Dear Web 2.0: It’s Still the Economy, Stupid!
by Kara Swisher
Posted on September 15, 2008 at 8:15 AM PT
Last week, one of the things that struck me about the coverage of the two main tech conferences devoted to start-ups, DEMOfall and TechCrunch50, was the almost complete lack of discussion–or, more appropriately, worry–about the troubled economy.
This, even though the subprime mortgage crisis remains in full swing, along with the continuing turmoil around the stability of Wall Street financial firms, as well as Fannie Mae and Freddie Mac. Also, let’s not forget those sky-high gas prices.
Still, one entrepreneur after another got up and spun stories of companies built on fancy new ad models to come or the more hidden premise that they would get bought by a bigger fish up the food chain like Google (GOOG) or Microsoft (MSFT).
But as I wrote last week, all those stocks are suffering, and those companies are likely to be retrenching rather than expanding.
In fact, at an interview with Internet entrepreneur and investor Peter Thiel at TC50, he called Web companies undervalued. (See my video interview with Thiel here last November, in which he says a lot of the same stuff.)
As he told me almost a year ago, Thiel repeated his contention that the technology sector was still not in a bubble.
Well, perhaps not, but that’s actually because most companies in Web 2.0–despite their massive valuations over the last few years–aren’t going to have the chance get frothy and light enough to become so poppable.
Instead, most will likely fizzle away quietly, with no exits in sight as the economy weakens and puts a vise grip on companies that cannot survive the very tough financial road ahead.
That means the popular Web 2.0 maxim of “growth before profits” is in for a very bumpy ride.
It’s going to be especially true after this weekend’s latest round of bad news–the bankruptcy of Lehman Brothers, the sale of Merrill Lynch, the impending crisis at banks like Washington Mutual.
And with more to come, I could not help but remember the well-known political phrase used in the 1992 presidential race by the Clinton team: It’s the economy, stupid.
And that’s true even here in Silicon Valley, where the sun always seems to shine, even as the clouds gather.
(Also, here is a very good piece on the topic by CNET’s Larry Dignan on some more details of the impact on tech firms, specifically on selling products to financial firms.)
Comments
You are right when you say many of today’s startups or non cash flowing tech companies will just “fizzle away quietly”. The only way a bubble could occur is if Wall Street traders get involved, that’s when valuations become inflated and they throw good money after bad in order to sell and provide their clients with a positive return. They did it to Oil in June and July and that’s what got us where we are now. When i created Cocktail Match i focused first on potential advertisers rather than build it and they will come.
Posted by alfonso escamilla at September 15th, 2008 at 12:01 pmGood article, very reasonable — and I totally agree!
I think a significant part of the problem has to do with the way “technology” is bandied about as a “unit cost” (which is, as we may think, constantly decreasing according to Moore’s law).
However, “technology” goes far beyond mere bits — and measuring it is (as my economics professor once poignantly pointed out to me as we were discussing Schumacher) basically just as difficult as measuring a unit of labor.
Whether or not technology can be easily measured, I feel the skew created by Google’s algorithms is finally coming to an end (and it’s about time!
…. We already have many indications that the extreme aberration that resulted from too many people believing too much in Google’s algorithms — as if the engine were some sort of oracle — is now turning around and the pendulum may soon return to more reasonable attention to details such as logic, natural language approaches to classification, and editorial oversight. An algorithm that “plays with” billions of dollars overnight (the way it seems to have happened with Google/United) is a tell-tale sign that it’s time to get back to some fundamental basics in order and leave the pie-in-the-sky stuff about sophisticated cloud schemes with convoluted EULAs out of the question for the time being.
Posted by Norbert Mayer-Wittmann at September 15th, 2008 at 1:17 pmhow many of demos’ presenting companies have been acquired? demo has been around a long time and it would strengthen your writing to add some facts to it rather than just very obvious commentary…perspective with facts is always preferred
Posted by Sam Harrison at September 17th, 2008 at 3:24 pm@Sam Harrison, Demo has launched 1500 companies over the past 15yrs.
From demo’s web site, I found this -
“In just the past four years, DEMO companies have raised well over $2.5 billion dollars in the months/years following their debut at DEMO. More than 40 of these companies have been acquired by tech giants, such as Adobe, Cisco, Google, Microsoft, Motorola, Nokia, Symantec, Viacom, Yahoo!, and more. Past participants such as WebEx, VMware, Salesforce.com, iRobot, Linden Labs, Six Apart, and Roku have single-handedly redefined their industry’s market.”
I personally recall Grandcentral acquisition by Google, Ribbit by British Telecom from recent past.
Is there someplace on the web that lists startups and their exits, that would be cool to track.
Posted by Sudha Jamthe at September 19th, 2008 at 3:56 pm