Survival classes from previous tech downturns

Surviving this tech winter, and constructing for the subsequent increase, requires methods which are typically the alternative of these in style solely a 12 months in the past. It additionally requires a change in mindset. Tech leaders typically are informed to maintain their eyes mounted on the horizon. But to navigate the present financial downturn, wanting again at what labored and didn’t might be important.

A winnowing is coming. For many, it’s already right here: Startups will fail. Many large firms might be reworked, some might even be disrupted.

The implications of the sudden shift in investor and C-suite sentiment about the way forward for tech are profound. It has led to what some are calling a “white-collar recession,” with at least 140,000 layoffs at tech companies in recent months. More than $7 trillion has disappeared from the tech-heavy Nasdaq index. Some of the biggest tech companies hit record-high valuations in 2021, and are now down 50% or more. After record investment in startups in 2021, some of them are now taking on debt to avoid having to reset their valuations with a fresh round of venture capital. With interest rates soaring and profitability still unsure, that could backfire.

“Jack Welch taught me that you do not have a great company until you have had a near-death experience,” says John Chambers, chief govt at Cisco Systems from 1995 till 2015, referring to the legendary former CEO of General Electric. He sees many parallels between the present and previous downturns in tech: “Lots of people received’t make it by way of.”

Tech, like other high-risk, high-return industries, grows quickly on the promise of future outsize returns. But when optimism turns to pessimism, the seemingly limitless river of both investment and spending on tech can turn to a trickle. PC shipments to both consumers and businesses dropped nearly 20% in the past quarter, compared with a year ago. Cloud-computing companies are complaining their customers are slow to sign new deals, chips have gone from shortage to oversupply, and crypto markets are in free fall.

All the wild bets that seemed like reasonable investments in a world where disruption was just one good idea and a few engineers away, now have to be shelved as companies focus on what actually contributes to their bottom line. A social-media company’s drone project, for instance, may no longer seem so smart.

“Companies that basically had been able to spend recklessly, without any concern about where their next paycheck is coming from, are going to be in trouble today,” says Leslie Feinzaig, founding father of the Graham & Walker enterprise fund.

Even so, there’s super alternative throughout a tech downturn to construct the subsequent large factor. This is true at any level in an financial cycle, however downturns encourage the main focus, effectivity and urgency required to construct a worthwhile enterprise.

From development to profitability

Ms. Feinzaig began her profession at Innosight, the agency based by business-consulting legend Clayton Christensen. “I bear in mind one thing Clay used to evangelise, which was that within the early days of an organization you need to be hungry for revenue, and within the late levels you need to be hungry for development,” says Ms. Feinzaig. “The funny thing is, the early-capital space has been behaving the exact opposite of that for the past decade.”

What these in enterprise, and notably tech, referred to as “blitzscaling” is no longer in vogue. This was the growth-at-all-cost strategy employed with mixed results by Uber and DoorDash, before they abandoned it, but also WeWork and FTX. (The same strategy was also popular in the lead-up to the 2001 tech crash.) Huge losses sustained by funds like Tiger Global and SoftBank, which championed this approach, immediately preceded a massive drop in the amount of startup funding in 2022 versus 2021. In the third quarter of 2022, global investment in startups was down 53% compared with a year earlier, and down 33% compared with the previous quarter.

In a world where interest rates are rising and giant tech companies can no longer count on shareholders to indulge their spending on moonshot projects, the most important advice ex-venture capitalist and current serial entrepreneur Adam Dell has for companies of every size, and startups in particular, is: “Don’t run out of money.”

“One of the important thing classes in constructing an organization is that the basics are all the time there: You make one thing, it prices you x, you promote it for y, and that margin is sufficient to assist the price of items bought and your overhead,” says Mr. Dell, the brother of Michael, who disrupted the PC business in the late 1990s. Citing his recent experience launching a financial-planning app, his fifth startup, he says that less than a year ago he managed to raise $33 million in a seed round that valued the company at $77 million, with nothing but “a PowerPoint and me waving my hands.” Today, if he tried to boost cash, he estimates he’d have to offer away a bigger portion of the corporate to safe lower than a 3rd of that quantity of capital.

