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Written on 14th November 2008
1 COMMENT 
Patrick de Laive, Internet entrepreneur and co-founder of The Next Web Conference. Twitter: @patrick
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
Written on 21st October 2008
12 COMMENTS
Ayelet Noff, Next Web WebTipr Israel
In these difficult economic times, it is important for all companies to become more cost-efficient. One of the ways you can lower your marketing costs is by turning to social media marketing (in case you’re not doing that already). Promoting your brand on social networks such as Facebook and Twitter doesn’t cost you anything (except for the salary of the person who’s doing the job) and is increasingly viewed as the best way to market your product to your target audience. Here’s a list of 35+ companies that are using social media to carry out their brand message, amongst them, Coca Cola, Cisco, Intel, Dell, etc.
Where’s your social media presence?
According to Phantom CTO, consumers even expect a social media presence from brands:
“The highlights of the 2008 Cone Business in Social Media Study came out recently. The results of the study point to a growing trend in how consumers want to be reached by businesses. The study found that 60% of American consumers use social media and of those more than half interact with businesses on social media websites. 93% of American consumers who use social media expect companies to have a social media presence and 85% of them believe those companies should be interacting with consumers through social media.
Cone Researchers say that the results mean that “Americans are eager to deepen their brand relationships through social media,” explains Mike Hollywood, director of new media for Cone, “it isn’t an intrusion into their lives, but rather a welcome channel for discussion.”
Some social networks statistics
Social networks ARE seen as a welcome channel for discussion by consumers. See below chart from Forrester as well which breaks down interest by age groups (Note: This research was done a few months back and percentages are probably higher by now):
Much like social networks, coverage in the blogosphere is also a great way to get exposure for your brand and targeting those bloggers who would be specifically interested in your product is the secret formula for receiving the exposure you need. Don’t forget that bloggers are opinion leaders and their “say” is a crucial factor determining your product’s success or failure. If you approach the right bloggers that you think would get added value from your product, and you are able to gain their devotion as users and writers, then you have received coverage directly targeted at the right audience, without paying a dime. (more…)
Written on 13th October 2008
3 COMMENTS
Ayelet Noff, Next Web WebTipr Israel
During these times we are all somewhat paranoid about what the future will bring and whether we are entering a startup depression. In his newsletter dated September 27th, Jason Calacanis writes:
“It’s my belief that the economic downturn will be much worse than it is today, and that 50-80% of the venture-backed startups currently operating will shut down or go on life-support (i.e. 3-4 folks working on them) within the next 18 months.”
Jason gives startups a few pointers on how to survive the upcoming days and advises them to get focused, get leaner, and ultimately get profitable.
R.I.P Good Times
Om Malik had written last week that Sequoia held a meeting of all the entrepreneuers/CEOs of its portfolio companies and advised them to tighten their fiscal belts. Attendees were greeted with an image of a Grave Stone, with the following message: “R.I.P.: Good Times“.
According to The Marker, Other VCs such as Benchmark and Carmel Ventures in Israel have not only asked their portfolio companies to make budget cuts but have also taken their own advice and fired a few employees of their own.
So you may ask, is all this paranoia justified?
Some people in the industry think differently and much more optimistically about to the situation. Fred Wilson, of Union Square Ventures, an early stage venture capital fund in New York City, writes:
“But I do think Jason’s missing one important point in his email. It’s not the venture backed startups that are going to struggle the most…All startups are going to have to batten down the hatches, get leaner, and work to get profitable, but the venture backed startups are going to get more time to get through this process than those that are not venture backed. Here’s why.
Venture capital firms are largely flush with capital from sources that are mostly rock solid. If you look back at the last market downturn, most venture capital firms did not lose their funding sources (we did at Flatiron but that’s a different story). If you are an entrepreneur that is backed by a well established venture capital firm, or ideally a syndicate of well established venture capital firms, then you have investors who have the capacity to support your business for at least 3-5 years (for most companies).
Venture capital firms will get more conservative and they will urge their portfolio companies to do everything Jason suggests (and more), but they will also be there with additional capital infusions when and if the companies are making good progress toward a growing profitable business.”
Lack of IPO’s
According to VentureBeat, Mark Heesen, president of the National Venture Capital Association, believes there is an economic crisis in the lack of IPOs. but he doesn’t agree that so many start-ups are going to close. He believes there are still many angels who will continue to finance innovation among the seed-stage companies.
Mike Kwatinetz, founder and partner at Azure Capital Partners who invested in Bill Me Later during the post-bubble period and sold it recently to Ebay for $945 million, believes that this is exactly the time when investors should look for and target good business opportunities that they could profit from when the market revives.
He raises five good points:
- Since there’s less competition between the VCs, deals are priced more reasonably.
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Entrepreneurs have a better understanding of how much funds they really need in order to build their business and will stop asking for $40 million.
- The entrepreneurs who will stay in the game are those that really have a passion about building their company and not those adventurous entrepreneurs who come to Silicon Valley to make a few easy millions.
- There’s less competition between companies and there are less startups doing the same thing.
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One can hire a more skilled staff. Since the last bubble it’s been quite hard to find good people. Now this will change.
Flush out the doomed start-ups
So what do I think? In all honesty, nobody really knows what will happen as the startup world has never had to deal with such economic uncertainty in the past. However, it is my belief that the current situation will only do us good and allow those startups that have a unique offering to survive while flushing out those startups that were doomed to failure from the beginning. As Calacanis writes, companies now need to get better, more efficient, deliver more value, and use more cost-effective means to develop and promote their offerings. But this is not a bad thing. It just means that those entrepreneurs who really believe in their ideas need to find new ways to adapt to the current situation.
As Fred writes:
“I don’t think we are in a “depression” in startup land. We are in a down cycle driven by a bad global economy. I think the web and information technology is one of the few bright spots in an overall gloomy economic outlook. So if you are working on a web technology company, be happy that you aren’t working for a bank, a brokerage firm, an automobile company, or in many other industries. The tools and services that are made in the web technology business are only going to increase in demand over the next five years. But we are going to have to service that growing demand with leaner and more focused businesses and it’s time to start thinking more about profitability and how you are going to get there.”
Survival of the fittest
About a year and a half ago I wrote about the fact that we have too many startups offering us too many of the same things and that it may be time for Darwin’s survival of the fittest to take its place in the dotcom world. I mean, how many social networks do we really need?
As Stowe Boyd, writes:
“How many social bookmarking apps do we need? Is there really a place for seventeen social aggregators, or eleven blog comment plug-ins? Attention to hard numbers and real growth rates might lead hopeful entrepreneurs and investors to get smart fast and drop experiments that aren’t working, and to go back and dream something up that is really innovative instead of just-another-fill-in-the-blank application.”
Get funded one way or another
It’s time to get innovative people. It’s time to make changes. And if you’ve got a good, unique concept, I don’t think you need to be worried. You will get funded one way or another by VCs who still have plenty of dow or an angel who rather keep his money away from the Stock Market these days. Those companies that need to be worried are the ones that offer too much of the same and too little of the extraordinary. Sure, most startups will need to cut their budgets, but what doesn’t kill us, makes us stronger and the extraordinary will thrive. So stop getting depressed. Stop panicking. Depression and panic will lead us no where. Get inspired. This is your time to shine.
Written on 30th September 2008
18 COMMENTS
Patrick de Laive, Internet entrepreneur and co-founder of The Next Web Conference. Twitter: @patrick
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.
The Next Web Blog is closely associated with The Next Web Conference which is held annually in Amsterdam, The Netherlands. At this event speakers from all over the world come together to talk about, and show off, the future of the Web. (More info 
