Last week, Jason Calacanis got the attention of the blogosphere with his email "(the) Startup Depression". Friday's New York Times followed with an article entitled Credit Crisis Spreads a Pall Over Silicon Valley. So,how might the credit crunch impact the content industry?
First, even with the bailout bill signed, things will get a lot worse before they get better. The bailout may slow the bleeding on Wall Street, but credit spreads will continue to get larger and we'll see more companies default and others barely hang on in the coming months. Restructuring and layoffs will become the buzzwords for 2009 and we'll probably see municipalities unable to meet obligations while all states and cities will cut back on services. It won't be a fun time.
So what should startups and small companies do to prepare?
As in any downturn, the first thing to do is look at your burn rate. If you're a startup and have 6-12 months worth of funding in the bank, you better start thinking of ways to cut costs so you can survive for 18-24 months or more. I wouldn't want to be going back for additional funding in 2009 or 2010. For companies already backed by venture capital, Fred suggests there may be a cushion to help ride out the storm.
Next, you better try to assess the impact of the downturn on your customer base. If you sell to financial services, you've probably already felt some impact. But don't think industrials will get a pass. As markets tighten, manufacturers will be quick to reduce costs.
If your revenues are advertising-based, look out. Traditional advertisers will be pulling back pretty quickly and I think this may be a tough holiday season for those counting on retailer advertising to make their year. That said, online advertising is likely to hold up better than print and television advertising. The ROI is stronger and more visible, so as long as clicks continue to pay, advertisers will be there. I'd expect CPC rates to drop a bit while CPM rates take a stronger hit.
So, is it a bad time to be a startup?
If you have a good business concept, I believe it's always a good time for startups. Large companies will take a bunker mentality, reorganizing and cutting costs in an effort to ride out the storm. But the period coming out a downturn (which may be 18-24 months away) are where significant marketplace change occur. It's the best opportunity for upstarts to take market share from traditional leaders. And there's never been a time when it's been cheaper to start a business. With cloud computing and Google Adsense as a revenue generator, it costs less to get a business off the ground than ever before. That said, it will not be a fun market to raise capital, so if you can get to a revenue-generating point without taking venture money, you'll be in good shape. Meanwhile, while the dollar has strengthened a bit in recent weeks, it's still weak compared to the euro and the pound, so small and mid-sized acquisitions are still likely, an exit alternative while the IPO market remains on life support.