I blame David Hasselhoff.

Everything was going fine for the web — the financial world had been unwinding its overleveraged excesses for nearly a year without nary a ripple into Silicon Valley — until the launch of HoffSpace, a social network revolving around the oogachaka-ing, burger-wagging actor.

Some bloggers called it a bizarre nightmare. Others decried it as the end of social networks. They were probably joking. But they were right.

Hoffspace showed once and for all what the web sector had fought so hard to admit: These social networks had finally expanded a niche too far. No longer was it possible to argue that one day social networking sites would be anywhere near as good at making money as they were at expanding, fractal-like, into a grey goo of trivial matter.

Social networks spent too much time trying to build audiences without building a solid business model. The thinking was, let thousands of startups innovate in thousands of ways and one of them will stumble onto something big. The way eBay did with online auctions, or Google did with a better search engine.

But even the site voted most likely to succeed is still punting when it comes to financial success. Facebook CEO Mark Zuckerberg told a German paper this week that the site won’t have a business model for three years. “Growth is primary, revenue is secondary,” he said. On the face of it, that statement isn’t absurd. But coming last week, it sounded blindly out of touch. Facebook will surely survive, but smaller sites looking to it as a role model probably won’t.

This was the week when the Internet sector realized that not only are the good times over, but that much of the room we had for innovation is also gone. The time to experiment around with big, audacious ideas is passing. The invoice for that luxury is now due, and companies will have to either pay up or be so well-funded, like Facebook, that they can still afford tinker a bit. Money is what everyone is expecting from startups, simply because there is suddenly so much less of it around.

Of course, one thing that would help the sector would be if a major social networking company were to give enough of a peek into its books to show it has healthy cash flows, even a robust operating or net profit. But sites like Facebook and MySpace have been suspiciously shy about their financials so far, so that’s not likely to happen.

Many of these sites — focused on social networks or widgets or other mere embellishments to the web that emerged over the past few years — aren’t going to make it. Some with a smart focus, like LinkedIn, will muddle through. A few will be bought out cheap; others will live on as labors of love.

This is the destructive part of that celebrated and magical creative-destruction formula. A lot of areas in tech are probably going to find ways to keep growing, if more slowly: mobile advertising, perhaps, or cheaper, more efficient on-demand software.

Skeptics have been arguing for the past few years that social networking wasn’t a standalone business model, but a feature to enhance larger businesses with established business models. It seems that fate is finally happening. It just took a luminary like David Hasselhoff to make it real.

The economy is changing in dramatic and unexpected ways, and many of us are having a difficult time deciding how to react. Should we adopt a bunker mentality, or keep plugging ahead as if little has changed?

The fact is that entrepreneurs are well-suited to respond to the chaos, perhaps even to use it to our advantage, because we recognize that every challenge really presents a new opportunity. To anyone heading a startup, steeling yourself for the ups and downs of circumstances that are often largely out of your control is a daily ritual — even in good times. Sure, the credit markets are throwing us some new tricks now, but dealing with uncertainty is old hat for founders.

Call me an inveterate optimist. But with so much doom and gloom in the media, I’m offering four tips for maintaining a positive perspective through the current events. If prognosticators are right, we will live with these painful economic conditions for a while. Positivism is a discipline we all need to hone.1. Listen for substance. Vet for noise.

You’re going to get a lot of downtrodden talk, and head-shaking. Listen carefully to your employees, capital partners and industry experts. But train your ear. Vet at the same time. Your job as an entrepreneur is to drill down to the heart of matters. Is the fear and concern being voiced to you based on valuable information, or is it just negativity? If it is the former, respond. If it is the latter, vet and ignore.

2. Ring cash out of your contracts.

You must wring more bang out of every buck now. Vendors are uncertain, too. This is your chance to renegotiate everything: leases, open-ended vendor contracts, advertising rates, technology purchases, you name it. If you’ve been prudent and have a history of paying your bills on time, business partners will pay a premium to continue to do business with you. Economic uncertainty works in your favor here.

3. Pull a Buffett: Buy low.

I’m talking about human assets. Great people are now available. Such employees pay for themselves. A partner recently introduced me to a candidate for a big job we needed to fill. One conversation and I knew he was a great fit. Normally, I couldn’t have afforded him, and he probably wouldn’t have returned my call. But his phone isn’t ringing much lately. So I reshuffled our cash position to seize the opportunity. Warren Buffett would be proud that I borrowed a page from his playbook and “bought low.”

