There’s no doubt in my mind that the U.S. economy is headed for a recession. The Federal Reserve just cut rates — again — down to 3.50%. This, coupled with oil’s rising prices, the fall of the value of the dollar, the rise in inflation, and the credit lending problems are all pointing to a dramatic downturn in the stock market. Heck, U.S. markets opened today down 5% but managed to come back a few points through solid intraday trading. This isn’t just a random blip on the radar, it’s a signal.
The genius behind the Drama 2.0 blog posted his thoughts on the recession’s effect on the tech industry so I’m going to jump in and post two impacts of the recession right here.
What Will Get Cut First?
When budgets get tight and revenues aren’t as high as they were in the glory days, what will go first is marketing. You can’t dip on your core competencies and get rid of a dozen highly-skilled engineers because then you’re cutting your own throats. Getting rid of your top people and replacing them with low-level morons was the reason that CompUSA went out of business, and cutting the head off your engineering department is a similar mistake.
When advertising gets cut, the ones with the lowest ROI will be the first to get the slash, and that’s going to mean CPM advertising. With CPC, a company is putting all their effort into converting the click on their own website so they control the conversion rates. CPM ads put all the pressure on the publisher to get good click-through rates, and if they’re paying top dollar for CPM rates on popular sites and aren’t getting a good CTR, then it’s a waste of money. AdWords and AdSense aren’t going to drop much, but CPM rates will.
Investors Change Their Tune
VCs have been pouring dollars into companies like paper money is going out of style (*cough*) and 2008 will be the year they take a more careful look at their investments and investment strategy. Investing in pre-revenue companies with no revenue strategy is a lot different than pre-revenue companies that have a solid revenue strategy, and you can guess which type of company won’t be raising as much money this time around. The theory of “past success indicates future success” when it comes to startup founders is going to be flipped around and although an entrepreneur may have had a big name a few years ago, investors will realize it’s a totally new game in 2008. If you’re giving away the cow (the service) and the milk (unique value proposition) for free then you don’t have much of a leg to stand on when it comes time to introduce a revenue model for your “at scale” company. You may be big, but you’re not sustainable. And money doesn’t grow on trees anymore.