The tech recession
David Peterson

I can’t help but feel like we’re witnessing the end of an era.

The US economy, on the surface, seems to be doing well. Record low unemployment, strong consumption growth. But the tech economy is undoubtedly in a recession. Over 130K tech workers have been laid off so far, with deeper cuts looming. And a who’s who of web 2.0 darlings are down 50–90% in 2022 alone. The markets have spared no sector, not social media (Snap, Meta), not SaaS (Twilio, Asana, DocuSign, Zoom), not consumer (Spotify, DoorDash, Lyft), and not ecommerce (Shopify).

The grim reaper is knocking, and he’s specifically targeting all the companies that most represented growth and innovation over the past 15 years. The web 2.0 era appears to be over.

Now, this blow up isn’t too surprising. The immediate causes are obvious. The pandemic ended, and the companies that benefited most from that stay-at-home, remote-work fever dream (e.g. Zoom, Shopify, Peloton) are suffering. Inflation spiked and interest rates are going up, so capital is getting more scarce. It’s no surprise that high-growth sectors, like tech, would suffer more than others in an environment like this.

But I wonder if there are some broader trends at play that led us to this point. If we were to look back on this era in five years, why would we say it had to end? What would we say were the faulty assumptions that got us to this point?

Here are two that come to mind:

1) Network effects were weaker than they appeared. Billions of dollars were invested in companies on the premise that the network effects that made Facebook so sticky could be replicated across other industries. But it’s clear now that many of these network effects were weaker than they first appeared. Uber’s network effects are almost nonexistent — both drivers and riders frequently use multiple ride-hailing apps simultaneously. Netflix argued that there were “winner-take-all” dynamics in content production as well, but their distribution and data advantage haven’t proven to be nearly as durable as they first argued. How many venture dollars were incinerated on the premise of buying market share in a market that turned out to be winner-take-some not winner-take-all?

2) Most point solutions didn’t become platforms. As I’ve written before, for the past decade, conventional startup wisdom has been to focus. Find a narrow problem, solve it and you’ll be rewarded. And for the past decade, that’s been pretty good advice. But I think we let things go too far. Investors poured money into point solutions betting that they’d be wedges into platforms. But vanishingly few point solutions have become true product suites that provide differentiated, comprehensive solutions. That was fine when companies were willing to spend for “best of breed,” either because they were swimming in VC dollars or because they were willing to do whatever it took to grow a bit faster, but what about now? How will these point solutions fare when faced with procurement teams tasked with recession-inspired belt-tightening?

I’m sure there are others (not to mention crypto/web3 and all the speculation therein), but those are two trends that define this era for me.

So if this is the end, what’s next?

I’m not sure, but I can’t wait. Just as a pendulum seems to stop in mid air as it reaches its apex, many of the large platforms of the web 2.0 era have felt stagnant for awhile now. When is the last time you excitedly bought a new iPhone? Or even noticed (let alone benefited from) an updated feature in the Google suite?

It is my fervent hope that the pendulum is swinging back, and beginning to accelerate. There are many technological revolutions ahead of us still. For all this talk of no/low-code, these computers we use every day are nothing more than black boxes to the vast majority of people. When will the true power of computing finally be put in the hands of the average person? The sudden affordability of genomic sequencing, space launches, solar electricity…all of these portend the formation of new, massive venture-scale businesses. We’re just now seeing what large language models can do. What new business models will AI bring about?

There’s pain now. And as Gil wrote last week, this isn’t fun for anyone. But we’re on the cusp of a new era in tech. And I can’t help but feel optimistic.

David

EVENTS

Feb 8 / Lessons Learned From Investing Early in Over a Dozen SaaS Unicorns Including Salesforce, SuccessFactors, Box, Gusto, SalesLoft, ServiceMax, Veeva, Bill.com, Doximity, Yammer and Zoom Among Others
Jason Green, Founder & General Partner, Emergence Capital

Feb 15 / The Evolution of Collibra’s Product Positioning & How They Created a Category
Stan Christiaens, Co-Founder & Chief Data Citizen, Collibra

FROM THE BLOG

It’s Never too Early to Build your Growth Model
What are the specific mechanisms by which one user turns into many, and an initial investment turns into revenue?

How to Think About Revenue Quality as an Early Stage Founder
What does “quality revenue” mean when you don’t have much revenue at all?

It’s Not All About Bottoms-up
Two recent trends indicate that we may finally be past the mistaken belief that bottoms-up is the only “fundable” business model in town.