4. Offer people a reason to adapt.

People won’t change unless you give them a reason to change. Customers need a better product, or a cheaper price. Employees need a new mission, or a new incentive. In any case, it is usually excruciating pain that convinces a person, or a business, to consider a proposition that alters their status quo. Pain like: a device or service that no longer works; an operating budget slashed; an external economic crisis.

Painful economic conditions are, in a peculiar way, ideal for entrepreneurs: They present us with numerous opportunities to convince people to change their behavior. The playing field is ripe for innovative products, services and business models. Deliver one.

No question, we face challenging times. But each of us has the chance to benefit from the opportunities intrinsic in the chaos.

Mike Sheridan is founder and president of Global Debt Network Automotive, an online marketplace for trading auto loan portfolios.

I live in Texas, where during the tech bubble folks were walking around saying that it was nothing compared to the real estate crisis of the late 80s. So now seemed like a good time to chat with Austin Ventures, which has been investing in the state since 1979 and announced two funds worth a total of $900 million in September, a few days after the markets started to collapse.

I spoke with general partner Chris Pacitti, who told me that once the firm, which has a reputation for being financially-oriented rather than operationally-oriented, saw the crunch coming it kicked its fundraising machine into high gear. Now Austin Ventures has $300 million for early-stage deals and $600 million for growth equity.

When it comes to recession or depression fears, Pacitti talked about the fine line entrepreneurs will have to walk between cutting spending to a point where they can last through a protracted downturn and shrinking to the point that they can’t compete once the dollars start flowing again. But he also said that this time around, many of the startups are well positioned to withstand a downturn, especially those with recurring revenue streams.

“We’ve seen this movie before, but this will be different than the last downturn,” Pacitti said. “The economy will be worse, but this is not a tech-led recession that we experienced before with lots of overfunded sectors and business models that didn’t work.”

In his mind, most of today’s startups (especially those at Austin Ventures, which didn’t make a lot of Web 2.0 and cleantech bets) have the type of subscription-based revenue streams that could see them through a protracted downturn. He also sees Texas faring a bit better than the California tech scene.

“There aren’t a lot of cleantech investments here that need a lot of capital, so that will be a net positive,” Pacitti said. “Basically those are large, capital-intensive science experiments that need a lot of project finance. That is very difficult sector to be in right now. We have a different mix here, and are focused on software and media plays.”

For those wondering how to achieve the fiscal discipline to hang on through the downturn, Pacitti put it simply, “This means the CFO is back in control.” For a venture firm that prides itself on financial acumen and strategies, that’s music to Austin Venture’s ears.

We’d like to say thanks to this month’s GigaNET sponsors:

This is either a brilliant Photoshop job, some canny viral political campaigning, or both: An Xbox 360 gamer playing Burnout Paradise spotted an Obama campaign billboard with a “Paid for by Obama for President” caption as he whizzed by in his turbocharged sports car, Game Politics is reporting. The site was unable to confirm the ad’s authenticity with Burnout publisher Electronic Arts; I’ve left messages with both EA and the Obama campaign and will update this post if we get confirmation either way.

Its veracity aside, the virtual billboard raises an interesting question: Are political ads in video games a good idea? In terms of eyeballs, I’d have to say yes. Roughly one-third of American households own an Xbox 360, Sony PS3 or Nintendo Wii. In terms of effectiveness, Brandweek recently detailed a survey undertaken by its fellow Nielsen Games division in which 11 percent of gamers said they bought a brand after seeing it advertised in a game.

Of course, buying a brand of shoes or soda is a totally different prospect than buying a politician’s brand in the polling booth. And young voters — the kind most likely to notice an in-game ad — are also the least likely to show up on Election Day.

At the very least, however, several gamer sites are now excitedly talking about the Obama billboard, which translates into some level of viral messaging success. It’s certainly a better idea than John McCain’s Pork Invaders, a knock-off of a video game that was popular when Sen. McCain was already in his 40s.

Hat tip: Broken Toys.

An almost decade-long effort to bring an unknown wireless broadband technology to the U.S. is set to bear fruit next month in Florida after XG Technology Inc. scored a $375 million infrastructure deal backed by a secretive Swiss billionaire. Earlier this week the Financial Times said Sarasota, Fla.-based XG scored a $375 million deal from an investment firm owned by Johan Bohman to start deploying XG’s low-power wireless base stations. So far I’m taking this story with a heaping grain of salt, especially since other reports call this guy a reclusive Swedish billionaire, and there are allegations of fraud regarding a member of the company’s management team, plus uncertainty about the technology.

XG, which is listed on the AIM market in London, is pushing a low-power, long-range wireless technology called wMAX that they’re pitching as a competitor to cellular and WiMAX networks. They already have handsets in the works, and FCC approval. According to the company, its signal range at 900MHz is 7.55 miles, compared with 2.3 miles for GSM, 2.46 miles for WiMAX and 2.53 miles for UMTS (3G), all using equal average power.

