Monthly Archives: October 2008

This may not be the place to post this, but it wouldn’t be appropriate on any of my other blogs either, so I’ll toss it up here. New York venture capitalist Nate Westheimer did a good post on his blog yesterday about how the economic downturn will affect tech investing over the next few months/years. To oversimplify his point, he’s saying it hasn’t been and won’t be affected as much as we’d think:

…in the early stage investing world, relative to the rest of the financial markets, times aren’t changing very much at all.

Even if you’re not super into tech, this is an important question. We’re coming off a heady few years of tech boom, in which there’s been easy investment money available for every crazy Web startup that cares to take it. I asked Michael Arrington last year which startup sectors were having the easiest time raising capital, and he snorted and said “Everybody’s getting funded.” As such, there’s been an explosion in Web startups—I spend all day looking at new Web sites and meeting with companies and I can’t even scratch the surface of all the great stuff out there.

Think of the cool stuff that’s come out in, oh, the past three years. Tons of social networks. Tons of free music services, video-sharing sites, and photo sites. Tons of blogging and micro-blogging platforms. Free web-based apps that do everything.

Here’s where I have the problem: Nate argues in his post that early-stage investing hasn’t gotten much riskier in the last couple weeks. In fact, since it hasn’t gotten much riskier and traditional Wall Street investing is much more risky right now, the relative risk of early-stage investing has gone way down.

I have to disagree with him, though; I think techstartupland is a much more treacherous place than it was two weeks ago. Consider all those new social networks, music services, blogging/microblogging platforms, and Web-based apps. The vast majority of them make their money by selling ads. Well, one of the first markets to soften in an economic downturn is the ad market—companies slash their ad/marketing budgets first thing.

Now, obviously there are lots of B2B and non-consumer-facing startups that make their money the old-fashioned way: by selling a product, whether it’s infrastructure or development or enterprise apps or what have you. But on the consumer side, it’s next to impossible to sell a web-based product or service nowadays—we just expect everything to be free—which is why advertising has gradually become the crutch that supports the entire web startup industry.

I give it two or three months until that crutch is removed, and that’s assuming the existing 2008 budgets aren’t cut into. When the ad money dries up, it’s going to affect bottom lines and valuations in a big way.