The Next Web

Bad economy ≠ no opportunities

Written on November 14, 2008 – 4:50 pm
Patrick de Laive, Internet entrepreneur and co-founder of The Next Web Conference

In 1987 we had a major stock market crash, ten years later (1997) another correction of the stock prices made us shiver and in 2001, still fresh in mind, the bubble burst, resulting in a vaporization of almost all Internet related stocks. We can say that 2008 is a dramatic year for stocks, but also for the worldwide economy.

We, the people, lost huge amounts of money (wealth) during each and every of these crises, but many people earned their fortune during these bearish times. The difference between a good economy and a very bad one is that during a good economy the wealth of a lot of people increases, during a bad economy Joe and Jane Schmo loose wealth but there are still big winners. You could argue that under certain circumstances the stock market is a zero sum game, meaning that for every dollar won someone else lost 1 dollar (conventional economics state that the stock market is not a zero sum game, it is not easy to understand and goes beyond the scope of this post).

Lots of professional traders for example earn money when stock goes up or goes down, the higher the swings the better, as long as the market moves these volatility traders earn money. Lets translate this to the web. We could say that there a loads of companies going after gold but are actually poorly managed, have the wrong/right people in the right/wrong place, or anything else that makes it that a company doesn’t work (the Joe and Jane Schmoes of this world). On the other hand we have some professional traders in the embodiment of professional and healthy companies that know there way around, build stuff that people want and earn money. Those are the companies who have the opportunity to grow and come out even stronger of this

The good things of a bad economy

Employee loyalty
Your employees will love you if you nurture them and can give them security that they can keep their job. As it becomes more difficult to find another job, your employees are more likely to stick with you then to try finding another job at another company.

Fire badly performing employees
First of all a bad economy urges companies to think over their strategy and their right of existence. If you have a company and you have employees that do not blend in very well, the crisis is a good excuse to use to lay off some staff. In Europe it is really hard to fire someone, but during the crisis even that is possible. I’ve heard some companies saying that they don’t need to lay off people cash wise, but do so because if there is a time to say goodbye to some people who are more happy somewhere else, that time is now. Everybody understands it.

Down to earth
Second, companies and their employees get down to earth again and focus on stuff they are good at (and makes money). No more wild and excessive parties, no more buying every gadget we think we need. No more Salmon and caviar for lunch (or is this a bad thing..). The message the economy sends us is clear. Hold your horses and go back work.

Less competition
Third, a lot of companies that are badly managed or are underpricing their services in the hope to get some market share will not make it through the downturn. This is good news if you have a company and have positive cash flows. You’ll survive these turbulent times, you might even come out stronger and you might loose some of your competitors along the way!

Internet services might find new clients
Fourth, I think companies are looking for a way to reduce costs, they’ll go over all costs and might find qualitative equal but cheaper ways to get the job done. In general this is good news for Internet companies (you need to have a good product or service though). A senior manager at Amazon mentioned that since the economic downturn they see an uptake in the use of their web services. I wouldn’t buy Amazon stock in the blind based on this info, but see it as an example how high-quality-low-costs services find new clients.

Buy things cheap
Of course, you need to have cash in the bank, but you can buy stuff or companies cheap now. We saw acquisitions in the banking scene (e.g. the Dutch government that bought the healthy part of Fortis, including ABN AMRO, for less than the price Fortis paid a year ago for ABN AMRO alone). But what about buying Yahoo! for almost 1/10th of the price you’d pay 8 years ago (Apple… maybe). And there are a ton of nifty startups out there that build a sweet service and are up for grabs for the bigger fish in the sea (publishers, wake up I’m talking about your chances here).
Buying companies now allows you to grow and will create you a stronger position after the crisis, if all goes right.

Read also this excellent essay of Paul Graham on Why to Start a Startup in a Bad Economy

I hope you like that post!