Don’t be Fooled by the PLG Mullet
How to know if you should be building a PLG Now, PLG Later or PLG Never company.

EUROPE & ISRAEL FUNDING NEWS

UK/IT Infrastructure. WekaIO raised $135M for its platform offering parallel file system-based storage management software.
Israel/Security. Akeyless closed $45.5M for its secret data management automation platform.
UK/Semiconductors. Cambridge Gan Devices raised $19M to manufacture its gallium nitride transistors for power management.
Germany/DevOps. EngFlow raised $18M for its continuous deployment management solution to help developers speed up their builds.
Netherlands/Security. Eye Security raised $17.5M for its all-in-one security product that includes monitoring and detection, 24/7 incident response, and cyber insurance.
UK/Payments. Banked closed $15M for its open banking API solution for payments.
Israel/Data Tooling. Loops closed $14M for its product analytics platform.
Germany/Marketing. Buynomics raised $13.4M for its platform to support enterprise customers with their commercial decisions, predicting consumer behavior in the field of revenue management.

WORTH READING

ENTERPRISE/TECH NEWS

Generative AI market map. Base 10 Ventures have catalogued over 300 startups and also have a condensed market map below across emerging segments as well.
“What we’ve learned suggests that Artificial Intelligence will be the next platform shift–following cloud, social, and mobile–and is in 2022 where Cloud was in 2006–07, with Generative AI leading the rapid charge.”

Notion adds AI. Notion the popular note taking software has implemented AI to generate blog posts, brainstorm ideas, fix grammar and translate text all with AI.

Humans are going back to the moon. NASAs Artemis spacecraft is set to arrive at the Moon, this is the first time in 50 years that a human exploration spacecraft has left low Earth orbit and been sent to the Moon. “Because this is a test flight, no astronauts are on board this time — instead three manikins, covered in thousands of sensors, are making the journey.

“Those sensors are getting an idea of whether the environment is going to be OK for people,” explained Nasa astronaut Zena Cardman.

“So there are things like radiation sensors, motion sensors, accelerometers — things that we as human payloads are going to care a lot about.”

“And this is important because if this flight goes well astronauts will join the next ride, first of all going into orbit around the Moon, before a third Artemis mission then takes the first woman and first person of colour down to the lunar surface.”

HOW TO STARTUP

Seed sales. Workbench have created a deck on How To Master Outbound Sales Without a BDR. It includes practical tips including what process to run to template emails and Linkedin messages. One of the biggest mistakes we see Seed-stage founders make is hiring BDRs too early in hopes the addition of a dedicated outbound sales team will help produce and close more leads. What founders don’t realize is that hiring, training, and managing a BDR team is a heavy and time-consuming lift. This Enterprise Playbook outlines how founders can conquer founder-led sales by experimenting with the sales process until they have defined a successful and scalable playbook, all before hiring a fleet of BDRs.

B2B sales. Contrasting to above with a lens to being at a later stage, Balderton has released their Founder’s Guide to B2B Sales which covers everything a Founder/CEO needs to know about building and managing a B2B sales team.

HOW TO VENTURE

Down rounds. Serial entrepreneur Dragos Novac explores the interesting topic that are down rounds the path to startup survival? “That is why down rounds have less to do with founders embarrassment asking to be saved and are more of a investors’ pragmatic calculation of a portfolio performance over helping startup founders out. It ain’t personal, it never was — it’s just business.”

Public reminder. Joseph Jack from OSS Capital tweeted about a clip from the All In Podcast the result of technology companies who went public since 2020.

“The power law (pareto) distribution governs everything… not just VC, not just startups, not just biology… everything. 50% of all tech IPOs since 2020 (300~ companies) are publicly trading for what is now only 20% of the CASH they raised to-date. That’s absolutely incredible.”

PORTFOLIO NEWS

Forter was selected in the Cloud 100 companies, an annual list of the world’s top private cloud companies. Forter Co-founder & CEO Michael Reitblat discusses the company’s origin and his more than 25 years of combating fraud.

Snyk was selected in the Cloud 100 companies, an annual list of the world’s top private cloud companies. Snyk CEO Peter McKay explains how their unique offering enables developers to work securely throughout the software development lifecycle.

Reco’s Tal Shapira wrote an article on ‘Why Business Context Justification Enables Safer Collaboration’.

Aquant collaborates with Oracle to optimize how field service organizations operate and deliver service.