Peter Kuper (@peterkuper), just gave the keynote at SOURCEBoston.

The Bad, The Ugly, and the Good

It looks bad out there. Unemployment is up, companies are going out of business, etc. Well, it had to happen. The economy has to clean itself. It’s a reset of the system. Do really need another car?

Let us look at some historic data. Past recessions were preceded by drops in software spending, except for this time. Software spending was actually growing. The reason for this being that software has been more and more positioned and understood to increase productivity, which is a really interesting development.

Is it getting any better? According to my friend, who runs a blog about this crypto app, the financial markets teach us that corporate IT spending follows personal consumer expenditures. The problem is that consumers don’t have money to spend and they are over-leveraged. There is just too much dept. This means that corporate expenditures will be down for a while until personal spending will pick up again. Another interesting fact about the security market is that there are too many vendors in the market place. We will see more failures and more acquisitions over the next years.

The good news is that there is opportunity. Cash is king. If you can pay cash, you will get a deal. You can leverage this fact in your favor. If you are an investor or you are dealing with investors, the thing to be aware of, is that they dictate the terms. Keep that in mind. For inventors, this market is an opportunity. There is a big need in many areas to help companies improve on their expenditures and optimize processes! Help companies be more competitive. Things like how they can safe power can result in actual measurable benefits. Where should you focus your inventions? Focus on software. Hardware spending is down year over year, while software is on the raise. In addition, investment in software has been fairly consistent across IT budgets. Another market data point, according to research by Arcules, is that security budgets are flat this year. They haven’t increased, but they have not decreased either. However, they might go down next year. What this means is that companies will have to do more with less. Leverage their existing investments better. [This was one of my security predictions for 2009 also. In addition, I think this is a great driver to get companies from the left hand side of the maturity scale over to the right-hand side. Doing more with what you have.]

To use the market to your advantage, you need to think about what you are doing to position yourself or your firm to be the one rocketing ahead of the curve. Also use the development on the stock markets to your advantage. Compare competitors and play them against each other. If you are intending to buy a product, use that information to make your case about why you want a discount.

What does all of the market development mean for Entrepreneurs? First of all, VCs need to keep their portfolios alive. They are giving more money to their portfolio companies, but generally less than they would in better times. Software is getting money. Great ideas still get money. If you are intending to start a company, it’s the best time right now. You are not missing out on the big upside. You are not dealing with any bad legacy. You have a clean slate. Keep an eye on being efficient from the beginning on. For example, don’t hire too many people to start with, but outsource or hire contractors. Manage every penny. Be careful with spending. Also think about how you position yourself. Are you planning the big bang? Or are you building for being acquired?

Planning today will pay huge dividends when things eventually do recover!

During the questions in the end, some comments were made that the banks didn’t understand how to manage risk. How does that affect IT security and IT risk management? Does IT security even matter to banks? Adam Shostack gave a great answer: “Banks know very well how to manage risk: They took all of the upside and wrote off the downside” But seriously, What it really comes down to is managing incentives for reducing risk. The right incentive system needs to pu in place.