This past Wednesday night (Feb. 18, 2009), we attended a Churchill Club event entitled ‘How Can Silicon Valley Survive the Great Recession, which was a panel discussion on how leading technology organizations are addressing the current global economic meltdown. The panel included some Silicon Valley gray hairs – Bill Coleman, a veteran of BEA and Sun Microsystems; Lisa Lambert, President of Intel Capital and Patricia Sueltz, President and CEO of LogLogic.
If we weren’t sober enough after the doom and gloom that’s been permeating the news for the last six months, then Wednesday night’s discussions ensured we were positively tee-total. Moderated by a very skilled capital markets expert called Joseph A. Grundfest, the discussion focused on the challenges facing Silicon Valley and the venture capital industry in this current macro-economic climate.
With the IPO window largely shut, funding sources drying up, consumer demand declining and acquisition prices low, the question was posed – how bad will it get and what strategies can Silicon Valley firms and investors follow to adapt to the new economic realities? One thing the panel agreed on, is that they’ve never seen anything like this. A recap of the panelists discussions is below:
Patricia Sueltz, LogLogic
- Despite remaining cash-flow positive, LogLogic has already made job cuts deeper than they needed – the strategy being that if they face an ‘economic nuclear winter’ they have enough dollars conserved to get them through 12 – 18 months.
- Almost every vertical has been negatively impacted but businesses able to focus on the government sector should increase their efforts – government is one of the few markets where there still appears to be plenty of spend.
Bill Coleman, Cassatt
- The Valley will fare worse this time than the last recession. Recessions have typically happened because technology has been overhyped and reality falls far short however this recession is about the cost of capital. The bigger issue is that while previous crises were local or national, this is global. With no region left untouched there’s no healthy engine to drive a recovery.
- Forty percent of the world’s economic wealth has been destroyed over the last 18 months with some of the most drastic effects felt in Russia, China and India.
- Startups need to learn to monetize their offerings quickly or risk going out of business. The strong will get strong, the weak will cease to exist. Coleman states we are at the next major inflection point in the evolution of technology market. We’ve experienced an invent-boom-bust-rebuild cycle at every other major inflection point, which so far consists of the creation of the integrated circuit, the PC, the network and the Internet. This next generation will be centered on the commoditization of IT through virtualization and monetization of social networking.
- Cleantech is the ‘welfare child’ of Silicon Valley. While the price of oil remains low and the capital intensity of cleantech projects remains high, the sector has to rely on government spending to survive the downturn.
Lisa Lambert, Intel Capital
- The speed with which this happened was most alarming. Intel forecast $10.5 billion in sales in Q2 and finally turned $8.2 billion. $2 billion in sales evaporated in 2 weeks.
- While Lisa believes the Dow is nearing a bottom, she also believes that we have seven years left of a 15-year bear cycle that started in 2000.
- Much like industry giants Oracle and SAP, Intel Capital maintains that innovation still happens in a downturn and, as such, it will continue to invest in unique ideas that target at a clearly defined customer profile. Companies with a strong team, differentiated product or services offering and solid business model will always be compelling targets for investment.
The messages from the event were simple – conserve cash and conserve capital. No different to the ‘doomsday’ meeting held by Sequoia Capital with its portfolio CEOs in October 2008. According to Grundfest, survival in the downturn is all about ‘distance to cash-flow positive’ meaning the best companies are the ones that can get to cash-flow positive in a reasonable amount of time with no more than two rounds of funding predicated on clearly defined performance metrics.
However one thing other recessions have demonstrated, is that innovation loves a crisis. Lambert reeled off a list of innovations emerging from recessions years passed: During The Great Depressionof the 30’s and 40’s GE made significant lightbulb advances and Hewlett Packard was formed. During the 1981-83 recession, Microsoft launched Word and IBM shipped the first PC with Intel 8088 processors. There is no shortage of success stories during troublesome times. Even the first version of the iPod shipped during the recession of 2001.
In short, although there are some serious stormclouds overhead the odd glimmer of sun still breaks through. As businesses continue to innovate and develop products that consumers demand, they’ll continue to source capital—the products just need to be unique, differentiated and sellable. As for those of us who are working through our first recession, it’s worth remembering—as Coleman stated—you learn far more during a downturn than you do at any other time.
Source: NTSI
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