Monday, September 15, 2008

Wall St's Demise and the Impact on Tech

Imagine waking up to read the following headline, "Oracle Declares Bankruptcy, Cisco Sold to Microsoft in a Cut-Rate Deal."
The figurative and literal pillars of the financial economy are falling like dominos - Bear Stearns, Fannie Mae, Freddie Mac, Lehman, and now, amazingly, Merrill Lynch is being sold to Bank of America.
It is hard to fathom the depth of the financial crisis on Wall St, yet alone the seismic shock waves that are rippling across the country given the litany of failed and failing firms. The CEO of Bank of America expects 50% of the nation's banks to fail. Yes, that would be 50% of the 8,500 banks in the US.
The tech downturn saw marginal firms fail, however, the financial market failures are not only of a much larger magnitude, but also the names in distress are of a far different caliber. The firms failing today are the bell-weathers of the industry and foundational institutions. 
Walking up Park Avenue, or through Times Square and the size of Bear Stearns, Lehman Brothers, etc literally loom over you.
Thousands of employees, billions of dollars, the credibility of regulators, executives, and the ability of markets to effectively price and manage risk are gone.
To date, the shock waves seem to be passing Silicon Valley by. 
What will the impact of this unprecedented meltdown be on Silicon Valley and on the Internet sector in particular? To what extent will Wall St's failings and the large credit downturn impact Internet/tech companies?
Will venture firms change behavior or their appetite for certain types of risk? 
No one knows...the future is uncertain, however, start-ups can work to reduce risk by exercising real spending discipline - working hard to reduce non-core expenses, thereby delaying capital raising and extending the runway.
Great start-ups play on long-term secular trends - on-line media consumption, mobile Internet, on-line advertising, etc. For us in tech start-ups, I see two important gut-checks - are we working and riding major secular trends and are we investing in growth in reasonable and prudent ways?
So much in life lies beyond one's control. If one is riding a major wave of change and spending wisely to leverage it, then keep your head down and keep making it happen. If you are not....

1 comment:

  1. "The CEO of Bank of America expects 50% of the nation's banks to fail."

    Whats the source? Link?

    I could not find a news story with this number..