Boomtown

So what is your business doing to prepare for the recession?

 

Seems like an odd question, given the current buoyancy that is permeating almost every nook and cranny of the Australian business environment. We are awash with private equity, unemployment is low, inflation is (for now) contained, and a resources-driven boom is propelling us to ever greater wealth. Even the Australian venture capital industry has managed to raise several hundred million dollars in the financial year.

 

If you aren’t making money today – or very, very near to do doing so – it’s time to change game. There are no excuses now.

 

In fact, things are so good at the moment that it’s pretty easy to forget that all of this is cyclical, and that we are only ever one chain of events away from everything collapsing back down into the gutter again.

 

It has happened before, and it will certainly happen again. The only uncertainties are exactly why it will happen, when, and how badly it will hit when it does. Perhaps if there is a good time to be planning for being kicked in the teeth, it’s when your head’s in the clouds.

 

One of the most common questions I hear these days is whether or not what we are looking at is another tech ‘boom’ – something to be compared to the dot-com bubble that flew away millions at the start of this decade. I’d argue no – the irrational exuberance that permeated the market last time around has drummed a few lessons into some at least.

 

There are some fundamental differences between what we are seeing now, and the last boom. Last time the poster kids were companies like Webvan and Pets.com – dubious businesses with high valuations and no revenue. Now it is Google – still with a high valuation, but very strong profitability.

 

The building blocks are also fundamentally different. The development of open source tools, in particular the Linux operating system, means that companies can now get off the ground at the fraction of the cost that might have been required ten years ago. Take the Australian wiki software maker Atlassian as an example. Only five years old, it now employs around 100 people and sells to large corporations all around the world. Founders Mike Cannon-Brookes and Scott Farquhar have never taken a cent in venture capital. This business is far more recession-proof than many that preceded it.

 

The second component is that hardware costs have also plummeted. The development of dual and quad-core server architectures means that computing power that was once in the realm of the supercomputer is now in the reach of a wider variety of businesses. When teamed with technologies such as virtualisation, it is also now available through hosting companies to just about any start-up at a nominal fee. Storage is no different – check out the prices for Amazon’s S3 service if you don’t believe me.

 

With investors’ dollars now less of an issue, the tech sector at least is much more resilient than it has been before.

 

Not that it won’t still get hurt should the current debt-funded private equity boom come crashing down around our ears, or some other macro-scale geopolitical conflict tip the world into a period of fear and uncertainty.

 

Then there is climate change. The current winter rains falling in parts of Australia may spare us in the short term, but should we fall back into drought, there will be significant impacts in terms of inflation. Already some companies have reported jumps in the peak cost of electricity of more than 100 percent, as falling water levels impact the cost of power generation (and not just at hydro facilities).

 

Food companies are also reporting greater than 100 percent increases in the cost of basic inputs, such as grain and vegetables. It will only be a matter of time before these increases are passed along to the supermarket shelves.

 

That means a rise in inflation, which is likely to then spark a rise in interest rates, an increase in loan defaults, a tightening in capital availability, and then the inevitable squeeze on business.

 

Regardless of how it happens, any business should be planning today for what might happen should the current momentum run out. Failing to do so is nothing short of negligence.