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September 23rd, 2008

The opposite of startup: Observations from a remarkable week in New York

in: Anticipate, Create, Funding, Startups

I was in New York for an historic week. While in the city for three conferences and a weekend of R&R, I saw firsthand some of the changes that are happening to the financial markets. It’s no hyperbole to say that the past few days will shape the next century for much of the Western world, and they are the result of a free-market experiment gone horribly wrong.

Normally, I try to keep this blog focused on startups. But I wanted to share some of what I saw while there; I believe it holds some important lessons for entrepreneurs as well as a few guidelines for how to run your businesses in the coming drought.

On my arrival last week, I walked past Lehman Brothers mid-meltdown. Town cars were parked three deep, and suited executives with confidence-inspiring grey hair fled the guarded doors into the safe embrace of stretch Lincolns.

Towncars outside Lehman Brothers on September 16

The rank and file had a different fate, however. Bewildered middle managers, identical but for the splash of color around their necks, walked blinking into the bright sunlight. Satellite trucks from the major networks were parked across the street, their cameras trained on these now-unemployed workers, hoping for a tear, a dropped box of office supplies, or a soundbite for the evening news.

News network satellite trucks waiting for the drama

But I’m not sure the decay sank in. Every conversation I overheard that week had something to do with the meltdown, but most of them looked at its silver linings.

  • At Interop, buyers seemed undeterred by the market fallout — after all, it meant record numbers of trades filling their networks, which meant bigger machines and more tools to manage them. Spikes in traffic are good news for virtualization companies, too.
  • Web2Expo’s startups weren’t fazed, and finances were seldom on their minds. Web startups are valued more on aspirations and eyeballs than cold, hard dollars. Built atop pay-as-you-go cloud computing, these ventures are less dependent on large injections of capital than they were a few years ago and can often be launched from a Macbook, a coffee shop, or a dorm room.
  • Buttoned-down hardware architects and pony-tailed Quants roamed the crowded halls of the Roosevelt Hotel at the High Performance on Wall Street conference. There, exhibitors like Microsoft, Cray, Rapidmind, HP, Sun, and dozens of boutique hardware companies promised to squeeze microseconds out of banks’ automated trading systems.

Ironically, these are the very systems that turned complex derivatives into a financial house of cards and allowed deregulated banks to lend many times their worth at unrealistically low rates. If there’s one thing I learned last week, it was how much banks depend on technology to make money. Here’s a quick lesson I got late one night in a bar from a colleague who should know:

For every dollar a bank has, it can lend out several dollars to others. This is based on the thinking that not everyone wants their money back at the same time. If they did, you’d have the kind of run on the bank that triggered the great depression.

The ratio of money held to money lent — the leverage — is therefore key to the bank’s profits. Banks that can demonstrate that they analyze risk well are allowed more leverage, so they have tens of thousands of computers crunching numbers. Greater oversight means more strident restrictions on overlending, and as a result, more investment in risk analysis.

The TV networks weren’t helping matters, either. They could have explained deregulation, or lobbying, or the banking system. But none talked about Teapot Dome, or Eisenhower’s rant on the military-industrial complex, or the abandonment of the gold standard, or the cross-party Financial Services Modernization Act of 1999 (all of which, IMHO, are required reading for an informed electorate this year.)

Instead, many news stations furiously pointed their fingers at a political party, a natural disaster, a religion, or an industry rather than taking a step back and looking at the big picture. This is a tragedy: If any city has the media clout to explain things, it’s this one.

New York is media central, and most companies there pride themselves on their openness. Walk up to NBC, or CBS, or ESPN, and you can stroll their historic properties or watch a show being filmed.

Not so with Fox News: The windows are opaqued, affording no glimpse of goings-on to curious passersby. You can’t cross their courtyard, and a lone guard intercepts people who stray onto their property or take pictures. Rows of heavy concrete “flower pots” make the place look more like a threatened embassy than a News Corporation.

The unwelcoming concrete barriers around Fox's do-not-cross property

The economics of New York may be changing a little, too. Even the stratospherically wealthy are tightening their Gucci belts a little; one story talked of how a socialite was forgoing her birthday-present facelift in favor of a more modest Botox treatment.

Meanwhile, most citizens seem oblivious to how this all affects them. Frankly, I’m surprised everyone isn’t withdrawing all their money from certain banks that dabbled too much in sub-prime mortgages — but for some reason, that hasn’t happened yet. Yet venerated brands like Washington Mutual are so bereft of assets that nobody’s bidding for them, forcing bailout engineers to step in and take over bad debt and bureaucracy, turning the free-market US into what is — at least temporarily — one of the largest socialized governments in the world.

The clothing store in the front of the Lehman Brothers building said it all.

Lower prices on clothes at Lehman, I mean Barclays.

As I left the city this morning, delegates were filing in for the Clinton Global Initiative, which aims to ease the ills of the world by encouraging its leaders and captains of industry to help out. Across the city, at the UN, George W. Bush was giving his final address to the nations of the world, while Iran’s president Ahmadinejad waited to take the stage later in the day.

With Times Square thronging around us, my Iranian cab driver and I drank in the events of the week and listened to the speech. I looked up at the landmark Lehman Brothers sign to our left.

The new Barclay's Capital

Normally, the Rednod blog is about startups. This time, it’s about shutdowns. The world’s finances are in a flat spin, and America is on the cusp of an election that will decide much of the next century (this excellent piece from Worldchanging is well worth your attention on the matter, particularly if you’re planning on selling technology to Americans.)

If you’re an entrepreneur, it’s never been more important to focus on the fundamentals: Getting to revenue quickly, finding a niche that sustains market ups and downs, being frugal with spending and questioning every dollar, avoiding debt, and waiting as long as possible before diluting your cap table or bringing on investors that aren’t in it for the long haul. IPOs are nowhere in site, and running on your own fuel indefinitely is a prudent decision.

We’re watching large public companies — indeed, entire industries, from housing to travel to finance — collapse. For startups, this is indeed the best and worst of times.

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