These are indeed interesting times for businesses, most particularly startups. I always seem to be in a virtual world presentation or at a virtual world conference as the macro-economic situation worsens and worsens. In stepping back, this downturn should have some surprising impacts on this stage of development of the virtual worlds industry.
By way of context, in my humble opinion, the virtual world industry is still relatively nascent. There have been companies doing virtual world platforms for fun and profit for decades, however as a technology sector overall, they are just now coming into mainstream adoption numbers. There is the standard first/second/third technology generation tensions between early entrants (many of which are making money) and new market entrants (who are not) looking to disrupt and capitalize.
The virtual world companies that are in the middle of (or about to seek) fund raising will find their valuations pushed down as a best-case-scenario, with 'no capital availability' as a worst-case scenario. Typical sources of capital like friends/family/angel investors are all feeling the pain of watching their personal portfolios shrinking on a daily basis, and are therefore less likely to invest in a speculative venture in an increasingly-crowded sector. The venture community is suffering from a combination of gripping fear, lack of self confidence, and overall paralysis.....but only at a certain altitude. Large VCs are most impacted, as they have so much more capital to put in to play that they need certain (absurdly large) valuations of the startups they are injecting capital into. Smaller funds, which invest in smaller denominations/valuations, are going to clean up during this time.
Bad news for VW startups wanting large valuations about now, good news for smaller VCs with capital on hand and VW startups looking for early smaller rounds.
What about the impact of the economy on the broader value proposition of the industry? Lets break it down a step at a time....
You would think that this means that corporate travel is going to be cut back and therefore this is a great opportunity for virtual collaboration to take the reins and make rapid inroads into the Enterprise. Well, not exactly.
When downturns like this happen, enterprises often over-react and lock down all hiring, purchasing and new projects. It's belt-tightening at the extreme. If the virtual world project isn't already in-progress at said enterprise, it's highly unlikely that the purchasing department is going to grant you a Papal dispensation for your technology trial when the person in the cubicle next to them just got laid off five minutes ago, and they are next to meet with the 'consultants'.
The parachute in many virtual world platforms' business plans is to be acquired by a large technology company. During these hard times, I suspect you'll see limited (read 'fire sale prices') acquisition activity by the major tech firms, as they need to keep their powder dry in the event that this situation is a 10-15 year drought and not a 24 month one. All of the portents and omens certainly point that way, and these large companies are already run by their finance groups anyway (don't tell!).
Where does that leave us? The predicted consolidation in this currently-overpopulated technology sector will be accelerated as underfunded startups will join with like-minded underfunded startups in efforts to stay afloat through these rough times. Larger companies that are already making profits in this space are best positioned, provided they are reasonably cash-flow-positive and don't need capital infusions in this tricky VC climate.....they just need to continue to close business and pay payroll until the clouds part.
The sad casualty will be the increasing genetic diversity happening around the fringes of the industry as the consolidation will defocus everyone from expanding as they concern themselves more with fortifying their current market position.
If you have the capital on hand, Mr. Startup, this will be a great opportunity for you to take a market at wholesale prices. Wait about 12 more weeks, then hang out a sign that says 'we buy distressed VW startups with more than a million users' right on top of the one offering to purchase the technology assets of startups that could have disrupted your business model for the worse. Buy them and shelve them in that Indiana Jones warehouse next to the Ark of the Covenant. You'll be happy you did so soon enough.
All old hat,
Computer Associates did all this in 1999. Bought up and buried VRML.
No open standards/corporate 3d for anyone...
Not that it ever made sense anyhow. But you needed something to "consult" and "conference" about...
Posted by: past | October 26, 2008 at 03:05 AM