From the Shores of Silicon Valley....
April 15, 2001, 12:07 AM, The Crash
every new beginning comes from
some other new begging’s end
Closing Time, Semisonic
I'm currently in the midst of finishing my book about incubators and corporate venture arms for John Wiley & Sons. It's been an exciting ride, especially having started this project on the tail end of Dot-com Success! Surviving the Fallout & Consolidation. Everyone thinks technology is in trouble; it's only the companies that are in trouble. Technology never rests, nor does it pay attention to recession. I heard on the radio a few days ago (NPR most likely, probably MarketWatch) that the difference between a recession and a depression is whether or not you've been fired. I look back at all of those crazy companies I saw started up out of a whirlwind of money and little sense and I shake my head. Of course they were bound to fail. What do you expect when you don't have a bloody revenue model? It's hardly a business without a way of collecting income. And because big, established companies (such as HP, Intel, etc.) had to pay astronomical salaries and give bonuses and raises to match those employees who got offers from elsewhere, all kinds of companies lost money last year. Of course they'll blame it on the economy instead of saying they were out of their minds and made excessive errors. The layoffs we're seeing are a direct result of the sins of over-compensation. And as I call my HR sources one by one, they tell me that they're quietly filling those positions they just gave people pink slips for. Hey, why do they call it a pink slip anyway? Has anyone ever received a slip that's pink? I'd be interested in finding this out. Anyhow, they're hiring people back at a 45 percent wage cut. Yeah, we'll see better numbers in Q3.
The telltale signs of a recession are here and as I look at the classifieds, the list of Hummers and SUVs for sale by owner grows and grows. The housing and office space classified listings are becoming stagnant as people wait for the costs to correct themselves before they jump back in again. And my real estate buddies tell me that escrows are falling through at an alarming rate. There is a mass exodus from the Valley as people who used to be magazine writers in Ohio and Vermont surrender their dreams of an IPO at a company where their title used to be so magical. All of those wonderful, dreamy titles — VP of Creative Strategy, VP of Ideas, King of Code, Code Gurrrl Extraordinaire — they woke up and found themselves asking their old bosses for their extremely ordinary jobs back. They'll have to work somewhere that doesn't have a people slide between the second and ground floor, or an Odwalla juice bar. All of the shiny stuff that looked like gold has rubbed off, and the only building that truly remains gold-looking is the IRS building in Downtown San Jose. They'll still get their money for all of those great wages that people collected for such a very short time.
It's a tough market, but it will bounce back. Probably in Q4, but not before we bottom out in July. July is when all of those companies that are begging around the angels' and VCs' doors for bridge rounds right now to make payroll and the rent will finally have to admit defeat. Going, going, gone. Two to three companies will bite the dust every day until the fallout and consolidation takes hold.
The interesting thing? As I write this book covering incubators and corporate venture arms, I'm finding that the investors don't believe it's over, they know that profitable technologies were born out of chaos. They will continue to invest in solid technology. And that's how this will go. If you're smart enough to invest right now, you stand a pretty good chance in hitting the next round of winners. If you're an investor, you can pick up good companies at low valuations and you'll see the technology begin to shift. Nano, geno, robotics and packeting will all head up the next round. And let's not forget entertainment and its marriage to the Internet. Entertainment has never suffered during all of these years, and sales go up during depressions and war. The Internet porno industry did not take on any losses this year.
There is no way everyone will survive. There will be carnage, and many will have to start all over again from Ground Zero. But technologists and investors are used to these kinds of risks. We've had tech recessions before, but none of them this closely watched. The media didn't used to care so much until all the reporters started investing live-time and wanted to make sense of their dying portfolios that were supposed to sustain them when the quit their jobs and wrote The Great American Novel. Now they want blood and are going to try and make sense out of this by exposing losers one by one.
It will be all the people heading home on buses, instead of in their BMW sports cars they were planning to drive home for the summer family reunion, who will suffer the most. The ones who thought they'd gotten in one time to get a piece of The Rush. All those dashed dreams of those kids who sold everything to come West. You play the game, you pay the price. They are so screwed. Okay, so the investors got screwed too, but they should have known better.
And as we see George Bush completely fuck up foreign relations — isn't he the true proliferater of the hoof in mouth disease, petrol go up over $2.25 a gallon this summer and electricity black outs occur nationwide (as Bush helps his friends push manufacturing and business out of California and into Texas) we will survive. We'll look back at this as our Techno Disco Era when we all went a little crazy and we really don't want to ever be reminded of it again. "What were we thinking?" we'll ask as we shake our heads as we tell our great grandchildren of the Great Crash of '01.
Yeah, it's not over. Not by a long shot. But if you didn't have the stomach for it in the first place, you better go home now.
My tips for Q3-4?
Oracle will take a huge hit as open source takes hold. I think Larry really fucked up when he let the press go wild on his "billion dollar estate," as companies paying the last of their Gold Rush dollars for his outragious licensing die on the vine. Companies such as Red Hat will excell in this market (Go Bob, go!).
Microsoft will make noise to buy a computer company — perhaps Gateway or Dell. Although I think Bill has more of a connection to Gateway because of their new branding with rock and roll. He is, after all, a stoner at heart. Poor Compaq ;-(