About 500 people converged this week on the AlwaysOn Venture Summit West at the luxurious Ritz Carlton hotel in Half Moon Bay, Calif. Apparently shell-shocked investors, venture capitalists and entrepreneurs still want to commiserate and await the upturn in a group setting.
The conference itself is a kind of barometer for the economic downturn and what its impact will be for Silicon Valley. After sitting through the survivor tales for a day and a half, I will share my impressions of where things stand in what we might later call the Cosmic Collapse of 2008. (Sounds worse than the Great Depression, right?)
Messages about how to survive in the downturn are becoming familiar homilies. At AlwaysOn, I heard the same ones over and over: Innovation lives on. Companies need to batten down the hatches Sequoia Capital style, but they should spend what it takes to innovate their way out of the storm. Be capital efficient. Focus on what you do best and cut out the rest. And (my personal favorite from angel investor Ron Conway) if your company doesn’t have a year of cash in the bank, you’re in the intensive care unit.
“This economic drought is going to last at least a year,” Conway said. “If you don’t have a year of cash, you might as well shut down.”
Opinions differed on how long the slump will last, ranging from predictions of a recovery in the third quarter of 2009 to bleaker assessments of a three-to-four-year downturn, said Tony Perkins, head of AlwaysOn and organizer of the conference. Valuations of startups have been slashed, and venture capitalists have engaged in portfolio triage. But there are clear bright spots, like cleantech firms, he said.
Paul Kwan, managing director at Morgan Stanley, delivered the bad news in an opening talk on Tuesday. He said that the S&P 500 gained $3.5 trillion in the six years that ended October 2008, but that the index has lost $2.5 trillion in value since October. He rattled off a lot of bleak stats — initial public offerings are down 94 percent in 2008, for one — but he said that liquidity has been returning to the credit markets in the past few days.
He believes that ad spending will not crater entirely. Rather, it will follow the pattern of the gross domestic product, recovering as GDP does. He thinks signs of recovery will be evident in two or three quarters. On the bright side, Kwan ticked off a bunch of reasons for optimism, including the fact that digital consumer internet traffic is expected to surpass business internet traffic for the first time in 2008.
Moreover, he said investors can find gems by paying attention to alternative metrics, aside from profitability, that are associated with high-growth companies. As an example, he said that companies can calculate the lifetime value of a customer. That number will show early on why it’s justified to spend more money acquiring customers than they generate in revenue.
Jeff Matthews, a partner at RAM Partners, said that it will probably take a high-profile IPO to bring confidence back to the tech sector, much like Google’s 2004 IPO brought back optimism to Silicon Valley after the “nuclear winter.”
While IPOs are down, there are still a lot of companies that have filed registrations for going public and are awaiting a better stock market. That means that there are a lot of healthy private companies out there that may be looking to go public in 2009 or 2010, said Lise Buyer, founder of the Class V Group.
“We shouldn’t underestimate what a huge disaster the economy is,” she said. “But the only way to get out of a disaster is to innovate.”
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