A Blog by Jonathan Low


Dec 14, 2022

How VCs Are Applying Survival Lessons From Past Tech Downturns

Experienced venture capitalists know that the seeds of the next tech boom are being planted now, in the midst of yet another worrisome downturn. 

That experience suggests that while prudence and a focus on doing what it takes to keep enterprises running under challenging circumstances must be a priority, identifying investment opportunities for the inevitable future upturn should remain top of mind. JL  

Christopher Mims reports in the Wall Street Journal:

Beyond the current downturn, more people in tech should be asking how to capitalize on it. Surviving this tech winter, and building for the next boom, requires strategies that are often the opposite of those popular a year ago. It also requires a change in mindset. Decisions made now will determine who survives and lay the groundwork for the next boom. Downturns inspire the focus, efficiency and urgency required to build a profitable enterprise. The overbuilding of internet infrastructure during the dot-com boom laid the groundwork for cloud and mobile computing. Many who exited failed startups at the time learned hard lessons, and then founded the next generation of companies.

People who have been in the tech industry long enough to remember its previous major downturns have a message for those facing the current one: Decisions made now will determine who survives—and lay the groundwork for the next tech boom.

Surviving this tech winter, and building for the next boom, requires strategies that are often the opposite of those popular only a year ago. It also requires a change in mindset. Tech leaders generally are told to keep their eyes fixed on the horizon. But to navigate the current economic downturn, looking back at what worked and didn’t will be essential.

A winnowing is coming. For many, it’s already here: Startups will fail. Many big companies will be transformed, some may even be disrupted.


The implications of the sudden shift in investor and C-suite sentiment about the future of tech are profound. It has led to what some are calling a “white-collar recession,” with at least 140,000 layoffs at tech companies in recent months. More than $7 trillion has disappeared from the tech-heavy Nasdaq index. Some of the biggest tech companies hit record-high valuations in 2021, and are now down 50% or more. After record investment in startups in 2021, some of them are now taking on debt to avoid having to reset their valuations with a fresh round of venture capital. With interest rates soaring and profitability still unsure, that could backfire.

“Jack Welch taught me that you do not have a great company until you have had a near-death experience,” says John Chambers, chief executive at Cisco Systems from 1995 until 2015, referring to the legendary former CEO of General Electric. He sees many parallels between the current and past downturns in tech: “A lot of people won’t make it through.”

Tech, like other high-risk, high-return industries, grows quickly on the promise of future outsize returns. But when optimism turns to pessimism, the seemingly limitless river of both investment and spending on tech can turn to a trickle. PC shipments to both consumers and businesses dropped nearly 20% in the past quarter, compared with a year ago. Cloud-computing companies are complaining their customers are slow to sign new deals, chips have gone from shortage to oversupply, and crypto markets are in free fall.

All the wild bets that seemed like reasonable investments in a world where disruption was just one good idea and a few engineers away, now have to be shelved as companies focus on what actually contributes to their bottom line. A social-media company’s drone project, for instance, may no longer seem so smart.

“Companies that basically had been able to spend recklessly, without any concern about where their next paycheck is coming from, are going to be in trouble today,” says Leslie Feinzaig, founder of the Graham & Walker venture fund. 

Even so, there is tremendous opportunity during a tech downturn to build the next big thing. This is true at any point in an economic cycle, but downturns inspire the focus, efficiency and urgency required to build a profitable enterprise.

From growth to profitability

Ms. Feinzaig started her career at Innosight, the firm founded by business-consulting legend Clayton Christensen. “I remember something Clay used to preach, which was that in the early days of a company you should be hungry for profit, and in the late stages you should be hungry for growth,” says Ms. Feinzaig. “The funny thing is, the early-capital space has been behaving the exact opposite of that for the past decade.”

What those in business, and particularly tech, called “blitzscaling” is no longer in vogue. This was the growth-at-all-cost strategy employed with mixed results by Uber and DoorDash, before they abandoned it, but also WeWork and FTX. (The same strategy was also popular in the lead-up to the 2001 tech crash.) Huge losses sustained by funds like Tiger Global and SoftBank, which championed this approach, immediately preceded a massive drop in the amount of startup funding in 2022 versus 2021. In the third quarter of 2022, global investment in startups was down 53% compared with a year earlier, and down 33% compared with the previous quarter.