What’s taking place now mirrors the dot-com increase and bust of 1999-01, says Mr. Dell, a enterprise capitalist on the time. From its peak in March of 2000, the Nasdaq fell 75% by September 2002. Countless startups closed, and their mascots turned avatars of the mania of that interval. Mr. Chambers, who laid off greater than 7,500 Cisco workers close to the start of the dot-com bust, calls 2001 “the worst 12 months of my life.”

Aaron Levie, chief executive of enterprise-software company Box, can claim to know a thing or two about adapting a mature company to adverse conditions. In September 2021, he beat back an attempt by activist investor Starboard Capital to take control of the board of Box.

To win over investors, Mr. Levie drew on efforts he’d embarked on earlier to trim costs and boost profit. Those steps can apply to most any other company during the present downturn, he says: “As we looked at the business and said we wanted to balance growth and profitability, we wanted to make sure every dollar we spend goes toward mission-critical things.”

At Box, that meant, as an example, making “dozens and dozens” of changes to trim expenses and boost productivity with less staff. “We’d go into software and rewrite certain parts of it to use less [computing resources], and those things add up to millions of dollars,” he provides.

Mr. Chambers, who now runs venture-capital agency JC2 Ventures, says that “Quite a few firms I do know are desirous about a second spherical of layoffs, or a 3rd.”

Time to build

Beyond merely surviving the current downturn, one question more people in tech should be asking themselves is how to capitalize on it. There’s an often-overlooked lesson in tech downturns, says Margaret O’Mara, a University of Washington history professor whose book “The Code” chronicles the historical past of Silicon Valley: The key position that authorities spending has in figuring out which firms will develop or be born throughout downturns.

A helpful interval to mine for these classes is one that nearly nobody nonetheless working in tech remembers—the late Nineteen Eighties. At the time, protection spending that had launched and sustained Silicon Valley plunged with the tip of the Cold War, and a lull in PC gross sales additionally set in, says Dr. O’Mara.

What revived the trade was the convergence of a maturing expertise—laptop networking—and the High Performance Computing Act of 1991. This regulation offered $600 million, price about $1.3 billion in right now’s {dollars}, to a wide range of establishments, together with the National Center for Supercomputing Applications on the University of Illinois. There, a crew of programmers created the Mosaic net browser, which was key to popularizing the World Wide Web. What adopted was, after all, the lengthy web increase that has continued, with occasional interruptions, till now. Without all of the coaxial and fiber-optic cable that made high-speed web entry doable, there would have been no World Wide Web, no Amazon, no Google

The just lately handed Chips and Science Act of 2022, which supplies $52.7 billion in U.S. semiconductor investments, has the potential to gas the subsequent increase in tech, says Dr. O’Mara.

The vital factor to recollect about such transitions, she provides, is that it’s very onerous to foretell what the subsequent large factor constructed on new {hardware} will develop into.

Mr. Levie of Box thinks it is going to be synthetic intelligence, which can delivery “a whole bunch of startups.”

Ms. Feinzaig is betting on augmented reality, especially if Apple delivers its long-rumored mixed-reality headset. And Mr. Dell believes that whatever comes next will be built from still-smoldering remnants of the recent tech boom.

The overbuilding of internet infrastructure during the dot-com boom laid the groundwork for the growth of cloud and mobile computing. And many of the people who exited failed startups at the time learned hard lessons, and then founded the next generation of companies.

“Our economy is structured to allow these moments of euphoria,” says Mr. Dell. “We overbuild, there’s a crash, after which it slowly builds up once more—that boom-and-bust cycle is important to a well-functioning system.”

Write to Christopher Mims at christopher.mims@wsj.com