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What If It’s Worse Than We Think?

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[qi:115] When the financial crisis reached full bloom last fall, it took many technology companies some time before they were able to appreciate the impact it would have on them. This year, we’re seeing the fallout in the form big losses or shrunken profits, layoffs and other signs of retrenchment.

Alongside the pain, however, there’s a sense of optimism — that the worst is over and the tech industry just has to muddle through until the economy recovers. But the worst may not, in fact, be over; Financial Meltdown 2.0 might be lurking around the corner to deliver a second, possibly harsher blow.

The tech world is at a crossroads. But the choice of which road we take isn’t ours. It belongs to the financial markets and the regulators who are still struggling to right them. On Monday, Treasury Secretary Tim Geithner is expected to unveil another plan to address the big banks’ bad assets and stop more homeowners from falling into foreclosure. Details of the plan may offer a signpost as to where we’re headed.

Down one road is a scenario described by Cisco (s csco) CEO John Chambers this week:

“The majority of our customers are guessing 2010 while a smaller group sees the upturn towards the end of 2009. Given the coordinated activities of global central banks and the extremely large stimulus packages that are being implemented in almost all of our major countries, I tend to be a little bit more optimistic than most of my customers.”

The other road isn’t so sunny, and it’s the road we’ll head down if Geithner’s fix doesn’t work and the markets slip into another crisis. Some of the people who saw the banking crisis coming early on are suggesting that course is the more likely one. George Soros argued last week that bank assets are still deteriorating despite the first round of rescue money, a fact evident in bank stock prices. Others, like Eric Sprott, Bill Gross and Mark Faber, are now discussing a depression as if it’s a near certainty.

Not a recession, a depression.

If executives at technology companies are also talking about this, it’s not very audible. Last week’s news focused on new ways of looking at the ocean floor from your computer, or being able track (even stalk) your friends. These are interesting enough innovations, but what are companies planning to do if another crisis hits?

Right now, an economic depression is still far from certain, but the possibility is real enough that companies will need to prepare. What will it mean?

At first, it will favor large, cash-rich companies like Google (s goog), Microsoft (s msft) and Cisco, or any company that can finance itself through its own operations. Others with decent promise but weak cash flows might hope to be bought. VCs will be forced to trim portfolios. Companies that have cut staff to the bone will have to cut more, even at the risk of hurting future growth. But even healthier companies might see their cash flows dwindle over time.

For the past few years, most tech companies have progressed incrementally, tossing out a new feature or a new gadget and seeing what takes root. But an even tougher economy would demand harder questions, rethinking what a company does at the most basic level: Why is your company here? What is it offering and why would someone else want to pay for your stuff?

In short, what would your company look like in a dramatically different economic landscape? To be clear, let me say again that the landscape may not necessarily change. Maybe John Chambers’ optimism will prove to be right. But we have reached a point where we need to at least be asking, what if things are worse that we think?

11 Responses to “What If It’s Worse Than We Think?”

  1. Kevin,

    You may be right and I accept that your intentions are genuine. But when everyone is saying that “the sky is falling, the sky is falling…and we are all doomed”, it gets sometimes a bit overboard. We human beings do not always go by 0s and 1s. Even though I am in tech sector and a hardcore programmer, I think the best programming comes when you put your heart into it. And heart is all about positive emotion.

    What I intended to say is let us stop quoting these economists or VCs who may have a huge chunk of money or some govt. jobs or may be in some board of directors or may be advisors to somebody.

    They are entitled to their opinions, but no thanks to them… we do not need them now. Everyone knows that the market confidence is low now and people are holding tight to their purses for exactly no concrete reason as such: credit market collapse does not mean that all of the banks got wiped out.

    To restore it back, we need quotes from some good people constantly and back it up with certain data. I think that is one way to restore the confidence back. Not this way.

  2. Kevin Kelleher

    @Spandan: I don’t really think it’s a case of optimism versus pessimism. There are some pretty bad things that are beyond an individual company’s control and that are looking more likely to happen. What companies can control is how they respond, and I am saying now is not a bad time to start thinking hard about that.

