weren’t sure if it would ever make any money. Our lack of faith has been amply rewarded in monetary terms ever since. Why invest money in something unpredictable if you can bootstrap the business from a credit card? A good idea is not more of a good idea because it has been funded by VCs, and you might just be selling chunks of a very good idea indeed.

Kawasaki is a shrewd guy, and not very experienced in technical terms. In fact, he’s quite like me really, minus the rough edges. So it’s great to see him make a go of Truemors. We wish him well and great fortune to come.

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