It’s early on a Friday morning (I’ve been up since 3), and, in the context of continued silliness in D.C., it feels like a good time for a quick update of my working thesis regarding the economy and the tech sector.
To refresh, check out my June post on the 3 scenarios (along with standard disclaimers about how I’m not an economist, and this is not financial advice). In that context, here’s where I think we’re at:
1. Debt ceiling deal or no deal (and I think we get something last minute or on August 3/4), we’re setting up for a credit downgrade — if not in reality, then at the very least in perception. That means a higher cost of borrowing.
2. Add in a reduction in spending — whether it be the end of stimulus funds, the end of benefits, etc — and you get a 1-2% reduction in GDP growth over the next year (higher interest rates + reduced spending + weakening fundamentals/sentiment=reduced GDP growth). Oh, by the way, GDP growth isn’t exactly on fire.
3. This softens the market for tech IPOs — not that the big names won’t still go public (Zynga, Facebook, etc), they will. But it will shut the door (at least partially) on second tier stuff. In addition, tech spending (enterprise side) slows down.
4. All of this coalesces into “hitting the wall” in 2012/early 2013 in the early stage world.
5. The end result of all of this is that an economic slide through 2012 (into early 2013) tamps down the tech sector (not a recession in tech, but a downward pressure that keeps things from exploding) through the summer of 2013. THAT sets us up for a real tech mania/bubble growth scenario that runs late 2013 through 2017/2018.
That’s not my prediction, that’s my working thesis. What I mean by that is that I’ll adjust it, tweak it, or change it completely as the surrounding facts and environment change. But, for now, that’s the filter through which I’m approaching the world of economics and the tech sector.
Seems about right - have to also factor in the 2012 election, of course (markets almost always go up in an election year - although this coming one could be different). If we could somehow get to a more centrist & less partisan place in DC, that will be great for the markets post-election.
A shakeout of the ‘second tier stuff’ wouldn’t necessarily be a bad thing. One CA VC recently told me that they are getting approached by 30 new startups per day. A lower volume of higher-quality investment opportunities could help everyone.
And of course, maniacal focus on execution if you’re building a business in this environment.