Ready for a Downturn?
Software companies with a plan for bad times will not just survive a downturn- they will emerge stronger than before.
By Peter Sobiloff, Insight Venture Partners
Nov. 26, 2007
Editor's note: Early this summer, things were going too well. Despite troubles in the credit and housing markets, the stock market was holding relatively steady. At our Enterprise conference in July, Peter Sobiloff of Insight Venture Partners made a prediction: This market's going down. And it has been a roller coaster ride ever since. We asked Peter to give us some more perspective on how software companies can survive the ride unscathed.
A Downturn is Likely
Software companies must have a strategic plan for surviving in a down market. Importantly, the time to create such a plan is now, well before market conditions become unfavorable.
The good news? Vendors who are ready for a downturn can use the opportunity to expand their business and position themselves for broader success when the economy turns up again.
Many economists are pointing to a market contraction next year in the software sector. There are several factors that are conspiring against tech companies to make this happen.
First, the troubles of the credit markets are everyone's troubles. If borrowing money becomes difficult, it becomes difficult for everyone - including investors launching LBOs, CIOs trying to buy new systems, and so on.
Overall consumer confidence is dropping. Gas prices are high, the housing market is a mess and the dollar is weak, which means imports are expensive. None of these are good signs for consumers.
Another unknown is the 2008 election. Every election year triggers market jitters. Regardless of who is or who will be in office, the market never likes a potential change in government.
So far, technology companies have escaped the troubles of the broader economy and have performed well - maybe even overperformed. But the gap between tech stocks and the rest of the economy may close at some point.
The reality is that downturns are part of the natural economic cycle and will come, sooner or later, so the time to get ready is now.
This Downturn Would Be Different
It is impossible to talk about a downturn without comparing it to the dotcom crash of 2001 and the subsequent recession. But if a downturn comes next year, the drop will be different and not nearly as steep. Here's why.
The dotcom boom was characterized by immature and unproven business models which exposed tech companies across the board. A startup that wasn't making money would buy Cisco equipment and Viant's consulting services. That cycle of economic activity based on immature models was bound to fail.
Today's software companies are much more mature. All tech companies have learned a lot of lessons which set them on much more sound footing than during the dotcom era and will help them during a future downturn.
Regardless of how stable and mature companies are, it is impossible to escape the reality of overall economic cycles. There will, someday, be a downturn and customer budgets will shrink, exits will become difficult and the fear of going out of business may become very real.
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A Downturn is Likely
Software companies must have a strategic plan for surviving in a down market. Importantly, the time to create such a plan is now, well before market conditions become unfavorable.
The good news? Vendors who are ready for a downturn can use the opportunity to expand their business and position themselves for broader success when the economy turns up again.
Many economists are pointing to a market contraction next year in the software sector. There are several factors that are conspiring against tech companies to make this happen.
First, the troubles of the credit markets are everyone's troubles. If borrowing money becomes difficult, it becomes difficult for everyone - including investors launching LBOs, CIOs trying to buy new systems, and so on.
Overall consumer confidence is dropping. Gas prices are high, the housing market is a mess and the dollar is weak, which means imports are expensive. None of these are good signs for consumers.
Another unknown is the 2008 election. Every election year triggers market jitters. Regardless of who is or who will be in office, the market never likes a potential change in government.
So far, technology companies have escaped the troubles of the broader economy and have performed well - maybe even overperformed. But the gap between tech stocks and the rest of the economy may close at some point.
The reality is that downturns are part of the natural economic cycle and will come, sooner or later, so the time to get ready is now.
This Downturn Would Be Different
It is impossible to talk about a downturn without comparing it to the dotcom crash of 2001 and the subsequent recession. But if a downturn comes next year, the drop will be different and not nearly as steep. Here's why.
The dotcom boom was characterized by immature and unproven business models which exposed tech companies across the board. A startup that wasn't making money would buy Cisco equipment and Viant's consulting services. That cycle of economic activity based on immature models was bound to fail.
Today's software companies are much more mature. All tech companies have learned a lot of lessons which set them on much more sound footing than during the dotcom era and will help them during a future downturn.
Regardless of how stable and mature companies are, it is impossible to escape the reality of overall economic cycles. There will, someday, be a downturn and customer budgets will shrink, exits will become difficult and the fear of going out of business may become very real.
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