I have not been blogging much because I have been working on my book, but many people have asked me about the markets. So here are my thoughts.
Much of the recovery in the labor market since 2008 had been driven by jobs in the oil and gas industry. These were high paying jobs that went into parts of the country that otherwise are struggling economically. A lot of US production, however, is profitable only at oil prices of $60/barrel and above (some are saying $80/barrel). Crude oil is currently at or below $30/barrel, which means that US production is contracting rapidly. The companies behind this are heavily debt financed, to the tune of $500 Billion. A big chunk of that debt will be worthless.
So the US is facing a double whammy of reduced employment growth and a debt bust which will lead to reduced credit across the economy (see this accessible website for an explanation of credit cycles). Add to this the troubles in the Chinese economy and In combination there is a realistic fear that the US and maybe the world at large are headed back into a recession. Various early warning indicators such as an inverted yield curve and this odd metric (YMMV) are also pointing to the possibility of another recession.
So what about Tech then? Fred had a great post earlier this week about the multiple compression for SaaS companies. The primary reason behind this is that the market has grown tired of companies spending money in an undisciplined fashion. For a while there was such a growth premium that almost any amount of spend on sales and marketing was seen as a positive. And the market also seemed to tolerate high spend in engineering without looking at product velocity. The same was true for many private companies that had raised increasingly larger rounds at ever higher valuations and grown used to it.
Well now we are in a completely different climate. Operational excellence will be at a real premium. Companies need to look at how effective their sales and marketing spend really is. They have to either show real product velocity or cut down engineering (incidentally, the latter will likely increase product velocity as there are many bloated teams out there). The companies that commit to that and start to show the results in their metrics will weather this storm. But the time to get going is now, especially for anyone who still needs to raise more money.
