Macro-economic gloom and startups

My last post of 2007 was entitled No predictions for 2008.  I wrote that in part because I’m reading Taleb again and you can’t turn a page of his book without being reminded of how people are wrong more often than they are right when it comes to the business of forecasting the future, and I’m now glad I took that line because if you had pressed me at the time I would have been a lot more optimistic about the year ahead than I am now a mere three weeks later.

As an aside which I may come back to later, as I read Black Swan I increasingly think that managing day to day is an almost totally different activity to managing over the long term.  Maybe so different that that doing both adequately at the same time is going to be prohibitively challenging.  The problem is that day to day management requires decision making based on short term predictions which you need to make with confidence (this sale will close next week, we can get a successful partnership with Google etc. etc.) yet if Taleb is right, and I think he is, long term planning requires you to embrace an almost overwhelming amount of uncertainty.  Taleb would argue that at the moment we effectively ignore this challenge by pretending the long term is more predictable than it really is – to our detriment when it all goes wrong.

Back to the main point of this post which is what the current macroeconomic gloom means for startups.  This topic is on my mind because of two conversations I had yesterday on this topic, one with an entrepreneur and the other a VC (Damon Oldcorn of Zebtab, and Paul Fisher of Advent), and in both cases we ended up concluding that if economic picture continues to deteriorate it will make a difference to budgets and financing strategies.

Hopefully we are all working in high growth markets and so even if the overall economy slips into recession we will still be operating in growth areas – albeit growing more slowly.  Which means that all things being equal our companies will still grow, just more slowly than before.  Slower growth means less cash in the door which for loss making companies either means bringing the next fundraising forward or reducing expenses.

That is the general case – obviously different areas of industry will be hit to a greater or lesser extent and we all need to look closely at our individual market.  Remember how internet advertising was disproportionately hit last time round, for example.

The other thing to consider is that if recession really does bite then the fundraising environment will get a bit tighter.

Putting all this together, it looks to me like the downside risks will become more acute for many businesses, whilst at the same time the upside is moving further out.  This is not an armageddon scenario, but it is definitely less rosy than it was 6-12 months ago.

Maybe all this is a bit obvious, but it is easy to forget the big picture when you are working 25 hours a day down in the detail of a startup.

Reading about Intel’s results didn’t do much to improve my mood either, although it is good to read today that IBM is more positive.

To finish on an optimistic note, the best companies come through periods like this stronger than ever and ready to capitalise on the fact that most established businesses under invest in innovation through the low points of the economic cycle.

  • A follow-on point worth noting perhaps Nic: setting up a business during a downturn can be the best time. New companies who set up and start generating revenue during tough times can demonstrate they are recession-proof. Something boom-time startups can’t claim.

  • A follow-on point worth noting perhaps Nic: setting up a business during a downturn can be the best time. New companies who set up and start generating revenue during tough times can demonstrate they are recession-proof. Something boom-time startups can’t claim.

  • Joe T.

    Nic, to what degree do concerns about the performance of existing investments, during rough economic times, influence a VC’s decision to invest going forward?

  • Joe T.

    Nic, to what degree do concerns about the performance of existing investments, during rough economic times, influence a VC’s decision to invest going forward?

  • nic

    Hi Alex – your point is a good one. Businesses started in the depths of recession are often the ones best placed to take advantage of the eventual upswing.

    Joe – the investors in our funds like us to invest at a constant rate and leave it to them to judge the cycle so in theory our investment rate should remain constant. That didn’t really happen in the last bust because there were so many first time funds who lacked the experience required to pull this trick off. Going forward I expect that to be less of an issue. The other dynamic relates to our time – we can only look after so many investments, particularly if they are underperforming and taking up a lot of time, so during a recession when exits take longer individual partners may not have the same bandwidth for new investments as they do when times are good.

  • nic

    Hi Alex – your point is a good one. Businesses started in the depths of recession are often the ones best placed to take advantage of the eventual upswing.

    Joe – the investors in our funds like us to invest at a constant rate and leave it to them to judge the cycle so in theory our investment rate should remain constant. That didn’t really happen in the last bust because there were so many first time funds who lacked the experience required to pull this trick off. Going forward I expect that to be less of an issue. The other dynamic relates to our time – we can only look after so many investments, particularly if they are underperforming and taking up a lot of time, so during a recession when exits take longer individual partners may not have the same bandwidth for new investments as they do when times are good.

  • Ian Leonard

    I’m inclined to agree with Alex, I started a technology business in 1993, interest rates were relatively high and house prices were forecasted to fall even further. We managed to build up rapidly in a niche market and flourished in the late 90’s. Got out in 2003/4 by the skin of my teeth, I hung on too long.
    Currently looking for other ventures after a period of consultancy work. Any offers ? Ian

  • Ian Leonard

    I’m inclined to agree with Alex, I started a technology business in 1993, interest rates were relatively high and house prices were forecasted to fall even further. We managed to build up rapidly in a niche market and flourished in the late 90’s. Got out in 2003/4 by the skin of my teeth, I hung on too long.
    Currently looking for other ventures after a period of consultancy work. Any offers ? Ian

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