How Will Tougher Economic Times Impact The Web?
The front page of the NY Times Week In Review section today looks like this above the fold:
The associated article by Peter S. Goodman talks about how a US economic downturn might play out in the worldwide economy. I’ve gotten a lot more emails recently from readers who want to know what I think about the economy and what impact a slowdown would have on the web and web startup scene.
First, I have been concerned about the US economy for a while. My post yesterday about oil based trade imbalances is part of my concern. I am also concerned by large and sustained budget deficits. The twin budget and trade deficits have put the US dollar and US dollar denominated securities under pressure. Huge wealth buildups are occuring in other parts of the world, most notably the middle east, russia, china, india, and other rapidly developing economies. To date, that wealth has been reinvested in the US. But that may not continue.
Add to this primary concern the secondary concerns related to our housing and mortgage mess and the inability to lower rates much more to stimulate the economy and it certainly looks like we are in for some tough times here in the US in the coming years.
I suspect these tough times will be reflected in our capital markets. Certainly they will be felt in the public markets for US equities and I believe we are already seeing that. Last week saw the pulling of a number of public offerings that were planned for the fourth quarter. The IPO market is weak for sure.
The buyout/private equity market is also undergoing some changes. Debt offerings have become much more difficult in the wake of the subprime mortgage mess. Banks are focused on risk and risk management, as they should be. Buyout valuations are coming down as a result.
Will the venture market see the same choppy waters? It’s hard to say. There is a lot of money that has yet to be put to work in venture funds right now. Venture deals are not dependent on loans so the debt market is not likely to be a factor. It is true that silicon valley is starting to get more cautious. I’ve seen a number of stories lately that firms such as Kleiner Perkins and Draper Fisher Jurvetson are taking a more cautious stance toward web applications and services (web 2.0 in the vernacular). That’s a good sign. If silicon valley can self correct without a meltdown like last time, we are all so much better off.
There’s something else at work however. The web itself continues to be a major economic force, both in the positive and the negative. The web is disrupting and wiping out margins in industries like music, film, newspapers, and increasingly sectors like personal finance and software. But the web is having an equally positive effect in sectors like advertising and direct marketing. We (me and my colleagues at Union Square Ventures) believe that the web is accelerating its transformative power and that businesses built around a web foundation will continue to take share of the worldwide economic pie.
So I suspect that there will continue to be a healthy supply of capital targeted at web applications and services for as far as I can see. Capital chases returns. And the web appears to be an increasing returns economy at this point in time.
What is probably going to happen is the hype cycle will die down. The capital markets, including possibly the M&A market that has been driving returns in the web sector, will be less attractive. And we’ll have to build our companies for the long haul. Which is as it should be. Venture capital is long term capital and those that are patient and are prepared to hang in there through up and down markets will be rewarded.
Comments (Archived):
My data point for my own online subscription-based venture capital database is that customers are more expensive to acquire and they don’t stay as long. We’ve got several initiatives to improve our value propositions and marketing channels.Recessions generally weed out the poor performers and force the better performers to improve their game. Coming out of the recession, that’s where the best money can be made.
Fred, it seems to me the economy has been funded by various kinds of debt–federal, consumer, home equity, credit card, etc. At some point (now, it seems), we become so leveraged we can’t borrow any more to sustain the levels of spending. The most troubing of these is consumer debt, given consumer spending makes up 75% of the economy. That, coupled with the administration’s failure to do anything about illegal trade from China and as you mentioned the tightening of credit across the board, and we’re headed for a shakeup.Retail web properties will suffer, certainly. Venture bets should increase, though. And boomer spending might offset consumer pullback. Hard to say. Fuel and healthcare costs suck strength out of business, making it even tougher.So it’s a good time to raise money for early stage and expansion stage companies, but I’d imagine very early and late stage companies might have a tougher time?
If the web continues to be the force you suggest, perhaps US venture funds will be more cautious but shouldn’t investment continue into innovative web concepts — even if the funds are China based rather than US based? There isn’t a worldwide recession so much as a redistribution, right? Or is US money the only investment likely to see an ROI on web 2.0 since our society is currently the only demographic such apps appeal to?
I think what’s really going on is the emergence, aided by the web, of a truly global 24/7 economy rather than a cluster of national economies. Issues like climate change and energy are not political, they are global and the only mechanism we have that has a possibility of dealing with them is global business. Instantaneous worldwide communication (one of your firm’s target sectors) has changed everything…
Well said.
Hey Fred,Being a Canadian I just wanted to say that we (Canada) have been down a similar road to what the US is experiencing today. Back in 1992-93 our economic indicators were terrible as yours are now. I’ve long held the belief that through government policies of the day, our dollar was pummeled in the International markets, and it soon became the Canadian Peso – as I and others called it. Today, I believe your administration is doing the same thing, which will pay-off in the long run.Although it hurts the pride of many to take it on the chin as we did, that low dollar inevitably led to more manufacturing jobs, more investment in CDN companies, a rebound of real estate sector, etc… etc….I won’t bother going into the many factors and details that have lead to our success today, it would take volumes. The key though was to balance our budget and start generating surpluses which we have ran now for 10 straight years, enabling us to lower taxes which has additionally spurred the economy.I also believe that the next positive cycle for the public markets will be led by the Nasdaq and tech companies. It’s been a long time since the Nasdaq and tech were the darlings they were leading up to ’99 and early 2000. For the past several years everyone I know has been making money hand over fist in Oil & Gas and Metals & Mines, although not so much anymore. There may need to be a quiet period for a bit now, but money will always return to risk and if you compare the other sectors and what is happening in each, it appears that tech is next.
Hey Fred,Thanks for linking to my comments on the Fatty Crab moving uptown. Appreciate it! I really like your blog and I’ll list you among my favorites.
bear market = no rich IPOs?cash-rich companies like Google and Microsoft gobble up Web 2.0?what do I win?
The web is disrupting and wiping out margins in industries like music, film, newspapers, and increasingly sectors like personal finance and software. But the web is having an equally positive effect in sectors like advertising and direct marketing.So so so true. And it may me recession in the short term but it is true that it can be viewed positively in some various lights. Some industries are going to be forced to revolutionize their approach and it could mean good for the competitive market overall.Getting rid of some of the hype would be good, though. It’s deafening sometimes.
Yeh – finally a return to profit driven startups.Cheers,Dean Collinswww.collins.net.pr/blog