Trouble finally has come to the tech industry. But don’t call it Dot-Bomb II, at least not yet.
After resisting the broader economic slowdown for months, the startup world and the technology field in general are seeing job cuts and economic pain reminiscent of the sector’s infamous collapse earlier this decade.
But thanks to smarter investments and sounder management, the startup scene is not looking nearly as bad as it did in 2002, said Dan Grosh, one of the leaders of an education program at the Silicon Valley Association of Startup Entrepreneurs.
“Is it a sequel to the dot-com bust? I don’t think so,” said Grosh, also a managing partner at Menlo Park, California-based executive search firm Vantage Partners. “But it still remains to be determined.”
From 2000 to 2002, scads of young Internet firms such as Kozmo.com, Webvan and Pets.com bit the dust and contributed to a national recession. The die-off happened in the wake of spectacular stock market growth that shoveled money into the tech sector. This time around, economic trouble is rooted in a housing bubble that morphed into a financial sector meltdown.
For much of the past year, the technology industry seemed above the fray. Computing giant IBM, for example, posted better-than-expected earnings for the first three quarters of this year. So did iPod maker Apple. Internet titan Google did so in two of the three quarters.
Vantage Partners, which works with venture capitalists to find executives for early-stage companies, was “very busy in the middle of the year,” Grosh says. But in the past few weeks, a handful of searches have been put on hold, he says.
Other signs of trouble piled up in October and November. Search engine company Mahalo.com laid off about 10 percent of its full-time staff. Internet retailer Zappos.com let go 124 workers, or roughly 8 percent of its workforce.
Computer chip firm Advanced Micro Devices said it plans to trim its headcount by about 500 people on top of other workforce cuts announced earlier in the year. Rival Intel said business in the fourth quarter will fall short of expectations.
TechCrunch, a blog focused on Internet companies, has tracked news of layoffs affecting more than 49,000 employees in the tech and media sectors since August 27.
Startup firms are being warned to prepare for still bleaker times ahead.
“As a startup, you are now, officially, on your own. You can’t count on your [venture capitalists] saving you or some magical offer from Yahoo or Google showing up to bail you out,” Mahalo.com CEO Jason Calacanis said on his blog recently.
But investors have funded better companies in the wake of the dot-com crash, Grosh said. And, he added, nascent firms have learned lessons from the last boom-bust cycle, when firms threw cash around on lavish parties and perks. Some startups are reducing their cash burn rate and being selective about hiring, he said.
“A number of companies are preparing for this potential hurricane,” Grosh said.
Job casualties in the tech sector have been minimal this year compared with the dot-bomb era, according to figures compiled by consulting firm Challenger, Gray & Christmas. During the first three quarters of this year, 120,643 jobs were cut in the telecom, computer and electronics fields. That’s about a quarter of the 473,649 jobs axed in those areas during the first three quarters of 2001.
Still, clouds are gathering in Silicon Valley and other tech hubs.
Startups that make it through the storm face a bright future, Calacanis suggested in his blog. Competition will thin out and advertising will move to the Internet, he predicted.
“Fortunes are built during the down market,” he wrote, “and collected in the up market.”