The goal is to roll out a VoIP service in South Florida this year and launch data and modem services in 2009, according to the Financial Times.  I’ve called the company to learn more, but have not heard back. If it can deliver a low-power, mobile broadband service that would be a cheaper alternative to cellular and possibly to other wireless broadband efforts, that’s pretty sweet, but it seems a little too good to be true.

Ready for a little Friday humor? Well there’s this British carrier called BT that’s spending £10 billion ($17 billion) to build out an all-IP network that would handle the massive influx of converged data, voice and video traffic coming over the next few years on one network. They’ve been trashed and mocked, as so many visionaries often are, but they’ve kept on building, with the goal of finishing the network by 2011. Only they apparently didn’t build it to talk to the next-generation protocols, which is like spending £10 billion for a machine that translates spoken Latin.

BT told a high-speed broadband provider in the UK that it doesn’t support IPv6, which is a protocol backed by the Internet Engineering Task Force. There are all sorts of dire warnings explaining how as more devices connect to the Internet (like your digital picture frame or thermostat), we’re going to run out of IP addresses to give them. That means we need to upgrade to IPv6 before we’re forced to share IP addresses or take other measures. This requires a big effort from equipment vendors and site owners who have to build and host IPv6 sites. With the doomsday predictions saying IPv6 IPv4 addresses will run out some time in 2012, it would appear that the BT 21 Century Network will be finished just in time to become obsolete.

Earlier this morning, Rich Greenfield, the scary smart media analyst at Pali Capital, slashed his price target on News Corp to $20 from $27, citing big concerns over slowing advertising revenues for newspaper and television stations. And since this is a global problem, there is little room for News Corp to hide.

He is forecasting a 1.5 percent decline in revenues for News Corp.’s newspaper business, a 9.5 percent decline in its TV revenues and a 7.8 percent decline in revenues at its filmed entertainment division. Greenfield cut his earnings and overall revenue estimates on the media behemoth as well. The good news? Rupert Murdoch is sitting on $6 billion in cash, which means he could grow revenues through acquisitions. Cash, if not king, is indeed a king-maker.

Since he didn’t offer an analysis of the Internet part of News Corp.’s business, especially MySpace, I emailed him to find out what he thought about that. He didn’t go into much detail but he did say, “MySpace is one of their BEST-performing assets right now…MySpace is doing great.” Last year Murdoch said he expected MySpace to bring in about $750 million in revenue for its fiscal year ended in June, the lion’s share of the $1 billion in revenue forecast to come from the company’s Fox Interactive division. If the big shift from old media to online accelerates, Rupert’s kingdom does have enough assets to capitalize on that shift. But then, I wouldn’t count on any ad dollars just yet.

Photo courtesy of Pinar Ozger via Flickr.

In times of trouble people like to revisit what they know, and what could be more familiar than the ever-present effort to get Microsoft and Yahoo together at last? Mithras Capital Partners has floated a proposal that Microsoft buy Yahoo for $22 a share, or 74 percent more than its closing price on Thursday. According to Reuters, Microsoft could then unload Yahoo’s Asian assets and recognize $3 billion in savings, making for a total deal cost of $10.3 billion.

Since the plan seems crazy, given the MicroHoo history, Mithras’ small stake (.14 percent) and the current economy, I wondered who the heck Mithras Capital is, and a bit more about its investment strategy. Surprise, Mark Nelson of Mithras Capital is not a fan of the Yahoo-Google search deal! While Mithras has been pushing a sale of Yahoo to Microsoft for months, they also have ownership stakes in SourceForge (5.6 percent as of August) and Transmeta (4.9 percent in June). SourceForge owns the Slashdot web sites as well as ThinkGeek. Apparently Mithras has tried to meet with management at SourceForge, but management has refused.

Transmeta, the beleaguered chipmaker turned intellectual property shop, put itself up for sale in September, and has seen its stock reach a 52-week high while the rest of the market bombs. There’s no indication in Mithras’ SEC filings that they’ve met with Transmeta executives. Perhaps this Yahoo stunt is an attempt to get its name in the paper and strike fear in the hearts of management at its other investments. Or maybe given the economy, it feels it has nothing left to lose.

EQO Communications, a communications company based in Richmond, British Columbia (just outside of Vancouver), that made waves at Demo 2006 and raised a total of $13 million in two rounds of funding from GrowthWorks, BDC Capital and Ventures West, is rumored to have cut nearly 65 percent of its work force — reducing the number of employees from 35 to 12. The news was reported by Techvibes, a Canadian startup-related publication. I have called their marketing manager for a comment but had not heard back as of press time.