  3. Even if you fall onto the ground, you are six inches above it!

    I think it is time that we show some optimism. Being pessimistic helps sometimes and may be keeps you on your toes. But then with over a year gone and every day when we so many bad news – can we be somewhat really optimistic.

    There is a Chinese proverb which says – “Even if you fall onto the ground, still you are 6 inches above it!”. Are not we??

    Below is one and it is being forwarded to me by one of my friends and I think it is very apt now.

    ================= What Worst Can Happen ==========================

    It is now old news that the whole world economy is in turmoil. Almost every day we hear news of companies getting shutdown, people loosing their jobs, senior people taking salary cuts etc. India, which is more connected to the world than ever, is also taking a hit – just like any other connected nation in the global economy. Of course, like many people, this was very scaring for me and I had time and again thought about it. I’ll share what gives me strength in the current bad times.

    When I graduated from college, it was an iron clad decision not to take a single penny from my parents and I wanted to abide by it. I did not have a job (an entirely another story, though I was a University Topper – some other day may be I’ll share) when I left the comforts of hostel life, but I had faith. I was at New Delhi then. I did not know when my next meal will come or where it will come from. I could not sleep for nights and had gone hungry for days and sometimes weeks. I did land up in a job within a month and I remember going to the interview in empty stomach and with the reimbursement they gave for my travel, I had a good meal in days.

    I quit the jobs within months as I felt it was not my passion and above all we were working on sixties technology and the place was not conducive for real growth. The place was at Morena, a small town around 28 kilometers from Gwalior, India: a case in point – you will get today’s newspaper tomorrow evening!

    When I searched for my next job in high tech sector the recession was in full swing and almost every company was laying off. To beat it all, I did not even know a single programming language as I was a hardcore Electronics Engineer. I still got a job from a software product company, which is very reputed now-a-days and I believe it was one of the best companies I have worked with. I remember going to the interview on a cycle in the scorching heat with my resume holder folded behind the carrier. When I reached the venue I was literally wet as the distance was around 7/8 kilometers.

    I do not know what will happen this time. But then what could be the worst? For a human being, the worst case will be (from my point of view of course) to die unnaturally: say a 30 year old young man died of accident or heart problem or some other disease. I do not think it will be that worse for me. Next worst can be: I’ll be without jobs for months, may be years. But then, unlike last time, I will not go hungry for days and I will have a place to sleep at night. And I know I can survive with minimal dresses, food and shelter.

    I know it may sound melodramatic and some may consider it to be extreme, but is it not the truth? I guess, we get very comfortable working in an air-conditioned environment earning some decent amount money and dread to do what we have done before. But then, thinking about those harsh days and without having any idea on what to do, I survived and moved on, gives me immense strength to go on this time also. Whenever I feel bad, I think of those days and I am sure it could not be worse than that. Or could it worse? Definitely a BIG NO, then why not keep moving?

    ================= What Worst Can Happen ==========================

    And I think Gigaom, being one of the most widely read blog portal, should be somewhat positive . . . well sometimes. It actually helps Om!!

  4. Optimistic_Desi


    I don’t need to. Pick any company in the NDQ 100 and it is a registered company in India now. It has everything going for it:

    1. A young and eager workforce that reminds one of Silicon Valley of the late 80s and early 90s
    2. A young and eager workforce that gets work done at 1/5th the price of an overpaid PA web programmer
    3. A young and eager workforce that the rest of the world wants to sell goods and services to!

    I am appalled at the laziness of so may tech workers in Silicon Valley these days.. they are still crying over their missed opportunity during the last bubble or crying over how unfair it is that their college buddy made out like a bandit while they have to “slave away” for the 150K salaries… and most Valley parking lots are empty even at 10 AM workdays and pretty dead weekends… folks are taking it easy :-)

    Everyone of my colleagues who visited Bangalore come back saying it brings back memories of the early 90s for them…

  5. @Optimistic Desi
    Can you point at a two tech companies in India that are world leaders in their respective product lines? None. You might be reading too much into those TOI editorials which create unnecesary hype. India has a long long long way to go before it can create tech companies that sell off-the-shelf products and feature in the Fortune 500 list.

