September 30, 2022

A cheat sheet for the next tech downturn

A lasting market downturn is unlikely to knock the tech industry from its perch at…

A lasting market downturn is unlikely to knock the tech industry from its perch at the top of American business, but it would reshape the tech world’s dynamics in profound ways.

Driving the news: The last big recession to hit Silicon Valley bottomed out 20 years ago, and last week’s stock market carnage has tech’s leaders and footsoldiers digging through their memory attics to remember what that feels like.

Here’s a cheat sheet for them and you:

The big companies will be just fine, thanks to enormous financial cushions. In past recessions, tech giants have continued to invest in fundamental technology advances.

  • Big piles of cash would give Apple (roughly $200B), Google/Alphabet ($169B) and Microsoft ($105B) even greater power during a downturn, when stock value ebbs and dollars are king.
  • Amazon ($86B) has plenty of cash, too, but is more exposed to the immediate ebb and flow of consumer demand.
  • Facebook/Meta ($44B) has less cash and less room to maneuver, given the trouble its ad business has faced from Apple’s iPhone privacy restrictions, but the company shows no sign of scaling back heavy investment in its long-term strategy to build a metaverse.

Smaller companies with business plans that involve burning venture capital to seize market share will scramble.

  • With the IPO window — the opportunity to sell stock to the public — closed and venture investors shutting their checkbooks, a recession would be brutal on companies without a lot of revenue.

In a recession:

  • Frothy investment fads — think meme stocks, NFTs and flavor-of-the-week startup ideas — would likely fade in appeal, at least for a while.
  • Big firms typically go on buying sprees — but the current antitrust climate could put a damper on that.
  • Lots of companies will rewrite their plans around business-to-business concepts, which often promise a steadier income than consumer-aimed efforts.
  • Underemployed engineers will pursue more passion projects, driven less by quick-score company concepts than by their own interests, and some of those projects will open up exciting new directions.
  • Everyone will be keeping their eyes peeled for what the next platform will be, since next platforms have tended to emerge during recessions in the past.

Yes, but: The industry has been operating for so long without any major setbacks that this time it didn’t wait for the economy to sputter before kicking off the next-platform hunt.

  • Lots of players — from Meta’s metaverse focus to the Web3 industry’s blockchain-driven frenzy — already believe they know what the next wave of tech will look like.
  • But a prolonged down market could scramble expectations and introduce wild cards.

What to watch:

  • Traditionally, recessions have meant companies have less trouble retaining key talent, since competition for employees dwindles and people are happier just to have jobs. But in the era of the Great Resignation and in an industry that’s made many of its employees wealthy, that might not hold this time around.
  • The dotcom bust seemed to be fading into the rearview mirror when 9/11 hit and extended that downturn by roughly another year. Geopolitical shocks can interact with slow markets in nasty ways, and the current world situation looks like it will provide plenty of that kind of scenario.
  • Every tech bust has been accompanied by a chorus of “I told you so” cynics who dislike the industry’s direction and misjudge a bad market as a final verdict on trends they don’t like. Twenty years ago, pundits were crowing, “The internet is dead,” so take similar dismissals of today’s new ideas with appropriate caution.

Be smart: The market could roar back next week, and even if it doesn’t, a lot of smart people don’t see a recession in the near term. But the better you know what one looks like, the sooner you’ll be able to recognize one is happening.