Many of us have heard the quote about "not having lived through the great depression" or even more recent history like the bear markets of the mid-1970’s.Â Technology companies and investors however have fairly fresh memories of the "dot com bust" of the early 2000’s.Â We have seen that in the past week with a raft of fairly aggressive and swift cuts of staff and burn rates at even very small venture-backed companies.Â
Companies are suspending expansion plans, shifting workers from full time to freelance, work from home staff. (Possibly exacerbating an already narrow number of employees who get healthcare benefits from their employers.)Â In some cases company managements are preparing their firms for survival through 2012 even if revenue fails to materialize between now and then.Â Staff cuts of 10%, 20% and even 40% are common.Â
Venture capitalists have also been vocal about the need to clamp down and are restricting their investments.Â Besides the weak economic outlook the proceeds from exits are certainly down from where they once were and the IPO market remains virtually non-existent.
To cope with the doom many are pointing out the obvious.Â This is pretty good news for the future and getting back to seeing attractive returns again.Â Â We’re just beginning to see examples of private investments that have 10x or better returns as fairly likely outcomes over multiyear periods.Â (Of course in this environment it doesn’t mean they will get funded!)
Technology should remain one of the better growth areas coming out of this recession.Â Some companies that are cutting staff are simultaneously increasing some of their investments in technology because they can improve productivity and lower operating costs.Â There isn’t enough of this type of spending to save us all from a downdraft in overall IT spending but it’s still an instructive example.
So for us and our clients and friends who can look a few years out this is also a time that is sowing the seeds for future wealth creation.Â We’re adding to our portfolio of names as we work our way through the crisis.Â The good news is that managements in most cases are taking the situation very seriously because they remember the bust of only several years ago.Â This will create leaner, more profitable and higher return companies than we would have otherwise.