re: How does the global economy affect the software industry? VIEW POST

FULL DISCUSSION
 

This is a super cool question. As a whole, software will probably fall like everything else. But at a smaller scale, many tech companies are uniquely suited to weathering out the storm.

Most B2B software companies are automation companies. They're often about reducing the amount of money you spend on something or at least creating a more efficient way to spend the same amount.

Compare that to something like real estate. A real estate business is only about growth. It only succeeds when companies are wanting to build new offices or people want new homes.

But tech companies can often offer you a "do X but with Y fewer people" or "do X but 10000 times faster with the same amount of money." So many B2B companies thrive (or at least survive) hard times because they are the belt-tightening.

 

Is it possible, though, that tech companies of all shapes and sizes get heavily invested in in times of growth, and if things slow down they are more susceptible to swiftly going to zero than companies with more tangible offerings and traditional profit models?

 

Probably yeah. Though I think that's because we tend to think of tech companies as mostly being startups. Google/Amazon/Microsoft are probably going to be fine. Likely even new business model companies like Uber or Airbnb will be fine as well.

What I'd worry about it investor spooktitude. Any company that's trying to blitzscale or otherwise grow really big through rounds of investing might find themselves in a really dangerous position.

As an explanation for folks reading who might be new to this world like I am, here's my simplified understanding of how a lot of these companies work and why investor freakouts could be kinda bad:

Many tech companies are only really feasible if they're really big. For example, Facebook is only really useful to people if they're big enough so your friends are on it. Uber/Lyft is only useful if there's enough drivers to match the riders. Airbnb only works if there's enough hosts, etc.

So in order to get really big, these companies take multiple rounds of funding to grow much faster than their revenue would suggest. Many companies hire wayyy more than they can actually afford and will therefore run out of money in X months.

After X months, they'll go back to investors who will hopefully give them enough money to survive until their revenue grows faster than their costs.

When it works you get Uber or Airbnb. When it doesn't... it's still kinda okay. Sometimes the company gets bought, but in many cases the investors, founders and employees all survive. Generally the investors have hedged their bets enough to not be at a particular loss, the founders have gained enough connections and experience to do it again, and the employees work in such a hot market they can just go get another job.

This whole machine is why a couple silicon valley companies make up some 50% of the NASDAQ and why tech is such a rocketship for the overall economy.

But it only really works if investors don't have too many crazy bets (like they did in 2000 right before the dot com crash) and if they're willing to continue giving rounds of funding. They've got to be in a nice happy medium.

So let's imagine you're an investor and you'd like to invest in these new fangled technobobber things. Well this industry is high-risk-high-reward, so you can't throw all your cash into there. So instead you do something like this:

  • 10% high-risk technobobber investing
  • 30% medium-risk stocks and indexes
  • 60% low-risk bonds

What would happen if you suddenly believe that stocks and indexes are actually "maybe-high-risk." Well, you'd probably want to rebalance a bit and you might do something like this:

  • 5% high-risk technobobber investing
  • 25% maybe-high-risk
  • 70% low-risk bonds

Now you've cut the total amount of money going to high-risk stuff like tech investing in half! If everyone did this, we might see companies only able to get half the amount they need when it comes funding time.

That could lead to some fairly significant downsizing across the industry.

On the other hand, tech is far, far better at handling reduced investing than other parts of the economy. It just takes so much less money to start a tech company than it does to start, say, a car company.

So yeah know, optimism and such.

From my perspective in my country. If a country economy is not doing well unless it is in a global phenomenon of economic melt down.

They might make their investment to startups in other countries with a much lesser cash burn and favourable business conditions especially in the Asia region.

Unless your an angel investor or a vc that prefers seeds rounds (initial capital).

There won't be boat load of investors coming to you to invest in your startup regardless of the economy situation.

Due to the attractiveness of bigger series of rounds with a more established and proven business model.

 

Also it depends on the business model of the company, subscription based companies tend to do better through a recession because they have sustained income.
As long as the people paying remain solvent.

Companies that sell software directly do not have this sustained income, I believe that is why we are seeing a general shift to service orientated tech companies. It better for the business and better for the customer.

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