NOTE: I’m no longer blogging, but rather sending my thoughts, advice and insider information to my friends via email.

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Note: I’ve been getting crushed this afternoon with folks asking for a copy of this email that I sent to my subscribers. I’m going to post this one since I can’t possibly get back to all of you out there. However, this is not going to be a regular thing. Don’t expect to see the next 10 emails on Calacanis.com. I’m retired from blogging and have moved to the comfort of my email newsletter, where 9,400 of my close friends and I have a nice intimate discussion.

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best, Jason

Location: Mahalo HQ, Santa Monica, CA

Monday, October 27th, 12:00PM PST.

Word Count: 2,585

Jason’s List Subscriber Count: 9,400

List management: http://tinyurl.com/jasonslist

Message type: Startups

Forwarding instructions: startups, VCs

Republishing: PLEASE DO NOT REPRINT (This includes Mike Arrington and

TechCrunch)

———————–

A month ago today, I wrote an email to you guys about about “(The)

Startup Depression.” When I wrote it, I obviously knew there were

rough waters ahead, but frankly I didn’t think a financial tsunami was

coming. Since I wrote that post on September 27th, we’ve seen the Dow

Jones drop from 11,143 to less than 8,000. One year ago, the Dow was

over 14,000. Think about the sheer destruction of wealth that has

occurred based on that fact alone.

Stunning.

The severity of what has happened can’t be underestimated. There will

be no white knight. Even the massive coordinated government

action–including the first global rate cuts and bail outs–has done

nothing to stop the panic or create a bottom (at least from where I

sit).

Bottom line: there is zero chance of a short or medium term-rebound.

Zero.

As a startup, you are now, officially, on your own. You can’t count on

your VCs saving you or some magical offer from Yahoo or Google showing

up to bail you out. Chances are Yahoo and Google are going to be

shutting down and/or selling off companies they’ve already

bought–like EBAY and AOL have started doing. Parents don’t adopt

while they’re putting their kids up for adoption.

What you do in the next 30 days will probably make or break your company.

The storm is upon us and the death spiral has started. Once that

happens, you can’t stop it–you can only ride it out. Let’s take a

moment to see how this movie will play out. Since I’ve seen it two

times, so I think I know what the second and third acts will be.

What is “The Death Spiral”?

====================

The death spiral for startups is like the condition that occurs to

pilots when they fly into “weather.” The “weather” right now is the

massive confusion and uncertainty of the financial and consumer

markets.

In other words, it’s so choppy and dark out there that none of us can

simply look out the windshield and know exactly where we are. The

greatest pilot in the world is a blind man in these conditions.

When a pilot flies into a mess like this, the only thing they can do

is look at–and trust–their instruments. Nothing else matters,

because what you see out the windshield is pure black and gray. What

you feel in your gut is just the choppiness and uncertainty.

Your instruments will tell you what is true and what is false, and if

you listen to them you will not do what ill-fated pilots do: turn into

the death spiral. When this happens you accelerate the process of the

plane going down because you’ve made a turn that eventually leads you

right into the ground. By turning into it you’ve increased your

acceleration and decent–at the same time. (At least that’s my

understanding of the death spiral in flying).

The paradox of the death spiral is that many pilots actually believe

they are stabilizing their plane when they are actually tilting it.

Enough of the metaphor for now. You should understand the basic point:

you must trust your metrics (revenue, burn rate, page views and

earning), not your senses. Your senses and emotions are FUBARed right

now, but your metrics are not.

The Death Spiral of the American Economy

=====================

Startups and established companies have started their layoffs already.

The list of layoffs on TechCrunch’s tracker is growing, and sadly it

now includes Mahalo. EBAY and Yahoo will shed thousands, and most

savvy folks I’ve spoken to expect to see Microsoft and Google cut some

costs.

Yes, there is chance that even the mighty Google might lay folks off.

Not because they have to–they’ve got a ton of cash–but because they

must show earning growth or risk a stock collapse. The best way to

show earning growth in a down market is by cutting costs. Google’s big

cost? People.

These layoffs are turning us deep into the death spiral.

The poor folks being laid off are going have a hard time finding jobs,

and as such they are going to curtail their spending. They are not

getting that new car or laptop any time soon because, well, anyone can

get an extra year or two out of a car or laptop.

Even the “not poor” and the rich are going into penny-pinching mode.

Why?

Well, the pull back in consumer spending is half-emotional and

half-necessity. In times like this, emotion becomes a major driver.

That new iPhone or crazy weekend in Vegas probably won’t make or break

most folks financially, but they just won’t “feel right” doing it.

Ask yourself: Have you put off a purchase because it just “didn’t feel

right spending that kind of money” in the past month? Exactly.

Everyone is feeling it, even if it’s opt-in and guilt-based.

The days of $2,000 bottle service in the clubs of London, New York,

and Los Angeles are coming to a close–even for those who can afford

it. Simply put, you look and feel like a jerkoff if you spend like

this when people are suffering.

