The Valley's proponents become its critics

Louis Gray · October 13, 2008 · Short URL:

The squeeze will be noticed by companies seeking the next series of capital

 Friday's stock market roller coaster was one to remember. With the Dow Jones Industrial Average at one point down more than 500 points early in the session, again, a colleague and I headed to lunch just before noon with the market down more than 400. As we ate, the TV screens alerted us to a market rally that saw the market reverse course, racing beyond the break-even mark to crest at almost 200 points up, only to fall back down to a loss of more than 100. In between bites and conversation, I'd pass along a report: "Down 200. Down 100. Even. Up 50. Up 150. Even again." My latest position in Apple, created just Friday morning, at one point was up 10 percent in the space of hours - making me feel good, if just for a day.

The rise and fall euphoria and despair that we've all seen as the market rises and falls (and falls and falls in recent weeks) is not uncommon. The crowd mentality sees us piling on to negativity when things are bad, and blocking out risks when things are good. But even as things have gotten a lot more tight in our own personal financial accounts and 401ks, banks have gotten wobbly, and credit has gotten unstable, many of the major tenets that saw the Web 2.0 world lauded just a few months ago are still there - namely the ability to start a new company for much less, to attract a solid user base, and reduce burn rates to a level that wouldn't require significant funding. This means that even in times of scarcity, there's room for innovative ideas. And for those companies that already raised sufficient funds, or who have achieved profitability, their major focus should be hitting product milestones and gaining revenue, rather than worrying about keeping the doors open.

With the near extinguishing of companies entering the public markets in the last twelve months, combined with VCs saying funding will be tight going forward, and valuations lighter, the squeeze will be most noticed by companies looking to get the next series of capital, or those who find acquirers won't be offering the big numbers they had hoped. Many companies will be proposing hiring freezes to slow the burn, or letting non-essential people go.

But with that said, the technology advances that have let companies get off the ground for less mean the pressure from VCs and board members to turn thousands into millions and millions into billions is less than it was five years ago, when we saw a similar slowdown. Even Twitter, which has one of the highest profiles of "pre-revenue" companies, has only raised $15 million, a small fraction of the hundreds of millions given to Webvan, and other high-profile Web 1.0 flameouts. Seesmic, which visibly laid off seven yesterday, also has raised a conservative $12 million or so in two rounds, and Silicon Valley darling, FriendFeed, has only raised $5 million in its initial round.

It has only taken a few months of bad news on Wall Street to see some of the most visible proponents of Web 2.0 startups start to pick on them and demand significant changes. But the calls for a route to revenue and product quality should have been there when times were good, not just now.

Most of today's Web companies don't need staffs of hundreds. They don't need seven-figure marketing budgets. And many are cutting costs on their technology infrastructures by turning to services like Amazon's S3. So the burn rates of years ago have lessened dramatically.

What recessions do is weed out the bad ideas from the good and move timetables. Great ideas continue to be supported and funded. During the last recession, LinkedIn was founded, in 2002. Google went from being a curiosity to a world leader, going public in 2004 after years of slowness for Web companies looking to reach the market. And in 2003, MySpace was started, following Friendster's 2002 debut.

That the economy's struggles will have far-reaching impact is not under dispute. But for Web companies that have been smart about keeping their costs low, and their revenue and profits in sight, they will power through. To prematurely call for their demise and dance on the grave of those that don't survive is not the way to go.

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