Venture capitalists are worried and urging their portfolio companies to enter survival mode. The layoffs have started. Michael Arrington has declared Web 2.0 dead.

While there are some who still cling to hope (and there are still some in outright denial), it's clear that most of the people involved with the world of internet startups have accepted the reality of the global economic "downturn" and understand that its impact on the industry will probably run deep and it will probably be prolonged.

After all, we're dealing with a possible meltdown of the entire financial systems around the globe (and we're anywhere near out of the woods yet).

So what does it all mean for internet entrepreneurs? What is going to happen?

While we haven't yet reached capitulation in the stock markets around the world, there are some who believe that we're almost at a "bottom." I'm not prepared to make that call and quite frankly, this has little do with the doom and gloom many in Silicon Valley are preparing for.

The reason? Stock market "crashes" are typically leading indicators for the economy at large.  Even if the markets hit bottom this week, it's unlikely that "business as usual" will resume because a bottom does not a recession prevent.

Thus, it is safe to say that things are going to get a whole lot tougher for many entrepreneurs and startups.

This time around, Silicon Valley wasn't the cause of the bubble that has everyone scared but make no doubt about it - Silicon Valley was in its own bubble (again).

Hype trumped revenue. “Critical mass” trumped profitability. “Viral growth” trumped sustainable growth.

One need look no further than the insane valuations given to “hot” startups like Facebook, Digg, Ning and Meebo to see Irrational Exuberance 2.0. And one need look no further than the plethora of angel and VC-funded “me three” startups to see Capital Glut 2.0.

Now that the future looks particularly hazy for overhyped startups without viable revenue models and VCs are being forced to rethink their values (as they always do after a bubble), it’s time to face the facts.

Unsustainable startups will go under. There will be layoffs. Funding will be harder to raise. M&A activity will be a lot more conservative. For most startups, the term IPO will come to mean "Impossible Public Offering." And fair-weather entrepreneurs who think the startup lifestyle is just one big partywill be forced to look for fun and games elsewhere.

This may sound like bad news but it really isn't because there is a silver lining.

In the fallout that is beginning, the wheat will be separated from the chaff. The fittest will survive. True entrepreneurs will continue to develop innovative solutions to painful problems.

Think of this as a cleansing. I for one am a fan of regular bathing and hopefully the world of startups will get a good scrubbing this time around so that all that's left will be squeaky clean.

Even though it may not be a pleasant place right now for many, the world is not ending. The days of cashflow-negative $15 billion startups are, however.

If you work for a company that’s profitable, you have as good a shot as anyone at keeping your job. If you run a company that sells products or services that individuals and businesses actually pay for, you have as good a shot as any company at staying in business.

The panic that is making its way through the tech blogosphere is driven by fact that many people haven’t been working for and building these types of companies. And to be sure, these people have good reason to be worried.

Drama 2.0

Published 13 October, 2008 by Drama 2.0

237 more posts from this author

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Comments (1)

Ian Jindal

Ian Jindal, Founder and Editor in Chief at InternetRetailingSmall Business Multi-user

Hey Drama2.0 - a fun but hardly earth-shattering insight here. Good businesses with real business models will have a chance of surviving, but we should also recognise that this isn't a visitation of "justice" or "fairness" - in tempestuous times the foolish, the unlucky and the good can all suffer.

The sadness is that there are good businesses who - in a one or two year timescale - would be viable but who go under due to the seizure of short-term liquidity issues. This isn't limited to dot-com-2.0s of course. There are also crap businesses who simply managed to grab and sit on chunks of cash and who will therefore be able to sit out a downturn/recession/depression (delete according to your level of pessimism).

While there'll no doubt be chuckling and schadenfreude in double helpings from some quarters, it's an unedifying sight. Sure, there are excesses to be parodied, but we shouldn't forget that some of the web2.0 hype has stimulated useful action in slower-moving companies. Equally there are some fundamental shifts in the use of data, interoperation, web applications and improved interfaces that have come from the serious work in web2.0 companies.

If the downturn cuts out some of the hype then I for one will be glad.

If the downturn just offers opportunities for piety or 20:20 hindsight then I'm tired already.

Ideally we'll be able to take useful messages from the recent years - in terms of pace, agility, open-ness, interfaces and improved customer/user experience - and move these forward in businesses that understand how to generate profits. We need to guard against smug retrenchment and conservatism, and using the downturn to somehow justify the "do nothing and we'll be OK" brigade.

Let's set our clocks: I expect that we'll be posting in a similar vein in 6-7 years: we should book the time ready for the next bubble's popping. I wonder what it'll be in 2014?

almost 10 years ago

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