Is That the Sound of the Silicon Valley Web 2.0 Bubble Bursting?

Om Malik at GigaOM has the news of a grim meeting that leading Silicon Valley venture capital firm Sequoia Capital held yesterday for its portfolio firms. The CEOs were greeted by an image of a gravestone that read:

Om Malik at GigaOM has the news of a grim meeting that leading Silicon Valley venture capital firm Sequoia Capital held yesterday for its portfolio firms. The CEOs were greeted by an image of a gravestone that read: “R.I.P.: Good Times.” The message was that the economic downturn could make things much worse for tech startups, most of which to date have been surprisingly unaffected by the market maelstrom.

Meantime, Mike Arrington at TechCrunch reports that prolific angel investor Ron Conway, who has backed many dozens of startups including Google, sent a letter to his portfolio companies suggesting they hunker down and lower their burn rates, in essence “raising an internal round” of money through cost-cutting.

So is the sunny sky falling in Silicon Valley? Om says this is bad news for the Valley, and in one sense he’s right. There’s just no way that the economy won’t have an impact on the tech economy and the Valley in particular, possibly a big impact. Certainly a lot of people could suffer if startups die off en masse. And as they do, the many services from law firms to cubicle suppliers to networking gear makers will see their business drop, in a vicious cycle.

But even in the dot-com crash of 2001 and 2002, many startups survived (more than you think) despite the high-profile flameouts like Webvan and As “John” commented on the TechCrunch post on Conway:

I spent the last few days visiting with several well known venture capital firms in the valley. We’re not raising money but I was curious to hear their take on things. The basic message was that they have dry powder, good companies will still get funding, and focus on efficiency is key.

Nobody seemed to give the “end of the world” message. I’m not saying we’re not in for some hard times, but Ron Conway and Sequoia are not God. Let’s remember that Sequoia wanted to pull their money out of Google after they invested in them because they thought the company would go out of business.

That turned out to be wrong in a major way. So while I think there will be plenty of carnage out there, I can’t help but have some skepticism by these public pronouncements.

Indeed, some people are even more skeptical of the motives of these investors—justifiably, since the same VCs who have been exhorting their companies to grow and not worry about revenue for now suddenly seem to be changing course (though some, such as Fred Wilson, have been sounding a warning for more than a year). One person who identified himself as “Alan Greenspan” commented on VentureBeat:

These are challenging times and some companies will go out of business. Nothing will ever change. But a friend of mine that is bankrolled by Sequoia says much of this was drama. Drama in the sense that they Sequoia wants to put the fear of God in them and make them focus more. For anyone at Sequoia to say it will last for years is completely irresponsible. How the hell do they know how long any down turn will last? Oh, I forgot they are Sequoia. Please.

“Anonymous” on GigaOm is even more cynical:

This is a PR stunt. When companies like Facebook go out and raise $300 million, or RockYou and Slide raise $50 million a piece, you know they were bulking up for hard times ahead. Sequoia knew about this, and told their companies about this, a long time ago. They couldn’t make that public though because they were saying the opposite to the Series A and B venture funds that gave their companies those war chests.

Now Sequoia will leverage this crisis towards more equity in companies that are looking for new rounds of investment right now.

This is all a God damn game for people who are going to be fine no matter what.

OK, that’s a little harsh, even if there may be a grain of truth there about the famously hard-nosed folks at Sequoia (and at other VC firms). But frankly, not to sound too cold, a lot of startups, especially Web startups that have driven the Valley’s recent boom, probably don’t deserve to survive. Many Web 2.0 startups are completely redundant or unnecessary, or both. I feel for the people working hard inside them, but we all knew in our hearts that the 47th social network or video sharing site, and at least 35 or 40 before them, really weren’t going to make it on their own.

And in other ways, their failures will be a good thing. The problem with those companies wasn’t so much wasted VC money, which still seems plentiful for now, but wasted talent. And the folks who are laid off or voluntarily bail from doomed startups—and again, I don’t mean to be cold about this—will probably be happy to work hard at a new place with more promise, even if they don’t get showered with so much stock option funny money. Mark Pincus, CEO of the casual games site Zynga, told me yesterday that he’s getting 30 to 40 resumes a day now, from people who suddenly aren’t so demanding. Up to now, getting talent has been the major bane of new startups’ existence. And ultimately, it’s better for these people that they’re working at a company with a solid user base and business model that has a better chance to succeed.

No doubt the Valley, and technology at large, is in for the toughest times since at least the all-too-recent dot-com bust. But I’m not so sure it will be a bad thing in the long run—maybe quite the contrary. So if you see the inevitable stories in coming weeks and months predicting the demise of innovation in Silicon Valley, read them with a heavy dose of skepticism. As any battle-tested entrepreneur will tell you, the bad times are the best of times to start a company that will last.

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