Surviving in a Downturn

Couple things:

1. The #1 thing you can do to protect yourself in a downturn is "Don't spend money." I interviewed at a dot-com in 2002 and know a few others that it made it through. The features they all had in common were that they were just a couple of founders working for subsistence wages, they had simple professional offices (just a couple of rooms), their furniture consisted of yard sale castoffs instead of Aerons, and their only employees were an intern or two and maybe someone working mostly for stock. You see this with more famous companies too: Flickr, HotOrNot, del.icio.us, they were all just a couple guys during the bust.

By contrast, the VC-funded startup I worked at from 2000-2001 flamed out in a spectacular way, as did most of the other venture-funded organizations. The only VC-backed startups to make it through were the ones that had been started in 1995 and 1996 (well, except Google) and had already begun to dominate their market niches. Even those were touch-and-go for a while: Akamai stock was down at $0.50 for a while, and there was some serious doubt over whether Amazon.com would make it through.

2. "In the depression, people were so concerned about making money that they actually took on extra jobs instead of having fun, which as seen as frivolous and risky."

That's actually not true. The 1930s are often seen as the "golden age" of the motion picture, because no matter how hard up they were for cash, people still went out to the movies. Walt Disney got his start then. Bootleggers and bordellos also did well during the 1930s. Radio did well in fundamentals, but their stock was hit hard because they were trading at P/Es > 100.

The whole point of the depression was that there was no work to be found. Very few people worked extra jobs - even if there were jobs to be found, companies were loath to give them to someone who already had an income when 25% of the population was begging in the streets. Many people tried to supplement their income with eg. selling apples on the street, but even more stayed at home and sulked. There was a major sex role reversal: women often found themselves the primary breadwinner, doing piecework out of their home, while the men found themselves unable to get any sort of work and eventually gave up searching.

These articles are poorly written, and the content is not only wrong, it is self contradictory. Paul Graham was right in suggesting that these articles are trolls. Sadly, I think it is a case where the author of the troll is sincere.

The author describes three traits of businesses that will fail during a downturn: based on ad-based revenues, being fun or recreational, and being innovative. Earlier in the article he says: "Back when the sector was hit hard in 2000, there were companies that managed to survive and grow."

It is interesting to note that one of those companies that managed to survive and grow during the last downturn was ad-based, innovative, and also could be considered "fun" and "recreational." Google, anyone?

This one clears things up.

Here's where I think you "went wrong" (so to speak) in the first article: you spoke of a possible downturn in the economy as a "dot-bomb". To us startup types, that says "party's over, give up your projects, go home". I know, you didn't mean that. Today's post made that clearer. It was the language you picked that caused a lot of the backlash. That, and questioning whether ad-based services are much more than a fad. :-o

Truth is, a downturn (self-prophetic or not) is always a possibility, and preparing for to insulate yourself is just good common business sense.

Saying "hey, it could happen, nothing's a sure thing" would resonate with everyone here, I imagine. Getting (perhaps too) specific and suggesting that the "Web 2.0" market (whatever that exactly is) will die Any Day Now is bound to get people irate because:

1- there is no actual reason to believe that there's anything going wrong in the web economy

2- you cannot have a 2000-style crash when the stock market isn't very involved with the businesses

3- just about everyone here is heavily invested in working the web economy, and so we don't take kindly to what we perceive as groundless doom-and-gloom.

Most of today's startupians want a buyout as an exit strategy -- or to become self-sustaining for a while. To me, there isn't a lot of difference between your John Chow (www.johnchow.com), successful blogger, and your self-sustaining web business (I'll point to plentyoffish yet again). Er, except Chow doesn't make the kind of cash that the dating site does. Me, I'm not sure I'd mind that much. I'll take small success over none.

The 2000 dot-bomb happened because of three interconnected reasons, in my estimation:

1- all the dumb, no-profit businesses burned through their VC money

2- the stock market got impatient and wanted to see some profits

3- VCs got spooked and stopped funding

That won't happen again. Something else? Maybe, but it will have to be a cause quite different.

Myself, I'll bet if something causes us heartache, it will be a downturn in the economy, most likely caused by the population believing that we're "due" for a downturn in the economy.

As PG would point out, as long as we keep trying to find ways to create wealth (not so much by making literal $$ but by improving the world), downturns cannot last forever.