Putting it Together: The Credit Crunch, A Weak Dollar, and Entrepreneurship

27 Aug

Dow Jones Down 56 pts, Aug 27I am writing today in response to an Open Thread on GigaOM.

The credit crisis will have an important impact on entrepreneurs, but must also be considered in the context of a weakening dollar and the risk of an economic downturn. The likely affects are three-fold:

  1. “Exits” through acquisition by an established industry player or private equity buyout will be less likely
  2. Consumer dollars may shift away from startup businesses whose products look a lot more like “luxuries” than day-to-day essentials
  3. Top qualified job candidates and new entrepreneurs may delay their entry into the market until conditions improve

Exits: If acquisitions become more challenging, startups will be pushed toward IPOs as the most viable exit strategy. Unfortunately, with an overall economic downturn in sight, investors are also less likely to be seeking high risk small-cap startup IPOs.

Overall, if entrepreneurs and venture capitalists cannot exit on their investments, the engine that powers Silicon Valley could slow down (note: I deliberately refrain from using “grind to a halt”). At first, if VCs are flush with cash to invest, they will continue to do so. As the burden of their growing portfolio grows, however, investing would slow.

Consumers: With home values dropping or plateauing in many markets, consumers will be cutting back on spending on luxury goods. And yes, Premium Membership at Flickr counts as a luxury good. The same goes for a weak dollar. Imported goods like electronics and gourmet foods, which become more expensive as the exchange rate weakens, could easily force consumers to shift spending away from new web toys.

While it is true that many web 2.0 businesses rely on advertising money more than actual consumer spending, it is important to remember that advertising is also linked to consumer behavior. In hard times, advertising dollars shrink.

Top Talent: If exits are hard to come by, it means that one of the great attractions (mind you, not only) of working at a startup, the chance for a big payday after a few years of work, is much less likely. Without that big carrot to lure in the brightest minds, the best job candidates may stray to other businesses with more secure, lucrative paydays like investment banking, consulting, and jobs in “industry.”

If recruiting the right people to fill important roles becomes difficult, growth at startups could slow, further depressing the situation in places in Silicon Valley.

At Least One Silver Lining: It would be inappropriate to conclude a post like this without an explanation of at least one of the potential benefits of the current credit crisis and economic situation.

This is starting to look like a good market for buyers. It will be possible for businesses to acquire other companies and consumer to buy houses at more reasonable prices, assuming they have the cash necessary to afford them. While this won’t be the case for all buyers, those which are well prepared will find the situation to be quite favorable.

As the saying goes, “buy low, sell high.” Sometime in the near future, conditions might be just right to make that home purchase you’ve been waiting on.

What do you think are the other potential upsides?

My Previous Posts on these topics:

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One Response to “Putting it Together: The Credit Crunch, A Weak Dollar, and Entrepreneurship”

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  1. Imminent slowdown - Blame the “YouTube effect” « Technology, Venture Capital, Private Equity - September 19, 2007

    […] are entering a phase of self reflection. Ref. – Fred Wilson’s piece, Read Write Web et al. The dampening impact of the sub prime crisis is already too well documented for further […]

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