    Try Realistic_Desi label instead.

  6. Optimistic_Desi

    Here’s a contrarian view:

    * If you love coding, consider moving to Bangalore NOW.
    * If you love business, consider moving to Bangalore NOW.
    * If you want to be on the cover of Fortune five years hence, consider moving to Bangalore NOW.

    Why you ask? Two of my nieces found their husbands on Orkut and got their marraiges “arranged” … the party in India has just begun!

  7. @Michael Kim said;
    …”I guess you are from the comms/optical world, and may have worked at one of our portfolio companies.”……

    Ah, hence the problem. I thought VC’s should be working hard for the company. It seems I was wrong. Everyone works for the VC’s. There lies the problem!!

  8. @soapers I’m curious why you mention me but I guess you are from the comms/optical world, and may have worked at one of our portfolio companies. The investments I made in that space are in companies that have not skyrocketed, but through the hard work of the entrepreneurs, and our continued support, they have have reached either profitability or near break even. You are correct that they are likely not going to be huge outcomes for my LPs but we and the management teams are working hard to ensure that these companies succeed. From an entrepreneur’s perspective, I would hope that is what they look for in a VC. If you want to chat about this more, my email is [email protected] and my office phone is 650-654-8502. Thanks

  9. Jake McCallister

    The worst is not over. The worst has not even begun. Job losses _so far_ are twice what they where for the dotcom crash, it took four years for the economy to recover those jobs. It’s four times the recession of the 90s, which took two years to recover. It’s not entirely unrealistic to suggest that it will be four years before we see job growth and eight years before all those lost jobs are restored. If this doesn’t eventuate, it’s more likely a result of massive job losses in the short term rather than a long slide down. This is a depression scale event and frankly most people are still living in a fairy floss mentality of denial.

  10. @ Kevin

    “The majority of our customers are guessing 2010 while a smaller group sees the upturn towards the end of 2009…………..

    Here we go again…..

    I entered the tech industry in 1999 – to witness my first OFC – 30,000 attendee’s – and at that time the tech bubble had been pricked and the bubble losing all it’s air – but everyone was wishful thinking – “it’ll pickup by September …” I kept hearing.

    Then 2001 came around and tech businesses failing all over the place like a drunken sailor on shore leave – but I still kept hears the ‘It’ll be better in September…”

    2002 came and went – more business failed, those billion dollar acquisitions back in 1998 and a1999 started to look like a bad idea, and were written down and off the books.

    I started buying small divisions of publicly traded companies for pennies on the dollar – some even gave me the division for free with millions of dollars of inventory and orders just to get rid of excess baggage!

    All the while Rustic Canyon’s Michael Kim, kept pumping money into failed business models – but he was never going to have a black mark (or should it be a red mark ?) on their investments record. I l had to Laughed – well it wasn’t his money!

    OFC attendance kept dwindling until there were more exhibitors than attendee’s.

    I bought equipment for ten cents on the dollar at auctions, and had a state of the art facility that I bought at BK Court – and the same with a competitor – and still I kept hearing “the upswing is predicted for the end of 2005…2006…etc etc”

    I bought shares of companies that once traded in the hundreds of dollars – for dollars – and still the drum beat went on…..

    I sold out to a PRC company that wanted my client base and equipment – we closed everything up here in USA and shipped it out in a bunch of big wooden boxes – that was 2006.

    Best thing I ever did – although putting 120 people out of a job wasn’t fun, but I was not about to go BK myself, but with my PH D.s earning $120K here plus stock but only $30K in PRC, my employee’s demanding medical, dental, vision, and increased taxes and hourly wages – compared with $8 a day labor – I wasn’t going to win this war.

    Wake up everyone – we are in for a long long period of depression, recession, failed businesses, little VC funding for new start up’s – no re-investment in local infrastructure, a fuddled muddled Congress (whats new) and a lot of people unemployed, State coffers drained, State workers on 3 day weeks, lowered tax revenue from home foreclosures, lower cap gains and income and sales taxes – the only people that will make money are either those that have cash and can buy up cheap properties and wait it out, and those in the bailout – the same people that got us here!