In a world where interest rates are rising and giant tech companies can no longer count on shareholders to indulge their spending on moonshot projects, the most important advice ex-venture capitalist and current serial entrepreneur Adam Dell has for companies of every size, and startups in particular, is: “Don’t run out of money.”

“One of the key lessons in building a company is that the fundamentals are always there: You make something, it costs you x, you sell it for y, and that margin is enough to support the cost of goods sold and your overhead,” says Mr. Dell, the brother of Michael, who disrupted the PC business in the late 1990s. Citing his recent experience launching a financial-planning app, his fifth startup, he says that less than a year ago he managed to raise $33 million in a seed round that valued the company at $77 million, with nothing but “a PowerPoint and me waving my hands.” Today, if he tried to raise money, he estimates he’d have to give away a larger portion of the company to secure less than a third of that amount of capital.

What’s happening now mirrors the dot-com boom and bust of 1999-01, says Mr. Dell, a venture capitalist at the time. From its peak in March of 2000, the Nasdaq fell 75% by September 2002. Countless startups closed, and their mascots became avatars of the mania of that period. Mr. Chambers, who laid off more than 7,500 Cisco employees near the beginning of the dot-com bust, calls 2001 “the worst year of my life.”

Aaron Levie, chief executive of enterprise-software company Box, can claim to know a thing or two about adapting a mature company to adverse conditions. In September 2021, he beat back an attempt by activist investor Starboard Capital to take control of the board of Box

To win over investors, Mr. Levie drew on efforts he’d embarked on earlier to trim costs and boost profit. Those steps can apply to most any other company during the present downturn, he says: “As we looked at the business and said we wanted to balance growth and profitability, we wanted to make sure every dollar we spend goes toward mission-critical things.”

At Box, that meant, for instance, making “dozens and dozens” of changes to trim expenses and boost productivity with less staff. “We’d go into software and rewrite certain parts of it to use less [computing resources], and those things add up to millions of dollars,” he adds.

Mr. Chambers, who now runs venture-capital firm JC2 Ventures, says that “A number of companies I

Beyond merely surviving the current downturn, one question more people in tech should be asking themselves is how to capitalize on it. There’s an often-overlooked lesson in tech downturns, says Margaret O’Mara, a University of Washington history professor whose book “The Code” chronicles the history of Silicon Valley: The key role that government spending has in determining which companies will grow or be born during downturns.


A useful period to mine for these lessons is one that almost no one still working in tech remembers—the late 1980s. At the time, defense spending that had launched and sustained Silicon Valley plunged with the end of the Cold War, and a lull in PC sales also set in, says Dr. O’Mara.

What revived the industry was the convergence of a maturing technology—computer networking—and the High Performance Computing Act of 1991. This law provided $600 million, worth about $1.3 billion in today’s dollars, to a variety of institutions, including the National Center for Supercomputing Applications at the University of Illinois. There, a team of programmers created the Mosaic web browser, which was key to popularizing the World Wide Web. What followed was, of course, the long internet boom that has continued, with occasional interruptions, until now. Without all the coaxial and fiber-optic cable that made high-speed internet access possible, there would have been no World Wide Web, no Amazon, no Google

The recently passed Chips and Science Act of 2022, which provides $52.7 billion in U.S. semiconductor investments, has the potential to fuel the next boom in tech, says Dr. O’Mara.

The important thing to remember about such transitions, she adds, is that it’s very hard to predict what the next big thing built on new hardware will turn out to be. 

Mr. Levie of Box thinks it will be artificial intelligence, which will birth “hundreds of startups.”


Ms. Feinzaig is betting on augmented reality, especially if Apple delivers its long-rumored mixed-reality headset. And Mr. Dell believes that whatever comes next will be built from still-smoldering remnants of the recent tech boom.

The overbuilding of internet infrastructure during the dot-com boom laid the groundwork for the growth of cloud and mobile computing. And many of the people who exited failed startups at the time learned hard lessons, and then founded the next generation of companies. 

“Our economy is structured to allow these moments of euphoria,” says Mr. Dell. “We overbuild, there’s a crash, and then it slowly builds up again—that boom-and-bust cycle is essential to a well-functioning system.”

People I know know are thinking about a second round of layoffs, or a third.” 


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