HellaFrank

Everyday we hear stories about the failing economy, whether we’re in a recession and the fallout of some bad decisions by big financial institutions. For many aspects of the economy, people have a pretty good idea what’s going to happen — mortgages will continue to be tough to come by for many people, some more bankers will probably lose their jobs, and Nintendo Wiis will continue to be impossible to get… Well, not sure that last one has anything to do with the economy.

But one aspect of the economy that’s near and dear to me is venture backed technology companies and how they will be affected. Many people have strong opinions and there is really no consensus on what will happen. On several occasions recently I have been asked by people outside the tech industry how the economy has affected, or will affect, the companies I work with and the VCs that fund them. My answer to them is that I really don’t know, and in my never-ending search for the answer to that question, no one else really seems to either.

Back in August, a prominent venture capitalist in San Francisco, Keith Benjamin received some attention from a blogpost he wrote about why the credit crisis would help venture capital. The New York Times and Silicon Valley blog VentureBeat also reported on his theory that venture capital is not based on credit and debt, therefore, investors will be more willing to invest in tech IPOs. There’s one theory.

But, the numbers show that those IPOs have not been plentiful the past few months. Hmmm?

More recently (and by recently, I mean, this week) another article in The New York times paints a dramatic picture of the slowdown in Silicon Valley. Silicon Alley Insider, a New York technology blog, agrees (but then again, they’ll never pass up an opportunity to prove superiority over our West coast counterparts).

On the flip side, here in New York, Union Square Ventures recently announced the closing of their most recent investment fund, apparently without much difficulty. Yesterday Reuters reported that New York is “fertile ground” for technology startups, and VC and tech/finance blogger Paul Kedrosky agrees, at least for financial tech startups. So now you’re telling me things are different based on location? It’s starting to get murky…

Probably the most convincing and level-headed post I’ve read on the topic comes from Fred Wilson of Union Square Ventures. Yes, he is a VC and it’s in his interest for people to remain bullish on tech startups and the economic viability of the web, but he makes some good points and concludes that now’s the time for companies to build their business models for the long haul. There’s venture capital money out there waiting to be invested (see above, USV just got $156 million), but the returns may not come right away. So, companies need to build real, sustainable business models since Google won’t snatch them up anytime soon and they’re damn sure not going public… A real, profitable company, what a concept!

In the end, there really doesn’t seem to be an answer everyone can agree on. Overall, it seems that whether the effects of the downturn are negative or positive depends on your role in the tech community. For an entrepreneur, it may be harder to get money and convince VCs that his company can make it in this economy. Bad for them. For VCs, they’ll have to strategize on which types of companies can make it right now and advise accordingly once they’ve funded those companies. Not bad or good, just different. End-users of these technologies? It seems like we/they are put in a position of power. Products need to be made for end-users now, not for Google or Yahoo!, and consumers may ultimately decide whether a company is successful or not. With so many early acquisitions the past few years, widespread consumer adoption and revenue haven’t necessarily been the benchmarks of success for startups.

So, I guess we just need to sit back and watch it all unfold, and the next time someone asks you how the economic downturn is affecting tech, tell them to get comfortable cause the answer may take a while.

Update: Interesting post on Silicon Alley Insider today about computer science graduates not having any problem finding jobs. Seems like engineers are always in high demand though — a company is nothing without its product, and developers bring those to life.