The party, we are told, is over. Or maybe it isn’t. Or maybe it is.
A week ago, Redfin was racking our brains over how we could possibly spend more money to drive higher revenue growth. When capital is plentiful, profits become less important to any business. You make hay while the sun shines. You experiment in costly ways with marketing campaigns, changes to the service, speculative new projects. If you need more money, you can get it. The advice of our investors at Redfin as recently as last Friday was, overwhelmingly, to stay aggressive.
That was then, this is now. After a week of terrifying stock-market swings, we still have plenty of money and the moxie to invest it. We’ll still be aggressive. But we’d be foolish not to pause for a moment to rubber-neck at the carnage on Wall Street, thinking carefully before embarking on a strategy that might require us to raise more capital.
Other companies are in the same boat. Already, nine public offerings were canceled or delayed this week. Regardless of whether the markets are up today or tomorrow, market volatility spooks banks from under-writing risky deals, and that in turn gives venture capitalists pause before tying up money at crazy prices in a private company.
But even if prices moderate a bit, that doesn’t mean we’re headed for a bust. Technology companies aren’t inert assets that go up and down on the tides of speculation like a chunk of wood or, say, U.S. real estate. They can rise or fall in value on their own, depending on their ability to get customers to pay more or less for online services & gizmos.
And my guess is that customers will continue to want to pay more for online services and gizmos, even in hard times. Just take for example the iPad. Launched in March 2010 with U.S. unemployment near 10%, the iPad was the ultimate extravagance. No one needs an iPad and anyone who does could easily buy alternative tablets for half the price. Yet iPad sales are through the roof. What this tells us is that when consumers pare back, their list of absolute essentials now consists of food, shelter, Internet.
And this is why, in talking to folks at all sorts of high-tech startups, you hear the same story of rising sales, even as worldwide consumer spending sags. Even in a recession, the only problem most consumers have with the Internet is that they can’t get enough of it.
The crucial difference between the current wave of startups and the one we saw in 1999 is how much better we now are at making money, not just noise, from this Internet traffic. On almost every front, today’s high-tech startups have become ferociously disciplined about profits, because we were born into the fire of a recession and learned to grow in a recession:
- through viral websites that can grow without advertising;
- via exquisitely calibrated email campaigns that hit you every day, not every month;
- through a massive investment in data analysis to identify profitable customers;
- with virtual currency, in-app purchases, subscriptions, online stores and micro-payments; and
- through a belated realization that the best way to make money is to ask your users directly for it, as Redfin, Zynga, Gilt, Groupon, Flickr and a whole new wave of e-commerce sites now do.
That’s why Zulily scored a $700-million valuation yesterday, and why the company richly deserved it. Online business and high-tech companies may grow more cautiously in this new environment — but they’ll still grow. And the sky may fall on Wall Street, but that’s only because they’ve got nothing but hope to hold it up. When big storms come, it’s better to be a builder than a speculator.