Surviving Bubbles And Busts By Buying Low And Selling High

from the up-and-down dept

A few folks are noticing a small correction among Web 2.0 companies, with a few laying off employees or shutting down completely, and wondering if the "bubble" is bursting -- though, they note correctly that the correction is a lot less painful than when the dot com bubble burst, because the public markets never really got involved. However, a potentially more interesting post comes from Tom Evslin, who notes that the common wisdom that Web 2.0 startups are cheap to start is no longer true. Evslin's argument is that part of the reason Web 2.0 startups were so cheap to startup in the first place was because there was little competition, and it was much easier to get the publicity needed to build a critical mass around a service -- and as Mike Arrington notes in the first link above, it's not the technology, but the critical mass of community that's needed to make many of these companies successful. While it is true that the aspects that were "cheap" for these startups in the past few years may be getting more expensive, that doesn't mean that other things aren't cheap.

This discussion reminds me of a conversation I recently had with some startup execs about how you survive the ups and downs of bubbles and busts. It goes back to the question of "when's a good time to start a company," and the answer is always that it depends on the company. However, the idea that there's a bad overall time to start a company is false. There are always opportunities, and it's always in figuring out what is cheap relative to other things. So, during the original dot com bubble, raising money was relatively "cheap." There was so much competition for funds, it made sense to raise a significant amount of money, since you could do so without giving up too much equity. After the bubble burst, there were a lot of out-of-work, but smart, people available who could be hired cheaply. Technology was also pretty cheap. So you could build a startup with cheap technology, cheap labor (and eventually cheap publicity). So, these days, it seems like money was getting cheap again (as evidenced by some of the crazier VC deals), though not as cheap as in the last bubble. People are getting expensive, thanks to Google and Yahoo snapping up lots of good people, but it looks like marketing is getting expensive again too. So, for any entrepreneur who is looking for the best way to survive the up and down swings of any market, never assume that what's cheap now will be in the future, and learn to stock up on whatever is cheap when it's cheap relative to everything else. As for what actually is cheap or expensive right now... well, that's up for you to decide.


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  1.  
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    ScaredOfTheMan, Jan 8th, 2007 @ 7:29pm

    I Disagree with Tom.

    I don't buy it, if you have a compelling product or service in a new company. People will notice you, they will have to, its viral.

    Googlemail, never spent any money on advertising (until the recent Tips but). Searchmash, (i.e. google search 2.0) is a wicked search engine that my buddy showed me and now I use. They didn't pay for any advertising...and I know for sure they didn't "...spend money creating a valuable aggregation of content in order to attract subscribers in sufficient numbers so that they add additional value to the content and create network effect for your startup."

     

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  2.  
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    ScaredOfTheMan, Jan 8th, 2007 @ 7:30pm

    Part II

    They didn't pay for any advertising...and I know for sure they didn't "...spend money creating a valuable aggregation of content in order to attract subscribers in sufficient numbers so that they add additional value to the content and create network effect for your startup."

     

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  3.  
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    misanthropic humanist, Jan 9th, 2007 @ 6:53am

    bubbles and business

    I agree that it's never a bad time to start a new project. But I have a slanted view on Mikes analysis because I'm an ideas person and scientist. Ideas are cheap, I've forgotten more good ideas than I've eaten hot dinners, and that's no boast, what is a good idea without the rest?

    Money is always cheap too, unless the capitalists have been burned recently. Money has to move, like information it wants to be free. Still money is dead money and if you have good idea and the articulate ability to communicate it you don't even have to be a charming salesman.

    Labor is very dynamic these days and the more you are prepared to be dynamic and roll with it the better. Reward loyalty, be loyal, and be 100% honest with the people who do work for you and you can weather any storm. Be generous and pay bonuses when the sun shines and your crew will take cuts when they know things are bad, unless they have families. After learning how difficult and expensive it is to recruit I quickly learned the importance of keeping good folks with you.

    What I hate about business (and why I'm currently out of it and doing piecmeal consultancy) is marketing and lawyers. Those bitches are my failure in business, I don't understand them and I think they are deadweight. Predicting demand and visibility, and avoiding the mines put there to scupper you, that's what you need them for, but they are vague, cryptic, disloyal people. My first startup failed because of marketing. We totally underestimated the cost and effectiveness of advertising. We built it, it was amazing, but they didn't come. Noone saw where we were going until it was too late.
    So I disagree with you ScaredOfTheMan, you can have the most compelling product and it means nothing unless it's visible. And visibility cost$$$$.

    The second one was blown clear out of the water by hostile forces, we didn't even see what hit us. And I'm not getting into that because it makes me angry and want to beat the genitals of lawyers with an electric cattle prod.

     

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  4.  
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    Anonymous Bum, Jan 9th, 2007 @ 10:19am

    Geo Cities

    So does this mean that my Geo Cities site won't be purchased by Rupert Murdoch?

     

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  5.  
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    ScaredOfTheMan, Jan 9th, 2007 @ 11:10am

    Dude I am sorry about your companies..I too know how rough it can be...but I go back to the same point... spending money on marketing does not necessarily lead to profits.

    Think, Digg, Flickr, Linkedin, When did you see 1 Ad for them? 1 Banner, 1 Pop up, 1 anything...yet they are hugely successful.

    I am not saying don't spend any money, obiviously thats foolish, but I do believe the traditional venues for advertising still do not apply to Web 2.0 companies.

    Do you Ask.com....I didn't think so...yet look at all their ads...even on TV.

     

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  6.  
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    misanthropic humanist, Jan 9th, 2007 @ 11:24am

    Re:

    All good examples and hard to argue with. And it's true, the marketing was what killed us first time. Hmm. There's something I have to learn before the next time I try an idea. Perhaps it's to ignore "good advice", particularly the legal kind.

    "Do you Ask.com....I didn't think so...yet look at all their ads...even on TV."

    Funny you picked that one. Actually yes, though only becuse I am on a Google alternatives exploration to see what else is happening in search. Their "natural language" question processing concept strikes me as something with potential.

     

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  7.  
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    Nobody Special, Jan 10th, 2007 @ 5:25am

    cut the buzz word crap

    All the talk about Web 2.0 implies that some fundamental shift to technology has taken place. Mostly it is techno babble buzz word crap that this place used to avoid. I predict within the next 6 months I will move on from reading the site. Quality is clearly job 2 here.

    As for whether it is a good time for a startup - yes. Good ideas often still lead to good money. But like all times, the best ideas don't always make the best money. And some great ideas fail.

    There is only one sure fire way to know the outcome. Simply don't work toward anything. Then you will succeed in accomplishing nothing. (Or you will fail at getting anywhere.)

     

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