Recession and Problems for Startups

We’ve been talking a lot here about whether recessions are good or bad for startups, and a chat with Scott Heiferman from Meetup made me a little gloomier than I had originally been.

In the hearty, whatever doesn’t kill them makes them stronger vein, you could argue that a company that makes it through a recession is one that knows how to manage its operations, headcount, expenses, and business model. Fred Wilson, of course, quipped “After all, if you have no revenue, you have no revenue to lose when your customers stop placing orders.”

I think that assumes, though, that a startup is unique and can attract capital or already has enough money in the bank that it can ratchet back and just burn cash frugally for a while.

But what if you’re not unique, what if you’re part of a big crowd of startups, which might make it less likely that you can raise much money. These what ifs apply to a lot of companies in the Web 2.0 crowd. And that’s what has made me wonder whether we would see consolidation and companies going under if the recession does last a while.

So I had lunch with Scott yesterday. (We sat next to a window where the guys were pouring concrete for the sidewalk next door. It was really cool and Scott regretted that he didn’t have his camera.)

Scott brought up a couple other issues that are particular to these recession stalked times.

First, if Microhoo does happen, it hurts in many ways the exit strategy favored by most startups these days. That makes investing and being in a startup right now a little riskier. Because a Microhoo combo takes out of commission one of the previous acquirers. It distracts Microsoft from making smaller buys as it focuses on digesting Yahoo. And it eliminates the bidding wars between Microsoft and Yahoo that might have increased bids.

Second, with everyone piling on the Free bandwagon so well explained by Chris Andersen, there’s a lot more folks competing for ad dollars.

that’s tied to the third notion, which is linked to the recession, that Madison Avenue is pulling back on marketing. Microsoft, WebMD, even Google, are seeing the impact of that in the U.S.

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