When it launched, we were intrigued by EQO because it was one of the first clients out there that allowed you to make Skype calls from a regular phone. Making Skype mobile was an opportunity that slipped away from EQO mostly because competitor iSkoot was better funded and had a better execution strategy. In August 2006, EQO got into a bit of a tiff with Skype. The company then refocused on social networks, but it seems even that strategy didn’t go anywhere. EQO raised another $9 million in August 2007.

Funny thing about these rumored job cuts is that the company has been supporting more and more mobile phones and was supporting all high-growth devices. The job cuts, if true, don’t bode well for the long-term health of the company. VoIP as an industry has proved to be hard nut to crack for startups, especially those aiming for the consumer market. Jangl and TalkPlus were two startups that hit the deck earlier this year. We are going to see more of these “save money on LD” phone apps with no discernible business model and relatively little traction or loyalty to follow suit. 

* Approximately

Venture firms are sounding the alarm over what this current downturn might mean for their portfolio companies — and it’s not pretty.  While it’s true that great companies are built during downturns, it’s also true that plenty of entrepreneurs are going to be shut out of any sort of financing for the foreseeable future, all as their personal wealth dwindles and banks decline to offer home equity loans or other lines of credit.

We’ve already reported on how the rest of this year is going to be a cautious time for venture and angel investors, but what does that mean for tech entrepreneurs? And how long, exactly, will VCs stay on the sidelines? As bad as things are forecast to be, my bet is that they won’t be there for long.

For venture firms, this economic crisis looks a lot different than the nuclear winter they went through after 2001. From a high of $105 billion invested in all of 2000, investments by venture firms hit a low of $19.76 billion in 2003. Since that time, the growth has been slow and steady, so there’s not as far to fall — last year, the total came to $30.69 billion.

This time around, rather than putting tens of millions into startups whose basic business models would never enable them to reach profitability, venture firms have been, in most cases, investing in real businesses. Some, most likely the Web 2.0 businesses whose business model is to get eyeballs now and revenue later, will end up flopping, but even they haven’t raised as much the dot-coms did. Also, having learned from the bubble, most VCs have been putting money into reserves so that it can be used for follow-on investments. That means they can keep funding their portfolio companies a bit longer than originally planned.

That’s the good news. But first venture firms have to tackle an exit environment that’s going to force their hand. If the IPO market doesn’t open up and interested buyers get worried enough to stop shopping, by the middle of 2009 VCs might have to turn to triage. So far this year there have only been six initial public offerings, and late-stage deals are piling up. In January I noted that the backlog of later-stage deals was getting higher and indeed, a few months later, second-quarter data showed the greatest number of late-stage financings ever. We’re even seeing more fourth- and fifth-round financings, such as that of telecommunications software maker Kineto Wireless, which just raised $15.5 million in its fourth round, or RFID company  Alien Technology, which just raised $38 million on top of $258 million raised since 1994.

“Most VCs have adequate funds they have held back for their late-stage deals, for companies that can’t go public or get acquired for two years,” said Mark Heesen, president of the National Venture Capital Association. When I pointed out that this backlog had been growing since late last year, Heesen admitted that if things don’t improve, we could see fire sales and the shuttering of certain companies — starting in the second half of 2009.

“When one avenue is shut down and there are fewer buyers because of gyrations in the market, then the Ciscos and IBMs of the world will still have to buy some companies, but it will become a question of those they have to buy vs. those they’d like to buy,” Heesen said. “Those they would like to buy will be left on the table unless the [acquirer] can get them for a low price.”

So those pitching early-stage rounds may want to stay in their day jobs while venture firms focus on getting their later-stage companies out the door. As for those at the helm of later-stage firms, they should hunker down and give up those dreams of ringing the opening bell on the NYSE — at least for now.

This article also appeared on Businessweek.com.

Today, Qwest Communications launches an Internet portal that allows users to access and see what’s happening on their home phones. Dubbed qHome, the service allows users to see who’s calling their home phone, listen to voicemail, forward messages, manage their contacts and place a phone call, all from the Internet. Users of Windows Live Messenger can also tweak their settings to get an Instant Message when someone calls their home phone.

For those of you who still have land lines, this is kind of a nifty feature that gives a little more control and access to a home phone without having to dial in for messages. Unfortunately, the service only works right now in Colorado and will be rolled out to the rest of Qwest’s customers later this year. More limits include the need for a customer to have both a Qwest land line with Caller ID and VoiceMail and DSL package as well as Windows Live, q.com, msn.com or hotmail account. This isn’t going to convince people to sign up for a land line, but it might keep those who are considering a rival cable or VoIP service happy with Qwest.

