What If the Tech Boom Sputters? How Startups Can Prepare

A Brooklyn venture capitalist offers advice for entrepreneurs as the economy shows signs of cooling off

The last tech slump, the dotcom bust of 2000, led to a mild recession (Photo by UI8 on Unsplash)

Tech’s success has been atomic since the Great Recession. Innovations in artificial intelligence, cloud computing, cryptocurrency, wireless, and other sectors the past decade have helped justify waves of cash flowing into the industry, made more readily available thanks to low interest rates from the Federal Reserve. Brooklyn has been a beneficiary of the boom, especially in the area dubbed the Brooklyn Tech Triangle.

But tech bubbles have burst before, most notably in 2000, which helped spark the new decade’s first recession. Now there are signs that the latest boom could be cooling off, along with a slowdown in the overall economy. Citing softening returns at Apple, Nvidia, Intel, Samsung and other key players, the New York Times intoned recently, “Storm clouds are gathering over tech.”

With those forecasts in mind, the Downtown Brooklyn Partnership, an organization that supports business interests and improvements in the area, organized a talk at Hank’s Saloon at Hill Country Food Park this week with guest J.J. Kasper, co-founder of Blue Collective, a tech-focused venture capital firm based in the borough.

“Brooklyn is increasingly full of entrepreneurs and start-uppers,” said Tyler Woods, the partnership’s director of network, who coordinated the event and played host. He noted that Downtown Brooklyn, Dumbo, Williamsburg, and Bushwick have enjoyed an influx of tech companies entering the area lately, bypassing Manhattan. “The East River is not as much of a barrier in the tech world as it would have been 10 or 15 years ago.”

The talk, titled “How the Startup World Changes in a Down Market and How to Adapt,” explored what the next downturn might look like, how Brooklyn entrepreneurs can prepare, and even the investment advantages that may arise in the midst of a slowdown. Among the takeaways:

Downturns Can Provide Opportunities

While most economists and business leaders think 2019 won’t bring a recession, which is defined as a period of time when the economy actually shrinks, a slowdown in the growth of business and consumer spending brings notable changes to the economy.

When such events occur, startups and venture capitalists (VCs), if they have the means, should swing into action, Kasper said.

“When you look back over down markets, the VC industry, specifically, and in respect to start-ups, is really well-insulated against down markets, which is kind of confusing and counterintuitive,” Kasper said. “The primary reason for that is the supply of venture capital is fairly fixed.”

A VC firm’s business model typically involves raising a fund that falls into an investment period that lasts between three to five years, sometimes longer.

“So even if there is a downturn, I actually still have that money there,” Kasper said. “And we are particularly insulated right now, and that’s actually because, over the last five years, fundraising in VC has just gone through the roof, in the same way that dollars deployed has gone through the roof.” 

Experts say that 2018 was a record-breaking year for venture capital in the U.S., which saw VCs investing around $130 billion.

So in troubling economic times, with costs lower and capital still around, investment opportunities can be ripe—with fatter return-on-investment potential.

“In down markets, this is actually when you see the best companies pop up,” Kasper said. “A down market’s good for us. There’s fewer competitors out there on the VC side, [and] the entrepreneurs in that market are the more true believers.”

“For entrepreneurs who are thinking about starting something,” he continued, “I’d say in a down market, those who make the leap into entrepreneurialism … while it’s going to be a tougher lift in the beginning, those tend to be the entrepreneurs we remember, and they tend to be those who really, really want it.”

Kasper cited the founders of Airbnb and Uber as people who got ultimately highly profitable companies off the ground during the Great Recession.

Turning a Profit Could Be Harder

“If there’s less money to go around, who’s hurt most?” Woods later asked Kasper.

As consumers do, businesses facing a slowdown cut back on discretionary spending, Kasper said. So young businesses may find revenue more elusive.

“The people who are the most exposed are entrepreneurs already in the flow,” Kasper said, “people who are out there, who’ve raised money and have products and services that they are pitching to customers or businesses.”

That said, Kasper added, “It doesn’t mean every startup gets hurt; some are providing extremely valuable services that are super sticky, that have been around for a while.”

“Some have [strong] cost-value relative to the money that you spend for it,” he continued. “But in a downturn there certainly is some reckoning that’s going to occur in the startup world, and probably those who don’t have the capitalization to survive that, those who maybe have charted for a path of growth at all costs,” will run into trouble.

To avoid such a fallout, companies need to “have a path to profitability in your back pocket,” Kasper said.  

“This is way harder said than done,” Kasper conceded. “If you have positive unit economics, that’s great, that’s a big plus, and if push comes to shove you can probably re-orient around that. If you don’t … and you’re in-market, you should probably get there sooner rather than later. … One way is cut costs and the other way is figure out what the revenue model is.”

Limited Partners Could Get Cold Feet

VCs have to get their money from somewhere, and often it arrives via limited partnerships (LPs), which can be individuals, pension funds or other organizations with money to invest. If the LPs start to see unfavorable conditions, they could start throttling back.

“It’s a matter of scarce resources on the LP side and them trying to protect their overall returns,” Kasper said. He then hypothesized that if LPs sense a down market on the horizon, the VCs they’ve worked with recently could be among the first investments they move away from. Instead, the LPs may put more of their money into bonds or more established equities.

However, according to Kasper, there are some LPs that continue to invest even in a down market. “There certainly are folks who will just say, ‘Let it ride,’” Kasper said, “and I would guess actually those are the ones who end up doing quite well.”

To learn about upcoming Downtown Brooklyn Partnership events, visit their website.