Did the Recession Prevent Bubble 2.0? And, is it Possible That Tech IPOs Will Help to Tame the Financial Crisis?
Jackie Peters | Funding, General, Social Media, business | Thursday February 26 2009I’d like to open up discussion based on a pair of symbiotic hypotheses: the recession prevented Bubble 2.0, AND there’s the possibility that tech IPOs could potentially help to tame the financial crisis. One wouldn’t be possible without the other. Here’s the situation as I see it:
Sometime in ’06, but really picking up in Q2 ’07 – Q2 2008: We were spiraling toward Bubble 2.0. High P/E ratios, inflated M&A valuations, investors allocating millions into companies with no business model, no revenue streams to speak of, thousands of “me too” companies, and “build it and they will come” operations. Perhaps there was a surplus of venture money and not enough good ideas to invest in. Or possibly it was that there were enough good ideas, but it was too difficult to wade through the muck caused by drastically decreased development costs to find the gems. Everyone was getting caught up in the “Web 2.0” hype. I got excited too at first, but then I got a little frightened. Now, I have to say, I’m excited again. I think few people outside of the tech industry, and perhaps even inside, realize the significance of what is happening with internet technology. It’s on the same scale as the industrial revolution. I want to see what’s been started continue to blossom.
Jump to late Q3 2008 – Q1 2009: In September of 2008 everyone is talking recession. People are scared, there’s talk of belt tightening. I found it ironic in a way that the day before the first big DOW crash back in September I had given a sobering but well-received presentation to the NY web 2.0 community that definitely echoed the “get real or go home” mentality. I woke up the next morning to walk out of my hotel room and saw the news on the front page of the paper. On October 10th, Sequoia Capital releases what’s been dubbed the “56 Slides of Doom.” touting an end to good times, and an end to companies with no business model, no proven team and no leg to stand on getting funded. In Q4 2008 venture capital raised takes a nose dive, number of fundsclosed starts to take a dive in Q3 of ‘08 and keeps right on diving into Q4. Times are tough. No doubt about it.
But also in Q1 of ’09: The cream is rising to the top. The lack of new venture money being raised and new funds being closed means that investors are getting pickier. It also means that companies that would have been funded last year aren’t getting funded. Which is a bummer, because it would be so amazing if we could just fund innovation without expecting returns, but we can’t, especially not right now. Maybe we did that just enough, developed enough technology for technology’s sake, for there to be a clear path for a select few to achieve success. The environment is perfect for us to start seeing some real innovation that can be tied to real profit. Previous recessions saw the birth of companies like Cisco, Facebook and MySpace. We’ve gone through what I view as a sort of Darwinian cleansing process.
And that brings us to take a look at what might possibly emerge between now, and say, 2010 or 2011 given our current environment. I recently read an interesting interview with Ben Howe, founder of America’s Growth Capital on the WSJ blog. Howe believes that tech IPOs could solve the financial crisis. I think currently, and definitely as of a year ago, this might have actually worsened the situation. But a year or two from now, when the results of this Darwinian cleansing process are starting to emerge, that could be the ticket. A recent survey by the NVCA predicts that tech IPOs will open up again in 2010. I’m thinking late 2010 maybe early 2011, but what do I know? If the market begins to stabilize by then, tech IPOs might be just the thing to bring it home. I’m curious to hear what you think.
Jackie, very interesting thoughts – and boy I hope your theory proves true.
I had a bunch of conversations with people at IAB at the beginning of the week, along the lines of “hmm, in ‘01 it was the tech in the tank, economy slowed but okay; today, it’s economy in the tank (and then some), tech (well, specifically, internet media/advertising) seems to be ’so-far-so-good.’”
We’ll see what happens, but there’s always something that pulls things back up again – would love for it to be tech this time ’round.
As always great post Jackie. I’ll add my thoughts to the convo.
On Web 2.0 S/N – 2008 saw the Signal-to-Noise ratio get way out of control (I’d say it was below 1). I think much of what you point out as overfunding may have been out of fear of missing the NBT and/or missing out on the emerging platforms. In my recent chats with VCs, many are pruning their portfolios and focusing investment in follow on rounds for the best companies. And clearly there is an interest in a business model. Last year was web[me]2.0.
Doom be Damned – it has not been an encouraging time for entrepreneurs. I’ve spent almost all of my last 3 years in startups and the end of last year was a huge bummer for many. But now the conversations are returning to focusing on what CAN be done – in this environment – to build companies that will solve unmet needs in 2010/11. One of the problems with last year was that there was WAY TOO much focus on current problems (loosely defined). The best startups focus on the future, bet big and then figure out how to build to that incrementally (that’s what I’m doing with everything I’m involved in). Buckle up – its going to be a bumpy ride, but a ride I wouldn’t miss.
Fueling Innovation – as you know, I have concerns about the early stage ecosystem, particularly in SC. And the last few months have not been kind to those seeking funding (I’m seeing way too much pay to play stuff). If we don’t place lots of bets on early stage opportunities the innovation system just doesn’t work well (its a numbers game and requires a healthy ecosystem). But, in recent days more news is coming out about new small funds – the wave of the future I hope (and something I hope to participate in). This is VERY encouraging – I think if our innovation system is going to return to greatness, it will be in large part because angels and small funds find ways to continue investing in early stage opportunities so we don’t fall behind. This is one of my great passions so I’ll stop now before I bore the hell out of your readers.
On Saviors – I don’t know if an IPO market will come back anytime soon (I’m betting on M&A led by the agency folks) and I don’t know if it would correct the economy fully. One thing I do know is that the entrepreneurs that survive/thrive over the next few years will be a new generation of amazing leaders. I believe innovation is our only way out of the current mess so we need to figure out ways to get more participation – plain and simple.
Me, my hat is in the ring.
I have no certainty that VCs getting ‘pickier’ will lead to better pickings. There were supposed to be professional risk takers before, and adding fear and financial downturn is unlikely to make the better at picking, just more cautious. We will see investments in more mature companies, as VCs start to act like bankers.
Likewise, asking VCs about the possibility of a return to tech IPOs is like asking evangelists about heaven: they want to believe.
There is no bubble 2.0 because there were no IPOs: it was an impossibility. So the downturn didn’t fend it off.
The real worry is that lack of capital will choke off innovation, and we’ll have a lost decade, like the Japanese did in the ’90s.
@chris re:
The problem is, it’s a fact that the vast majority of these companies will fail. And yet, we can’t have true innovation without taking a step back and funding innovation for innovation’s sake, so it’s a catch 22. But I think the “near bubble” that we may or may not have been headed towards actually got us to where we need to be in terms of building the next generation of advanced technology that will ultimately lead to ventures with mass market appeal and/or revenue models that make sense.
@stowe No IPOS true, but given that acquisition has been driving the startup market, and ultimately, as bigger fish eat smaller fish on up the food chain someone gets left holding that bag, often a public company, which mid-to-long-term over the course of several M&As definitely has an impact. I agree though, it was most likely not going to be a bubble the size of the 1st one, but I still think the impact could have been quite large and resounding if things had continued along the path they were headed down. I guess the fact is that we don’t know, because that’s not the direction things went in, and all of this is speculation.