It has been a summer of discontent for publicly traded Internet companies, whose shares have nosedived in tandem with the broader market. And the group — led by Google and Yahoo, both of which saw double-digit declines in the last month — is not going to be dancing in the streets any time soon.

Or at least that is what Ben Schachter, Internet analyst with UBS, thinks. In an astoundingly sobering note to his clients this morning, he cut his estimates on his entire portfolio of coverage:

we are also lowering our estimates and price targets across the board to reflect a deteriorating macro-economic environment that we expect will inevitably impact the online advertising market and consumer spending, likely continued unfavorable foreign currency fluctuations (at least in the near-term), as well as other company-specific factors.

In a rather brutal assessment, he wrote, “[W]e see no business model based on advertising or consumer spending that will be immune to a downturn. Specifically for the advertising names, as corporate profit forecasts come down, we expect planned advertising spending will be delayed and/or cut.”

UBS also had the following thoughts on the third quarter of 2008:

• September was difficult.
• Google held up better than others, though Schachter still thinks that results might be below expectations.
• Stronger dollar is going to cause issues for guys like Google.
• More cautious on 3Q results from Yahoo and ValueClick

Looking beyond to the fourth quarter of 2008 and 2009, UBS noted more optimistically, “[W]e think that the continuing shift to online will be somewhat accelerated by the macro weakness.”

Now here we are talking long term, and even as I trust Ben’s analysis, I am one of those folks who is assuming the absolute worse. Why? Because these are irrational times. Guys, General Motors has a market valuation that is lower than its value in 1930. Yahoo is a company that is likely to hit a massive air pocket, because it is highly exposed to financial- and automobile-related advertising.

Regardless, Schachter sees no near-term bottom in sight for the Internet stocks and is advising that people don’t try and catch a falling knife. In particular he was sour on ValueClick, an online advertising network. I think this is a bad sign for all advertising networks out there, especially the startups that are trying to get traction in this market. He did point out that Google will get beefier and bigger in these lean times.

Our big NewTeeVee Live conference is fast approaching — Nov. 13, just a month away! — and we’ve got a sizzling hot line-up.

Check out the newest additions to our speaker list:

- Alexis Rapo, who heads ABC.com
- Michael Buckley, breakout star of web show “What the Buck”
- David Verklin, CEO of Canoe Ventures, the new interactive advertising joint venture from the cable companies
- Ben Ling, recent high-profile hire at YouTube and head of product management for all its syndication projects
- Tania Yuki, senior product manager at comScore, who will be launching the firm’s new online video research initiatives
- Xeni Jardin, host of the fabulous new web series “Boing Boing TV”
- Felicia Day, star of the groundbreaking web shows “The Guild” (which she also created) and “Dr. Horrible’s Sing-Along Blog”

Want to get up close and personal with these folks and the rest of our stellar speakers? We still have a Super Saver discount going for advance purchasers, so buy your ticket today.

Telecommunications provider Ericsson is putting some wind power into its network with a new radio communications tower unveiled today. The Swedish telecom partnered with turbine maker Vertical Wind AB and Uppsala University to incorporate a vertical-axis wind turbine into the tower that houses radio base stations and antennas. The tower is now undergoing trials to see if the design will enable low-cost mobile communications to spread throughout remote regions with minimal environmental impact.

The rig is a conceptual riff on Ericsson’s energy-lean Tower Tube design. Ericsson claims it has greatly reduced the station’s power demand, eliminating the need for feeders and cooling systems and slashing energy consumption up to 40 percent. It’s not clear how much of the tower’s energy needs will be fulfilled by the turbine, but due to wind’s intermittent nature, it will likely need to be grid-connected to ensure a stable signal, although it could use an energy storage system in far-flung locals.

This project is part of Ericsson’s ongoing Communications Expander campaign, under which the company is boosting efficiency and using solar and wind energy to power its network whenever possible. Aside from the environmental benefits, Ericsson says this will cut operation costs and make telecommunications available to more people in more parts of the world. For the full story, head over to Earth2Tech.

Social applications are spreading off the networks and into the web as a whole, making it a more engaging and social place than it has ever been before. But how do startups, developers, and big businesses get through all the noise and find success? GigaOM readers are invited to attend the SNAP Summit Oct. 28 in San Francisco, to learn the basics of user growth: how to attract users, retain and measure them, influence their actions, monetize them, and eventually produce a highly successful company on the social web. GigaOM readers get a special 10 percent discount on registration!