Is Silicon Valley Heading for a Recession?
Published: January 23, 2008
Author: David Rodnitzky
The “R” word is starting to permeate the Valley again. More and more conversations seem to gravitate toward discussion of whether the Internet economy will go down with the ship and suffer from the same recession that is about to strike the general economy.
My sense is that the answer is “no”, but with a few caveats. I have several reasons to be at least cautiously optimistic.
My number one argument against recession is that most Internet businesses grow by taking away market share from existing offline markets. Take Amazon.com as an example. Will Americans buy less books and DVDs in a recession? Sure. But will that downturn in purchasing be offset by increases in the percentage of Americans purchasing books online? I think so.
I don’t know what percentage of purchasing is currently done online, but I’m sure it is still pretty small – in most cases, probably 20-30% of all purchases. There’s no doubt that this number will grow by at least 200% in the next few years. So even if overall purchasing declines by 10% in a recession, if market share increases by 25%, your business is still growing.
Argument number two is that there is still plenty of investment money flowing in the Valley, and I don’t think this will go away as a result of the recession. If you look back on the last downturn (2000-2001), the major reason for declines in funding was that VCs finally woke up and realized how ridiculous their portfolio companies’ business models were. Companies funded today usually have a sound plan to bring in actual revenue and profit.
Even if the economy is bad, a company with a plan to grab market share from existing players is still a smart investment. In some respects, a recession is a perfect time for new player to enter a market, simply because the established players are hunkered down and looking for safe paths or cost cutting opportunities. Many of today’s biggest Internet players saw phenomenal growth shortly after the dot-bubble (examples: Google, LowerMyBills, HowStuffWorks, Nextag, etc).
But here’s the caveat to my optimism – the Web 2.0 revolution has unfortunately resulted in a lot of companies getting funding with the only business model being “we’ll monetize eyeballs . . . someday.” All of those Facebook applications with two million users and $50 of ad revenue may have a hard time dipping into the VC coffers for a second round of funding during a recession. It’s one thing to invest in a “Are you a Pirate or Turtle” application when the market is full of irrational optimism. But once things get tight, I predict that a lot of these companies are going to slowly fade into oblivion.
Again, that doesn’t mean that the money won’t keep flowing to interesting ideas – it just means that the money will flow to interesting and profitable ideas and the interesting and ‘fun’ ideas will be in trouble. So for the sector of the Internet economy based on the 2001 eyeball model, the recession may be a real thing.
For the most part, however, I feel pretty good about our industry. I do have to admit, however, that this post does remind of a few fake headlines from The Onion’s Our Dumb Century. On the day before the stock market crash, the headline reads “Buy! Buy! Buy! Stock Market Invincible!” and the day after it was “Pencils for Sale.”