1) No Recession. As Agent Maxwell Smart would say: “missed it by that much”. I am short-term bearish about the US economy and, like many of you, have watched with great concern the emerging credit crunch, real estate asset bubble, US dollar devaluation, rising oil prices and inflationary pressures. That said, I think the US economy will power its way through 2008 without slipping into a recession (which is technically defined as two quarters of negative GDP growth). Yes, we’ll see anemic growth and more stock market turmoil, but corporate profits and international markets remain strong and I believe consumer confidence will return, particularly with the completion of the presidential election likely to usher in a wave of hope and optimism – no matter who wins. The implication in our business is that young start-ups will have a harder time accelerating revenue, but the fundamental pillars of the US entrepreneurial economy – VC capital, IT spending, advertising spending – won’t radically dry up. The CIOs and CMOs that I talk to and the survey data I read suggests budgets will be flat or modest growth rather than sharply down.
2) Web 2.0 – pop goes the bubble? Billions of advertising dollars are shifting to new media venues, with online being the most popular. This shift will continue to fuel speculation about what will be the most valuable online media properties and audience aggregation opportunities. But although this shift represents a real opportunitiy for a few winners, I believe that the so-called Web 2.0 sector has been grossly over-funded over the last few years. I think the weaker economy will cause this bubble to pop in 2008 when advertising budgets stop rising, there’s more pressure on experimentation, and investors realize that customer acquisition economics are proving harder than expected. The particularly strong inflation pressures on search engine marketing (SEM), as more advertisers direct their dollars to this performance-based category, will make this emerging problem even more acute. Talk to any of the CEOs of the major SEM-based businesses and they will tell you about margin pressure due to the rising cost of traffic acquisition. VCs who are over-exposed to the consumer/Web 2.0 sector may be in for a rude awakening.
3) Enterprise IT – the comeback kid. Look at the last few IPOs and mega-exits in New England and you see a pattern: the return of enterprise IT companies. Acme Packets ($600 million market cap), Big Band ($1.2 billion market cap), Bladelogic ($700 million market cap), Equallogic ($1.2 billion acquisition by Dell), Starent ($1 billion market cap) and Netezza ($750 million market cap) are signs that the post-bubble hangover IT departments have been suffering from has finally passed. IT is willing to invest in young infrastructure companies and new technologies to improve efficiencies and modernize their capabilities. These investment opportunities will continue in 2008, despite macroeconomic conditions exerting some pressure on IT budgets.
4) Wireless – slow and steady. The chokehold that carriers maintain over the wireless market continues. Meanwhile, advertising dollars are moving to mobile more slowly than expected due to ecosystem immaturity. There is simply too much friction in the business for an advertiser to place a $1 million purchase (lack of inventory, fragmented and nascent ad networks, handset fragmentation – to name a few). Thus, 2008 will likely be an incremental growth year for the wireless industry, not yet a breakthrough year. Breakout conditions (pervasive 3G networks, video and rich content, a more mature advertising ecosystem) still feel 2-3 years away. Good fodder for early-stage investors, but not an area of hyper revenue growth.
5) And our next president will be…who the heck knows?? This race is a toss up. I would’ve predicted Clinton vs. Romney, with Clinton winning in a tight finish, but Romney has faltered despite all the money he’s poured in and Obama and Clinton are neck and neck. This will be an interesting race to watch, for sure!
That’s it for now. Let’s see what 2008 holds for us all!