While travelling in NYC & to RIT to speak at their entrepreneurs conference last week, I collected some thoughts about our turbulent times.
We started Socialtext in 2002, during the last crash, a time when many said it was the worst time in history to start a company. But history shows us that the best companies started in the worst times, such as Apple or Microsoft. And all great companies lead their way out of recessions.
Equity is the Ownership Society
Silicon Valley runs on equity, not credit. The source of funding isn't drying up.
How equity is allocated, or rather the terms and valuation, will be effected. Too early to say how macro will effect it because all macro is currently just volatile uncertainty. While the classical shift in recession for venture capital is either towards more stable late stage (safe bets) or advanced R&D early stage (long bets), the underlying costs of startups have changed and some contrarians will even out the stage distribution.
How equity is reallocated will favor new money, but this is kept in check. Those who invested must be, those who vested must be incented and those that will work in the future must be offered upside. There will be greater requirements for startups to be more capital efficient, but at the same time investors will seek to further capitalize their companies to weather the downturn. There will be less leverage available for growth, so you will have to find more leverage within your business model on your own.
Scarcity and Abundance
Recent blog posts have some concerned that venture capital is drying up, but that is a perception problem. VCs are rightly advising that companies conserve cash, but entrepreneurs already know that. Dave McClure put it better -- its not about conserving cash (although Cash is King), but finding your frigging business model, fast. Don't panic. Scarcity causes, or at least favors, focus.
The scarcity we worrry about in Silicon Valley isn't our own. We have an abundance of innovation that is hard to disrupt, in part because we are so connected, through equity, but also social capital. All in a culture that rewards success and failure. I've got your ownership society right here.
What we do worry about is our customers. On the consumer side, even more people will spend time on line. Not just in the way that unemployment gave a boost to blogging. But a fundamental shift in how people spend their time has occured. Unfortunately, they will spend money with their time, but the difference is literally marginal. For our company customers, whole industries will dry up quickly, but our markets are more global now. And what the Valley brings to these companies is competitive advantage needed in turbulent markets -- from cost savings to productivity to the ability to innovate your way out of recession. If the Valley can create value while other sectors of the economy do not, we will keep and grow our customers.
Make Do With Less, Together
If you are one of our customers, just like us, you likely have to make do with less, in your personal or professional life. Funny thing about productivity. You can't drive more in a company by asking individual employees to work harder, the gain comes from how they work together. As a consumer, yes you can personally spend less, but you can spend smarter and find ways to make more with others.