Cash is King

A lawyer friend of mine just passed me a couple of interesting articles on the current tech business climate. While it doesn't look rosy for much of anyone, plenty of large tech firms have cash to spend. (I made this point back in October in my "Web Entrepreneurs Beware" post.)

The catch here is that the Googles and Microsofts of the world (namely Google and Microsoft) could become much more conservative with their valuations. Both companies have shed tens of billions in market cap and don't have the luxury of throwing high-flying stock at attractive start-ups. They'll have to dig deep into their piles of cash...but not that deep.

One of the few start-ups that seems to be flaunting a gaudy valuation is Twitter. Facebook offered $500 million for the micro-blogging website.

So, why didn't Twitter take the money and run? Well, because it wasn't money. Facebook offered $400 million of its seemingly sweet offer in Facebook stock. Over a year ago Microsoft's nominal investment (nominal to Microsoft) in Facebook gave the social networking site an implied valuation of $15 billion. This has since scared off a lot of potential investors and--in this case--Twitter.

For Twitter and Facebook, as well as for most other entrpreneurial web ventures, cash carries a huge premium. For the time being monetization will be a struggle because the online ad market--the by-default revenue stream for so many websites--is slowing down. Also, private equity funding is drying up quickly. The firms that are most proactive in getting investments and reinvestments will be the ones that survive the downturn. Those who sit on the sidelines will likely fall off the cliff (if they don't simply decide to close up shop now).

For Google and Microsoft, cash is still plentiful. However, they see the hoards of start-ups and smell their desperation. They will continue to seek attractive strategic acquisitions, but they'll begin to resemble financial buyers in their frugality.

For example, you might see Microsoft have another go at Yahoo--this time with a much lower offer. Microsoft might rather try its hand with Facebook again. However, this time around I don't see the software giant conceding such a lofty valuation for its investment.

You might also see Microsoft go after search technology to complement its Live Search. Just don't expect to see another $100 million acquisition like Powerset anytime soon. (I predicted the Powerset acquisition in "It's search, stupid".) 2008 was supposed to be the year when the start-up search technologies gained some major ground. Well, they haven't, and Microsoft knows that Google is now stronger than ever in search. While this obviously points to Microsoft's own shortcomings, it also signals an even greater weakness in start-ups like Mahalo, Cuil, Wikia, et al. They won't survive as stand-alone search engines. Microsoft will be able to offer decent--but not crazy--cash for the start-ups that have some real technology, and simply let the others fend for themselves.

So, cash is king. Hold onto it. Make sure you can last 12-15 months with your cash on hand. If not, seek investment now or take measures to reduce your burn rate.

The harsh fact is that web monetization--while not doomed--has become a bit trickier. Even the formidable Google machine has had to make some un-Googley concessions, such as putting ads on Google Finance and extending AdSense to parked domains. If Google has to be creative in these times, imagine what start-ups run by lesser mortals must do. Whether it be capturing more revenue, reducing costs--or both--start-ups need to protect themselves in this all-t00-common race against insolvency.