Getting ready for a tech slowdown

Why tech communicators are better prepared for the coming slowdown than the last one.

Getting ready for a tech slowdown

A slowdown in the flow of venture capital money, a bumpy IPO market, and grim outlooks from publicly traded tech giants such as LinkedIn suggest the boom times in Silicon Valley are coming to an end.

Experts say this will force new PR approaches for many enterprises and likely cutbacks in marcomms spending, depending on the severity of the downturn and how squeezed the fundraising environment becomes.

"I can’t point to any specific data, but it feels like we’re nearing the end of a bubble," says Henry Hwong, principal at the Cunningham Collective. "Silicon Valley seems to be anticipating the change."

Yet he adds that companies won’t be caught off-guard by a downturn like they were when the last bubble burst in 2008, so they should be better prepared to survive it. Hwong also predicts a softer landing because late-stage companies have made plans to delay their initial public offerings after watching post-IPO share plunges of companies such as Facebook, Groupon, and LinkedIn, which had strong evaluations in the private market.

"The easy availability of late-stage investments has conspired to make an IPO less attractive for companies to go public," he explains. "Companies haven’t counted on it to raise money like they might have in the past."

Still, he notes a slowdown could affect comms providers as both late-stage companies and public tech giants tighten budgets to weather the down cycle.

"Agencies have done very well in the Valley in the past few years; the minimum charge for a monthly retainer has definitely gone up. But if there is going to be a slowdown, there will also be a slowdown towards agency spending," asserts Hwong.

Zach Colvin, partner and regional GM for the Bay Area at Allison+Partners, says the slowing of venture capital funding and weak tech IP environment is cause for worry.

"When combined with the broader concerns over China’s economy and the shellacking tech stocks are taking alongside layoffs and lower evaluations, it is no wonder there is some handwringing," he says.

However, he is encouraged by the fact that he has not seen a broad-based slowdown.

"We’re seeing robust interest from enterprise tech, Internet of Things plays, and more mature consumer technology companies," Colvin explains. "We remain cautiously optimistic a bubble burst is not upon us."

Nonetheless, he adds that the firm "would not be surprised if several tech sub-sectors have a very difficult year."

Adjustment number one: Emphasize revenue stability, not growth
Investors, agency pros, and entrepreneurs say both start-ups and unicorns, so named because their evaluations have reached more than $1 billion, will need to adjust to the changed climate in terms of how they communicate their business model and goals to investors and employees.

Angel investor James Hong, who sold his website Hot or Not in 2008 for more than $20 million, notes that for a while, buzzed-about tech companies had to do very little strategic communications to attract investment. That’s not the case anymore.

"Venture firms had been doing more marketing and branding to sell themselves as opposed to the old days when entrepreneurs had to sell themselves to the venture guys. What has happened over the last 10 years is leverage moved away from capitalists and to the entrepreneur, because it became cheaper and easier to start something and get traction without first raising money," he explains. "Venture became less about finding the right deal, towards being able to win the deal that everyone believes is going to be big already."

Hong adds that trend cause the market to rise, which seemed normal because the economy was improving as well. "But now they’re seeing macro-signals of slowdown in the markets," he notes.

Tech companies now need to not only to ramp up comms efforts to secure their next round of funding, but also emphasize cash flow, profitability, and monetization rather than growth.

These will be the priorities for Compgun, a software provider for sales commissions, which is among a crop of early stage companies in the 2016 Y Combinator accelerator program. This year’s program will culminate at Demo Day at the end of March, where they will have an audience with 500 of the top VCs.

"Over the last 90 days, a lot of these big companies have lost half their value, and that impact is probably going to trickle down," says Tim Sze, cofounder and CTO at Compgun. "We haven’t felt it yet, but we’re preparing ourselves that if we have another 60 days like the past 90, it will affect evaluations for us as an early start-up."

He adds: "We are very focused on hitting our numbers because investors may have more appetite for companies that have better fundamentals."

Sze also sees a potential downturn as an opportunity, noting Airbnb was built during the 2008 downturn.

"Our mentors and advisers tell us [the downturn] shouldn’t change how we think about things. When evaluations are high and money is flowing well you tend to have more bad companies in this space and a lot of companies that aren’t focusing on profitability," says Sze. "We have focused on doing a lot with very little."  

Shift Communications CEO Todd Defren, who has lived in the Bay Area on and off since the dot-com crash, asserts there isn’t much companies can do in terms of employee-facing communications.

"Bubble talk is de riguer in the Valley; it’s an accepted part of the equation and part of the risk that makes being there exciting," he says. "To try to allay concerns is a fool’s errand, unless you have a crystal ball. It’s a no-win: either you’re right that the bubble isn’t bursting, leading to ever-higher rents (a bad message in itself), or you’re wrong, the bubble bursts, and you have disgruntled employees wondering about your intelligence or integrity."

He moved to Austin at the start of the year so he could be closer to Shift’s offices in New York and Boston, but suspects the high cost of residential and commercial property are also doing their part to keep start-ups away from the Valley.

"Bubbles are caused by an excess of enthusiasm: the excess of enthusiasm I’ve noted in the past 24 months has been on the part of the property owners – not the entrepreneurs," says Defren. "I think rather than a bursting of the so-called bubble, we’ll see it slowly deflate as more talent emigrates to cheaper but viable markets such as Austin, Portland, and Denver."

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