The downturn feels different this time

May 13, 2009
by Scott Johnson

Tonight is the MIT 100K finals. So I thought I would muse on why I feel so much better today than I did in the aftermath of the last downturn.

The 2001–2004 VC nuclear winter was brutal. Valuations fell so far so fast — it was like being on a bullet train that suddenly stopped. The wreckage was incredible and I was shell-shocked by the suddenness of it all. If you recall, the Nasdaq went from 5000 to 1000. 80% went poof. It was really intense. A direct hit on Silicon Valley.

This downturn is more severe and broad-based from an economic perspective. But it feels very different from my point of view. In the venture world, it is more like a commuter rail suddenly slowing from 50 to 10 MPH. You wonder if you will ever get home at this slow speed, and more than a few people bumped their heads. The difference for me is two-fold:

  1. In 2000, companies with minimal revenue had $1 million/month burn rates, and could raise outside capital at increasing prices. That went away overnight, and the burns were all so high the companies couldn’t survive the cuts even if the business still made sense to pursue. In 2007, if one of my companies had minimal revenue, we were VERY focused on burn, as outside capital was plentiful but much more focused on meaningful business traction. So we may have cut back on burn last fall, but the reductions were far less severe, and the businesses more fundamentally sound in the first place.
  2. The other reason this feels different is that when the internet bubble burst, there was nothing exciting left in the IT world. The web was the source of all growth, and it suddenly was a wreck of twisted smoking metal. Plus, 9/11 had happened, and the pall of that horrible day was still fresh in our collective psyche as we waited to see what the terrorist would do next. This time around, the economy as a whole is seriously impaired, but there are so many things to be excited about in the world of IT. The iPhone and its incumbents, Web Video, Cloud Computing, the rise of Social Networking. Entrepreneurs are innovating at a pace I have not seen in my investment lifetime. Now that everyone is connected all the time, the applications that sit on top of that network can truly flourish.

So, while it is always better to have a great exit environment, that tends to be cyclical and you just can’t expect that to be consistently available. So I will take a period of rapid innovation and disruption in a downturn. This could be the best time ever to invest in startups.


Originally published at navfund.com.

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