Tom O’Keefe

Well, last week was one heck of a week. Wall Street saw one of its worst weeks ever – actually the worst since 1933. After 8 consecutive days of decline the Dow lost 2,400 points, a 22.1% decrease in just 8 days.   Both the Dow 30 and the S&P 500 reached their all time high on October 9, 2007 closing at 14,164.53 and 1,565.15, respectively. The Dow is down 40% to 8451.19 and the S&P 500 is down 42.5 to 899.22, since October 9, 2007.  (Numbers as of October 10, 2008 close.)

Back in 2000 it was technology that drove the market down and this time around it’s the financials.  It will be interesting to see how much technology will be affected by this massive decline. The internet boom of the late 1990s and early 2000s was spurred by massive internet IPOs that saw stock prices skyrocket for companies with shaky foundations. Over the last 5 years there has been some massive internet valuations but most of them never went public – this could work to the internet’s advantage this time around. During the Web 2.0 era many of these startups were acquired or financed by established companies.  Of course some of these valuations were exorbitant, YouTube bought at $1.65 billion & Facebook valued at $15 billion, but they never IPOed.  Facebook has been flirting with an IPO over the last couple of years but given the current market they’re definitely not thinking about it now. One benefit of remaining in private hands is the ability to steer your company the way you see fit – not the way stockholders see fit which is often influenced by emotion.

One benefit of downturns is a startups ability (or need) to bootstrap operations, be creative and run a more efficient business model. Based on Bizak’s startup statistics over 40% of websites rely on advertising to generate revenues. Today is a good day in the markets but it will likely take years to get back to the levels we saw just weeks ago. The first department to feel this pinch will no doubt be the marketing department. Advertising across the web will decline affecting not only startups but also Google. For startups this will hopefully result in new & creative business models – hopefully more startups will generate product sales, services and subscription models. If a website can’t monetize their free content (advertising, Google Adsense) then they might be forced to charge (micro-payments maybe) for it. Adsense was already becoming worthless and these recent events will likely make it worse. 

Other startups will need to lower their burn rate to weather the uncertainty. I don’t think VC money will dry up as much as it did during the first half of the 2000s but it will probably take pause to access the trickle down effect. Right now the markets are running on a lot of emotion so we need time to pass before accessing the situation. Tough times tend to generate some of the most creative ideas – ideas that capitalize on the situation. Think of all the major web apps that you use today – Google, Myspace, YouTube, Facebook, LinkedIn.  All of these apps were post “internet bubble” products that were launched during a time when many thought the web was dead. They helped bring the tech sector back in force. This time around it’s the financials struggling and maybe it will be tech that pulls them out? 

All in all it’s a time to conserve and take the necessary steps to ensure the longevity of your application. According to Ron Conway, startups should heed the same advice he gave in 2000 which includes: 

• If you are in a funding cycle, you should raise your funding as soon as possible and raise as much as possible.
• You must aggressively examine and pursue M&A opportunities (unless you have over 12 months of cash reserves!) ro insure you have critical mass (including funding, customers, rolodex power, market
  share, cash, synergy, etc.).
• Be realistic on valuations – they will fall so be ready and willing to co-operate.
• Look for corporate partners to invest so you can raise more money. You should also consider a sale of your company to your corporate partners.
• While it’s safe to say entrepreneurs have had negotiating leverage with the “down draft” in the market, the VC community will start exercising their leverage.

For me I have two startups and three more on the way. None of these applications are funded and all of my “salary” is in equity which will require me to wait another 1-3 years. During this time I’ll continue to launch new and exciting applications but I also need to prepare for the unexpected. To accomplish this I’ll likely join/partner with a well funded startup/company where we can equally benefit during this exciting time. Interested?  My resume and my bio.

It’s an exciting time because social and economic events create a snow ball of technological innovation. Innovation that can grow quickly and adapt efficiently. Whether this is the end of Web 2.0 or not doesn’t matter since no matter how you define it the next wave of innovation has just begun.