The financial crisis, from Silicon Valley and Barracas Beach

Date: Nov 11, 2008 | Author: Santiago B. | Categories: Entrepreneurship

Even when it was not the central purpose of the Endeavor trip to Silicon Valley, given the difficult times we live in the issue of the financial crisis arised in almost all talks.

Here is a summary of the most interesting things that were said and my personal view on that subject, from the charming beach of Barracas, on the banks of the Riachuelo (a fetid river two blocks from my Buenos Aires office).

The theme “Crisis = Opportunity” is worn out, but seems to be true in this case. All the readings on what is coming can be grouped into two distinctive views:

- A pessimistic view: “It is one of the two greatest crises in history.”

For proponents of the negative view, it is clear that this will be a long and deep crisis. Atfer the Financial Tsunami passes, something that is not yet clear has happened already, then we will be able to clearly see the damage to the real economy that this left.

The impact is mainly twofold: the decrease in demand for the loss of wealth and confidence by consumers and the cost (or disappearance) of credit for businesses.

The impact is enormous for entrepreneurs: closed the window for IPOs (there were only 9 in the whole year!), with no debt market for companies that could give our shareholders an ‘exit’ strategy, it is difficult to think that, even in the US, it will be possible to maintain the pace of VC investment into projects. Even in the best case, those who get funding will do so at a cost of much higher dillution than a few months ago.

- An optimistic view: “This is the ‘purchasing opportunity of a lifetime’.

Those who sustain the positive vision insisted that many of the best ‘deals’ were made in times like this. That this is the ideal time to “buy cheap”. Examples of this not only apply to the purchase of companies. For an entrepreneur, this may represent an opportunity to attract talented people whose cost had not been able to pay before. For a retail business it may mean having access to premium locations that a while ago would have been impossible to find, much less pay.

These are my personal thoughts:

- Mid term vision: I think the two positions above are true at the same time. This crisis is going to be very deep and prolonged, at least covering 2009 and 2010. But I also subscribe to the view that more than lamenting we should be getting ready for the action. There is a saying that I think is of Norwegian origin who says: “There is no such thing as bad weather. Only improper clothing”.

An important fact is that if we all believe that a crisis will be long, it’s likely to be so. There’s a lot of self-fulfilling prophecy. If we think the demand for our products will drop and start laying off people, the rise in unemployment is one of the main factors for the actual decrease in demand we expected, both by the effect on those who are jobless and for the fear it generates in those who are still employed. When most decisions are postponed because “something bad might happen”, the basically something bad happens indeed.

- The right time to panic: Someone on the trip talked about the five stages of panic during a crisis: 1) Denial, 2) Acceptance 3) “We have a plan”, 4) The plan fails; 5) We panic. Another way to put it is as one of my favorite American Football commentators sys it: “Do not panic now. There will be plenty of time for that later”.

Panic is never good. It makes as take wrong decisions. Keeping a calm head is always essential. What may help us to do that are the kinds of things that I mentioned in the post on crisis management.

- Patience: Being an entrepreneur was never the fastest route to success, nor the safest. For those who embarked on this thinking that was the case, it is time to update your resume and start looking for a job. In the process of building companies, what was going to take two years will now take five. It is not good, but it is not the end of the world neither. For those who decided to become entrepreneurs by vocation, is a bump on the road. One more, and still counting…

- The impact on Latin America: As we Argentineans always like to do, we will single ourselves out by being hit the hardest. Not because the external environment affects us more, but because this deterioration in external conditions (lower price of ‘commodities’, recession in the markets where we export) catches us while we are getting “the check” for our recent sins ( drop in tax collection, capital outflows, higher country risk). I think the crisis is not going to be as profound as that of 2002 but unfortunately it is going to be bad. And clearly neither here nor in the developed world have we yet arrived to the bottom of the pit. This year is like the first half of 2001 in Argentina. The year most difficult year will be 2009.

With long-term vision for our projects, avoiding to fall prey to panic and being patient we will cross the turbulent waters once again and get to the other shore.