I’m sitting in the Denver airport on my way back to New York and I’ve just heard the awful news that Goldman Sachs, yes, Goldman Sachs, is going to lay off 15% of its workforce. This is obviously horrible news – Goldman is the marquee bank on Wall Street (and it has a sterling reputation for taking care of its employees), and this means that other banks will almost certainly follow suit. Supposedly the layoffs are going to be mostly in capital markets and support staff. Following the near bankruptcy of Bear Stearns and acquisition by JPMorgan last week, this is huge news that plunges the economy deeper into the big “r” word (I dare not say it out loud :).
From my perspective at the helm of a startup music/web company, all this news could be a signal to entrepreneurs to take funding now if they can get it. Of course, I’m never in favor of handing equity over to investors for no reason, but if you’re not on sound financial footing it might be wise to have enough capital in reserve to weather the storm. I won’t go so far as to say that any startup should take all the money it can get – the same formula won’t apply to every business – but there is obviously merit to looking at your financial situation through the lens of broader economic conditions.
Just to play devil’s advocate and make matters more complicated, tech is typically insulated from broader economic downturns due to lower capital intensity (among other factors), so again, today’s news from Goldman isn’t a clear signal in one direction or the other. On top of that, strategic players and financial institutions are going to need to continue expanding their businesses and producing returns for their investors – “r” words don’t change that. Every time the economy takes a turn for the worse cynics forget this simple fact and start screaming that the sky is falling and any startups that don’t stockpile cash are going to be done for.
That said, the news from Goldman is a clear signal that entrepreneurs should be thinking hard about their capital situations, and for some, it may be a good time to store up cash for the winter.