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crisis, economic crisis, economy, startups

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What the financial crisis means for us, the web industry

Written on September 30, 2008 – 1:14 pm
Patrick de Laive, Internet entrepreneur and co-founder of The Next Web Conference

It cannot be that you haven’t heard of the financial crisis. Bailout, crisis, Dexia, Fortis, etc. are buzzwords discussed on Twitter and are all over the financial news.

What happened and will it affect Internet companies?

It is a very complicated story, but with my financial economics master of science degree, my experience as a broker on the Amsterdam Exchange (10 years ago), and the fact that I lived in Argentina during their major financial crisis, I’ll do my best to share my thoughts on this economic turmoil.

The first problem

The American economy has shown a deficit on the balance of payments for something like 50 years in a row. Meaning that they import more then they export, or in other words they sell more dollars than dollars are bought. According to economic theories a deficit on the balance of payments should lead to a weakening currency. A lower dollar makes import more expensive and export more attractive and this would turn the deficit into an excess on the balance of payments. The problem… this never happened.

The dollar stayed strong. How is that possible? Well on the other hand a lot of capital investments got into America, people/companies investing in American companies, but foremost it was China that kept on investing / lending money to the US government. This way China bought billions of dollars (to keep the dollar strong in comparison to the Yuan, so that America would keep on buying Chinese export products). America financed their growing economy with borrowed money, mainly from China.

The second problem

In the US, real estate prices were soaring. The American economy lived on the rise in housing prices. It was easy to get a mortgage (and a second one) to finance houses, cars, holidays, burgers etc. Because the prices of American real estate kept on rising, people could borrow money based on their property. People kept on borrowing and now most Americans live in debt. All those mortgages need to be payed off, but a lot of Americans can’t pay the rising bills. Some banks were highly exposed to ‘bad mortgages’ and needed to borrow huge amounts of money (from other banks) to ‘keep things alive’. Interbank rates rose because the risk got higher. Then the first banks started to fall apart and nobody exactly knew which bank was exposed to this new threat. Trust is the main driver of our economic system and trust began to fade.

The people on Wall Street took outrageous risks (and reaped outrageous rewards) hoping and counting on a safe parachute (the government) to land when things got bad. A failure of the American economic system would lead to a worldwide depression and that is not what the government would let happen, bankers thought.

Well things got out of hand. People are panicking, there is no trust in the banking system and everybody is dumping their stock.

The bailout plan got refused, stocks are going down and we’re on the verge of the biggest financial depression in the history of mankind.

What does that mean, how will it affect us?

This is really hard to predict. As long as there is no trust and people believe it is better to put their savings in ‘a sock underneath the bed’ we all have a big problem.

But okay, lets see what’s kind of easy to predict:
The financial sector will be hit hard, that is for sure, but as Microsoft CEO Steve Balmer said earlier today “No one is immune from this financial crisis”. Financial issues are going to affect both business spending and consumer spending. So we’ll see a downturn in the global economy.

For the Internet industry, this is also bad news. The next one or two years will be tough ones for startups in search of investment. Investors will take less risk, and will invest in startups that already have a proven business model in place. The time of throwing money at entrepreneurs who claim to have “a great Internet idea where people can share…. social… ” will be over. We’ll see a shake-out of small Internet services who can’t find a way to get their users paying for their service. I believe that it will be essential for small startups to charge money as of day one to make it through this financial crisis. (If there is no money available from investors, who else is going to pay salaries?)

In the short term, we will see a decline in advertising budgets for all companies, but in the medium term I expect an increase in budgets for web advertising. Companies will have to spend their money more wisely, so I expect a bigger shift of budgets to the web, at the expense of TV and Newspaper advertising.

In the end, our economy is all about trust, trust in the banking system, trust in the people you work with, trust in the companies you work with, etc. The web ,and everybody working in the sector will notice the crisis, but new opportunities will arise and the web will come out stronger.

bailout, crisis, economic crisis

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