… and so the belts tighten.

The Group Belt Tightening Effect

=====================

In anxious times, folks like to take action, and the easiest actions

to take are the little ones.

This creates a massive ripple effect. Folks from dotcom companies and

investment banks stop coming into the Apple Store, so the Apple Store

lays off five people. Those Apple employees stop going to the

Starbucks on the corner, so Starbucks lays off a couple of folks.

Starbucks senses the lower same-store sales trend and shuts down their

lowest performing stores, letting go of their redundant managers. The

landlords renting to Starbucks are left without the money to take that

expensive summer vacation and buy new cars, which puts pressure on the

vacation destination and the car salesperson.

You understand the trickle down effect? This is the reverse: the group

belt tightening effect.

These little emotional reactions have not only started–they’re

building into a storm. That storm is going to hit in the fourth

quarter, when a lot of merchants see their order size drop and their

inventories climb. Some merchants will go out of business and flood

the market with tons of cheap merchandise, which will make the

profitable merchants suffer from competition.

Inventory will pile up, cash will dry up.

The fourth quarter is going to be a huge disaster: unemployment will

skyrocket, retail will crash and consumer confidence will flatline.

Some think it will be the bottom, some think it will half-way mark to

the bottom. No one really knows, and that’s really the scary part.

Emotional situations like these are impossible to stop–they have to

play out. The “cut spending now!” train has left the station and

there’s nothing that can be done about it.

How does “The Group Belt Tightening” stop?

=====================

At a certain point, folks feel more optimistic than pessimistic about

the future, and that’s when they start spending and taking risks

again. For entrepreneurs like us (I assume if you’re reading this you

are one), you’re wired to be optimistic, so you’re probably fighting

through this due to your internal fortitude.

That does not mean that you’re spending like a drunk sailor. It just

means that you’re wired to invest when you see an opportunity. That

makes you unique in relation to gen-pop (the general population).

The gen-pop doesn’t look inside their guts for guidance. Gen-pop

watches CNBC, the Dow, layoffs, and their friends’ consumption

patterns. They look out the windshield. The forecast for the next two

or three years is going to be dark, and as such, most folks will keep

their belts tight for at least two years.

At Thanksgiving and Christmas this year, your friends and relatives

will talk about cutting trips and not making major purchases. They’ll

recount stories of companies going under and kids moving back with in

their parents after college. It’s part of the morning process. Folks

have to vent, but on a psychological level, the venting causes

everyone to become more conservative than they actually need to be.

The conservative mindset leads to people paying down their debt and

otherwise cleaning up their personal balance sheets. This is the

virtuous part of the process: folks get their affairs in order.

At some point, the lack of competition in the marketplace results in

risk takers making impressive returns. Someone hears about a friend

who is “making a killing on Taser stock” or of a “startup making $250k

a month with five employees.” Then, folks think “hey, I’ve got a

little extra cash… maybe I should get in on that?”

Dentists start investing in startup companies again… We’re back,

baby! (Note: Too many dentists start investing and we’re in a bubble

again–careful what you wish for.)

The belt tightens out of fear and uncertainty.

The belt loosens out of greed and positive data points.

The way to leverage this, obviously, is to get greedy before everyone

else so you can take marketshare. Let’s look at all the good news,

shall we?

Good News Part One: Experiences Over Expenses

=====================

The good news in all of this is that folks are going to be spending a

lot of time online, playing video games and consuming things that are

not expensive. They’re going to be looking for “experiences over

expenses.”

If your service provides fun, social interaction and joy to the user,

you’re going to see it spike. Folks will start playing Mark Pincus’

Texas HoldEm on Facebook and the iPhone a lot more. Kevin Rose will

ride DIGG straight to 50m monthly uniques and five foreign language

versions in 2009. Garrett Camp will pry StumbleUpon from EBAY and

break the service out to the mainstream. If only Yahoo would give

Joshua Schechter del.icio.us back so he could finish the mission.

*Sigh*

Why will there be a boom in traffic, engagement and participation?

Well, people will have time on their hands and the desire to

socialize. Group behavior makes people feel better. One of the best

cures for the blues is sharing a meal with friends.

Blogging became a phenomenon not because of some technological

advance, but because between 2002 and 2005 there were a lot of

unemployed–and underemployed–individuals with a lot to say and a lot

of freetime. Bloggers like Peter Rojas, Michael Arrington, Nick

Denton, Rafat Ali, Xeni Jardin and Om Malik broke out in the down

market–not the upmarket.

Social networking and podcasting were born and boomed during the last

internet winter.

Bottom line: Folks with time on their hands–and anxiety in their

hearts–will be drawn to communications, content, and community

offerings.

Free time is good news for modern man.

Good News Part Two: Measurable Advertising Boom

=====================

The fact is that most advertising spending is in media without real

measurability–like outdoor, TV, radio, newspapers and magazines.

These sample-based solutions have a lot of inefficiency and lack the

real-time measurability of the internet.

