I wrote an article for the Baltimore Business Journal 7 years ago during the last tech downturn while I was at Sterling Partners. A lot has changed over the last 7 years but after coming across this article recently I realized many of the messages apply just as well today as they did back then. I've pasted the article below as well:
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Charles Darwin would have made one hell of a venture capitalist. Darwin's theory of the survival of the fittest was played out each and every day in the halls and conference rooms of venture capital firms and early-stage technology companies during 2001. More often than not, these young companies succumbed to the forces of natural selection.
So as 2002 begins to unfold, how can we expect Darwin's theory to affect the current crop of young technology companies? And just what characteristics are Darwin's agents, the venture capitalists, looking for in companies this year?
Entrepreneurs and investors should expect more of the same for the rest of 2002. While many weak tech companies have folded, many still remain. Our offices still receive business plans daily from existing technology companies still struggling to survive.
I predict by the end of 2002 all but a few of the "walking dead" technology companies will disappear and we'll be left with two types of young companies: survivors and upstarts. "Survivors" will emerge leaner and stronger after having survived the Darwinian market of the last two to three years. Upstarts will learn from the failed businesses of the last few years and bring new, improved and innovative ideas to the market.
And if history repeats itself, both types of companies will produce this country's next generation of technology leaders. One only needs to look back at the 1984-1985 recession to find a couple of good examples. In Silicon Valley, Intel became a survivor by shifting its business from producing memory chips to microprocessors, which led to its explosive growth during the 1990s. Meanwhile, in Texas that same year, a young college kid founded an upstart company called Dell Computer just as the PC market was in the midst of a complete meltdown.
I expect my colleagues and I in the venture capital industry will be on the lookout for both survivors and upstarts in 2002.
We're looking for technology companies that can deliver value to their customers, value to their partners and value to their shareholders.
We're looking for technology companies that offer a defensible and differentiated product or service. The successful companies will understand that they may forgo profits to achieve rapid growth.
And finally, we're looking for experienced entrepreneurs with domain expertise who are capable of managing their company through the ups and downs of the business cycle.
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One mistake I made in the article was stating that the walking dead companies would disappear by the end of 2002. Many companies (and VC funds) proved to be more resilient than I expected. They didn't thrive but did manage to keep the lights on. I expect the same thing to happen again.
The venture industry has always been a cyclical business and I don't expect that to ever change. I do wonder whether or not the boom/bust cycles are getting shorter and shorter in our business. Tech innovation cycles are shorter which may be tightly correlated to the venture cycle as well.
Food for thought.
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