This means that all these bullshit 2.0 companies won't get their next round of funding. Makes my life a lot more peaceful in 12-18 months. Same thing happened last time, we were around back then too

I think your analysis is quite thoughtful. The contrarian strategy is quite viable but only affordable by those who have staying power like Ron Conway for angels or Google for companies. Those are the exceptions. The rest of the herd will have to follow the herd. Sure enough, in my neck of the woods, angels are not nibbling but holding back. Same principle applies to companies - while top tier companies like Google and Amazon may not be affected, at least not yet, the second tier and below are or will. Also, I am not as bullish on the level of innovation as you are. The Web 2.0 type of innovation is really not true innovation but an incremental enhancements at best. The so called innovation is certainly not desruptive, even though each and every Web 2.0 company claims to be. As a point of referrence, the PC, the mouse, the web are real and desruptive innovations. Thus, the market will take longer to rebounce due to this lack of innovation. Also, the difference this time around is a lack of stimulus in our local market and tremendous competitive pressure from the global market. I also predict that IT spending will shrink. Furthermore, a huge dump of IT equipment from failed financial institutions will saturate the market and affect the purchase of new equipment which will affect Sillicon Valley companies like Sun and Oracle. So, it may not be like the first bubble because most bubbling companies like Facebook are private. And when, not if, they burst they will hurt their investors but not the general public. Also this time around the valuations are high but are not as unreasonable as before with the exception of Facebook, Slide, and the likes, even though Sir Thiel, would like to convince us otherwise (Gee, wonder why?!) So, this melt down is not as bad as the previous one but nonetheless it's quite ugly.

Our startup has been running down the lane, twisting its head back, looking for the competition to come up from behind us, while at the same time trying to find investors who would help us buy some new running shoes. The current financial crisis slows the track for us all, but I think likely puts more distance between us and others who would be in the race..... still, it's getting harder in these ratty threadbare sneakers. Gatorade anyone?

Investing is all about liquidity i.e. cash. So my view is that a good time to buy or sell depends on your cash position and time frame. If you have significant cash from selling investments in 2005 to 2007, then this is a good time to purchase.

However, for a stable business, today's lower prices mean that there are fewer sellers. More people want to sell all or a part of their business when prices are high than when they are low.

However, for start-ups, they must sell stock to raise money to survive. So they are forced to sell stock. So there are more good angel investments at this time when prices are low. So angel investors will be licking their chops now. The key of course will be the usual evaluation of the idea, the management, the technology, the capital need, and the timing of when money in will become money out.

i love it when smart people read something and then do a post of their own. it's like a public conversation between two people thousands of miles away. you make a bunch of great points and so do your readers. i want to buy $goog and will start building a position if it gets to $400 in here.

The Muse:
I like your point No. 3 - innovation is key, and these companies are the ones innovating. In fact, they're the drivers of economic growth.... I do think you're No. 5 "negative" point is good too. I guess - very similar to five years ago - there will have to be a re-setting of option prices.

Drew: We're taking this broader economic slowdown seriously. So, we're operating as though it's nuclear winter so we weather this storm and not have to be among those companies that burn out before making money. We want to be around as long as Fark - what's that 8 or 9 years now?

David: I think you're right. Some angels, like Ron, seem to beat to their own drum. And, good points on what is true innovation. But whether it's innovation or just huge adoption and enhancements to an existing platform - you have to admit that the way we use the Internet today versus the way we consumed it during the last bubble has changed tremendously. There's innovation in the way we socialize and consume. The technology may be seeing incremental value-adds, but innovation in social norms is huge.

Fred: Be interesting to see if Goog gets there. My guess is that a lot of people think that price is also a good entry point, and so it may not drop there. but I'm sure we'll see a lot of volatility and swings in its stock price around its Q3 report.

Bambi: I agree that we became very creative at adopting new paradigms and embracing the online world, but we have not been innovative, or at least, we experienced a decline in our technological innovation, which is critical to sustaining our creative adoption. As an analogy, we managed to save some money and became very good at spending it (i.e., creative adoption), but at some point, we will run out of money and we will need to start generating some money (i.e., technological innovation). A very good example is the iPhone, which has nothing innovative about it. Not one single feature in the iPhone is innovative. Yet, it is arguably one of the most successful product with an unprecendent rate of adoption. Twitter is even a better example - there is absolutely nothing exciting technologically about Twitter. However, its usage is resulting in some interesting changes of social behavior. So Twitter gets an "F" on innovation but an "A" on adoption. My argument is that unless we innovate, we will eventually run out of creative adoption. Let me put it differently: we need more engineers working on solving real problems rather than MBAs coming out with services such as iLike, Slide, or Twitter, and God forbid another advertising network. Another embarassement in technological innovation is Google's Chrome. What's innovatibe about it? Considering the financial/brain power that Google has, it is indeed quite disapointing. That alone is an indication of how low our expectations have become. It is also a good indication of our lack of competitiveness. So, I for one, join people like Judy Estrin to help restore our innovative edge that we are losing.

Hmmm, forgive the further detour off-topic. David: While I usually agree with your analysis, I think you are confusing innovation with invention. I found this quote that I think sums it up well: "An important distinction is normally made between invention and innovation. Invention is the first occurrence of an idea for a new product or process, while innovation is the first attempt to carry it out into practice."

10 years in February. Very few companies with heavy VC investments will survive this, just like last time

Gary: I like that quote. Who said that?

Fagerberg, Jan (2004). "Innovation: A Guide to the Literature", in Fagerberg, Jan, David C. Mowery and Richard R. Nelson: The Oxford Handbook of Innovations. Oxford University Press, 1–26. ISBN 0–19–926455–4. (Sect 1.2, p.4)

To nibble or not to nibble? Well, I haven't put on my economist hat since, well, ......, since putting on the full-time mommy hat. Nonetheless, ..., I'm nibbling here in NYC.

.... on a muffin, that is :-) Okay, all (most) kidding aside, to answer your question -- as a former grad school colleague once said to me, somewhat jokingly, somewhat not jokingly,.... "to be a true economist is to answer all questions beginning with the two words "It Depends" ". Well rather than start that way and burden you with a long-winded response, I'll give you my short answer, and in fact my answer to most things lately, and that is, ...."I don't know"................, so socratic, i know. sorry.

"I don't know." Bambi, Now THERE'S a quote of wisdom (no, I'm not being sarcastic). Francisco-Phillips, Nomel (2008) Vator.tv. Nomel, are you another one of Bambi's relatives?

Gary: umm... yes

Gary: I agree with you on the difference between innovation and invention. I stand corrected. So, you can replace the word "innovation" by "invention" and the argument stands.

great article bambi. i think one of the biggest differences for private companies is that back in 2000/2001, many venture capital firms preferred to fund startups that could eventually do their own IPO. to them i think this was a litmus test of the strength of their business model. nowadays, the incumbent companies are flush with cash but are not as nimble as they once were, so it seems they are frequently looking at startups or private companies for acquisitions for features or platforms they otherwise did not have the time or resources to develop.