Could the credit crunch be good for startups?
January 14, 2009
This morning Nortel filed Chapter 11 and on first look this might seem like a bad thing. Nortel has a big presence here in North Texas and I am sure it will take a toll on many businesses and people, but I can’t help think there might be a silver lining in the news.
Nortel has been in trouble since 2001 since carriers began moving away from Nortel’s big switches and as Cisco has gobbled up bigger and bigger slices of the lower end of the market. Easy access to credit has meant that Nortel has been able to borrow billions to keep the company afloat as they have tried to right the ship. Since 2005 the company has lost almost $3.5 billion and now has $4.5 billion in debt.
This easy access to credit has allowed Nortel to remain in almost every segment of the telecom market without regard to whether or not their solutions are a) profitable, b) sustainable and c) innovative. Upstarts and leaner competitors have had an uphill battle going toe-to-toe with Nortel simply because Nortel can buy important business and because their legacy and reputation is so strong. Nortel has been one of the most important players in the telecom market since 1895 when the company began selling telephone equipment to businesses throughout Canada. Many Nortel carrier network clients were almost ‘forced’ to buy Nortel’s second teir products such as metro-ethernet in order to keep their preferred pricing on the carrier side. Nortel, buy using its deep penetration into accounts and easy access to debt stiffled the ability of telecom startups to compete.
With the bankruptcy and ultimate breakup of the company, there will be lots of room for innovation from startups and entrepreneurs in the telecom space. So perhaps there will be quite a bit of pain in North Texas for the time being, but where there was one unhealthy company I believe there might be a hundred small, nimble, innovative startups ready to fill the void here in North Texas alone. Tightening credit markets mean that companies need to generate profits and can’t simply use debt to wait out under capitalized startups. Just as forest fires cause great destruction, they are fueled by dead wood and allow new healthier forests to emerge.