Advertisers will start cutting print, outdoor, TV, and radio (probably

in that order) in favor of the internet’s action-based offerings such

as CPA (cost per acquisition), CPL (cost per lead), and CPC (cost per

click).

Three weeks ago, I attended and spoke at WPP Group’s very understated

agency retreat at a–gasp!–Club Med outside of Athens. It was the

cheapest location you could imagine, but the people and discussions

were amazing. Sir Martin Sorrell gave a big overview of the coming

world and told his troops to focus on measurable solutions. He wants

WPP’s advertising spending to be mostly measurable (if I heard him

correctly).

Measurable advertising means internet advertising. The internet will

take a hit in the short term, but gain massive marketshare in the long

term.

Good News Part Three: No Competition

=====================

There are no longer going to be 10 companies pursuing one vision.

Twitter, Pownce and FriendFeed are going to fight over short blogging

and almost everyone else will go away or stop investing in their “me

too!” solution.

MySpace and Facebook will not have another major competitor for some

time to come. Del.icio.us and DIGG will not face many more clones, and

many of the existing ones will go away (or stop innovating). If you’re

launching a product, you won’t have 5-10 folks copy you in the first

year. There just won’t be the funding for the fourth or fifth person

in a space.

That jerk off who stole our code and content to make his vertical

Mahalo knock off? He’s not getting his next round of funding, I can

tell you that.

Bottom line: Less fighting, more marketshare. Less competition for

great developers.

[Sidenote: I’ve already heard some CEOs talking about the overpaid

developers they have on staff and that they wouldn’t hire many of them

for the prices they paid just six months ago. That’s a really hard

position to be in, huh? Overpaying for developers and being faced with

better options just six or 12 months later? What do you do? Cut the

existing staffer’s salary or replace them with a new person? Really

don’t envy either party in that situation.]

Good News Part Four: The Zero Cost Startup

=====================

When we interviewed folks for the TechCrunch50 show this year, we

asked them how much was invested in their companies. Many reported

nothing. Zero. They had no office space, no server farms and no Oracle

license. No marketing budget, PR firm or headhunters to feed.

The cost of a pure, boot-strapped, startups today is really the time

the founders put into it. Don’t pay for software, don’t sign an office

lease, and don’t hire a PR firm. Stay slim, build something great and

wait. If it doesn’t grow make the product better and wait some more.

Keep that process up until you find something that makes people

absolutely rabid for your product. If you can’t find something that

delights folks, well, then you suck. Give up. No really, you suck….

give up.*

* Note: That’s just a test to see if you’re a real entrepreneur. When

you read that, did you think of giving up? If you did, than you really

suck and shouldn’t be an entrepreneur. If you read that and said

“frack you, Calacanis…WTF do you know anyway?!?,” then you’re a

gangster entrepreneur and keep up the good work.

Your best investment right now?

=====================

The best investment you can make in any market–up or down–is in yourself.

Take this down market as a time to focus on yourself, professionally

and personally. If you’re level eight PHP programmer, make it your

personal challenge to become a 10 of 10. If you’re 20 pounds

overweight, get a trainer and if you can’t focus, start taking Tae

Kwon Do lessons.

If you’ve got a great idea, find three friends and build it during

your lunch break and weekends, while your boss is too distracted to

care.

Rafat Ali started PaidContent while working for me during the down

market. He asked me if it was OK and I said “yeah, sure… that

blogging thing will never go anywhere.” He sold it for $30m earlier

this year after six or seven years of hard, hard work.

Fortunes are built during the down market and collected in the up

market. Now’s the time to build, so turn off CNBC and forget the Dow.

It’s meaningless to you now. All that matters is your work and your

personal progress.

Eyes on your instruments please.

———

Sidenote: I was on the best podcast in the world, This Week in Tech,

yesterday talking about the economy and technology with Leo Laporte.

You can tune in here: http://twit.tv/166

Press: In WIRED magazine Paul Boutin says you should shut down your

blog. His evidence? Our success with the email newsletter:

http://www.wired.com/entertainment/theweb/magazine/16-11/st_essay

Question: Do you think I should post these emails to my blog, or

should I just keep them between you and I? I’m having a hard time

keeping these quiet, as folks like TechCrunch insist they are so

newsworthy that they can break my copyright and republish them based

on the alleged importance. Ugh. Is what I say really that newsworthy

that you can just take my work wholesale? I don’t think so.

Plug: We’re experimenting with a new feature called the “Mahalo Live

Blog.” Essentially if you go to http://www.Mahalo.com you’ll see a

running list of breaking news stories that we maintain 24 hours a day

seven days a week. It’s sort of like the DrudgeReport but faster.

10-15k folks seem addicted to it. Your thoughts on the live blog?

Question: I was thinking about starting a group email discussion list

for Jason’s list. What do you think of an email discussion list based

on Jason’s list? I was thinking of maybe starting it, but limiting it

to folks who send me $1 in cash in an envelope with their business

card. This would keep the trolls out right?