investiledysfunction

As anyone who reads this blog knows, I’m addicted to CNBC in the morning.  It’s an unhealthy habit, but I find the talking heads on CNBC hilarious because of their extreme short-term’ism.  If you watched earlier this week, you got to see tons of folks predicting the bottom based on one day’s good performance.  Where were all these smart people to tell us about the bloody October we were going to have?  Oh wait, these guys are mostly Monday morning quarterbacks.  In any case, it’s a channel for those with A.D.D.  Insights are infrequent but for me, entertainment value is high esp with folks like Joe Kernan and the morning crew who seem to be in on the joke.

In any case, I was watching Donny Deutsch tonite (The Big Idea is one of the best shows on TV so check it out)  and he had Jim Cramer on.  Cramer is a massive personality and for me personally, his picks have done well for me.  On The Big Idea, he was talking about the economy, the market, etc, and it was pessimism to another level.

Per Cramer, those with entrepreneurial ambitions should put them on hold for the next few years.  While a good stock picker, I think this type of generic device is wrong.  What I think Cramer should have said is “Those with entrepreneurial ambitions that are half- or partially-baked should put them on hold forever.”

Per my earlier post on the downturn resulting in smarter startups, having a good idea that solves a real problem will always be in demand.  And being contrarian, e.g., when there is blood in the water, can be exactly the right time to start a business as talent may be cheaper, there may be cheap office space and computers available and you may be competing against a lot less fluff to get attention from partners, the press, etc.

As Warren Buffet says, “Be fearful when others are greedy and be greedy when others are fearful.”

I’ve been reading about how Silicon Valley is adjusting to the downturn as it’s a popular topic in many blogs.  Many prominent VCs have issued memos to the CEOs of their portfolio companies telling them to raise more money, control expenses and focus on profitability because things are going to be rough for the foreseeable future.  This is all pretty good advice.  Of course, the sinister, conspiracy theorists amongst those I’ve read feel this is an easy way to instill fear and get better valuations for VCs.  I’m not so skeptical so as to believe this.

But the outcome from this recession/downturn from an entrepreneurship and innovation perspective is going to be positive in my view for 2 reasons:

Reason 1 - As I mentioned in my Part 1 post, there are going to be a lot of unemployed or disillusioned people who say “I’m going to invest in myself instead of getting a job or investing in the stock market”.  These people will pursue new ideas, develop new technologies and will start new companies.  Out of this might emerge a few great companies and many more which will employ people and inspire even more entrepreneurs.

Reason 2 - This shakeout is going to get rid of a lot of crap ideas and companies.  There is no other way to say this.  Many of the “me too”  social networks or “iPhone/Facebook app” developers hoping to generate a userbase that they’d one day magically figure out how to ‘monetize’ may not make it.  They won’t make it not because they don’t have a cool idea that is fun and even potentially useful, but because many of these businesses were “built to flip” as a friend of mine at a prominent Sand Hill Road VC once commented.  And so they were never predicated on a real business model that could bring in more revenue than the dollars they spend.  This is a risky proposition and unfortunately, and such businesses don’t allow you to make it up in volume.

And while some of these ideas were marginally useful or fun as I mentioned, I also don’t know if they were solving real problems, e.g., building stuff that people really needed or finding a better way to do something that enough people cared about.

So what we’ll see in my estimation is the bar will get raised and better ideas will emerge and a new crop of more well-conceived startups will come forward.  With VC funding tightening up, entrepreneurs will need to do this.  Things that solve really big problems and that are built with an eye towards becoming sustainable businesses which are lean, mean and profitable are what will come into vogue.  A dollar and a dream may not be enough but a dollar, a dream and some serious discipline will be required.

In essence, for every Facebook, there will be many others that don’t have the backing to make it through the next several years.  And honestly, even if they did, being the social network for ex-convicts was never going to be that big (sorry guys).  I do think that many of these smart people who don’t make it out of this cycle will come back with better, tighter, more refined ideas the next time around, and this type of cycle is healthy.  Of course, this all only holds until the next bubble.