No way to sugar coat it, this last week has been brutal. Almost everything I own has gotten a haircut that would make my girlfriend yell at them. I get the feeling that most of the finance/business articles that you’ll read this week will be doom and gloom. If you don’t read other finance/business material, now’s also not a great time to start. So I felt like it could be helpful to shine a light on the positive side of the bubble popping. Aside from taking advantage of the classic platitude “be greedy when others are fearful, and fearful when others are greedy”, aka we can buy at a “discount” now.
To preface, there’s nothing positive about millions of people losing their money. It’s sad, scary, and shows how vulnerable we all are to market influences and poor judgement.
This also is not a “it’s time to build” puff piece. We got plenty of those as Covid was rampant in 2020. To some extent, they’ve held up. Technology is better than ever before, the internet makes distribution cheap and basically infinite, and we’ve all worked somewhat remote for two years with minimal issues. It may yet again be time to build, but we’re in a pretty negative window right now. Similar to last week’s post about “The Great Resignation Reset”, I think we’re about to see a shift in the way that companies approach building their business.
This post by Aaron Levie (CEO of Box) stuck out to me. When companies raise a ton of money, they can flex their war chest in any which way. The mind naturally shifts from “eh, I don’t know if we should invest in X” or “instead of hiring Y amount of people, we could only hire Z” to “we’ve got plenty left over, go for it!” While that’s not always a bad thing, Aaron’s point is that when every decision looms larger on the longevity of a business, usually better decisions are made. Gravity has that effect. Bootstrapping a business can often be a good way to rationalize choices and build for sustainability. Of course, it’s not always possible, often bootstrapping is something that only people who are privileged enough to have a fallback plan or money saved up already can do. For those able, bootstrapping can help to narrow focus down to what really matters.
Having a high burn rate can be scary. Investors want to make sure that their invested capital is flowing efficiently and being used wisely. When that money is disappearing quickly, attention quickly goes to what it’s being spent on. Having a low burn rate can be scary too, though. It’s a signal that decisions either aren’t being made or the company isn’t focused on growing. Companies that aren’t growing aren’t producing [enough] revenue to cover costs. There’s not an ideal burn rate, and higher is usually worse. It’s easier to burn a lot of money quickly after raising a lot because saying “yes” becomes much easier than before.
Raising less money means that the available money to burn is lower and prudent decisions have to be made. It’s easier to run a company in the long run when costs aren’t a problem. The reason this is relevant now can also be attributed to a famous Paul Graham (founder of Y-Combinator, among other things) piece:
Fortunately the way to make a startup recession-proof is to do exactly what you should do anyway: run it as cheaply as possible. For years I’ve been telling founders that the surest route to success is to be the cockroaches of the corporate world. The immediate cause of death in a startup is always running out of money. So the cheaper your company is to operate, the harder it is to kill. And fortunately it has gotten very cheap to run a startup. A recession will if anything make it cheaper still.
Low burn rates mean long runways, or the time it takes for the company to run out of money. Long runways mean that a company is likely more capital efficient, or better at generating revenue from the capital it puts to use. Capital efficient companies typically are better at decision making, have more control over their business operations, and can handle situations like bubble bursts/recessions a bit easier. Capital efficiency can be measured in a ratio of the dollars returned / the dollars spent
. So if I spend $1 on marketing and earned $3 back for that, my marketing capital efficiency ratio would be 3:1.
The longer that something has been around, such as software or ideas or companies, the longer their future life expectancy is. This is called the Lindy Effect and can be seen in tons of places. The general idea is that “[l]ongevity implies a resistance to change, obsolescence or competition and greater odds of continued existence into the future”. Applying that to companies who can efficiently run their business without needing more and more capital shows that success can come from just being around. But survival is always easier said than done.
I think this shift from extras to execution will be good for companies in the long run. Whether early stage or not, being forced to focus on the problems at hand and not dipping into the nice-to-haves will create dividends. Narrowing focus on a specific problem while competitors or copy-cats are dealing with their own capital constraints allows for a massive head-start. Competition has to focus on their core capabilities and copy-cats will sink or swim.
With all of that said, I don’t think the climb out of this bubble-pop will be anything like what we saw out of the 2008 crash. Not that the economic and capital market situations are similar enough to compare, 2008 was much worse. However, 2008 was the beginning of the shift to mobile and that became a godsend for the likes of Uber, Facebook, Airbnb, etc. Mobile development is one of the greatest technological advances of all time. This time around there isn’t quite the massive shift in the end user and the use case. Arguments can be made for web3, sure, but I don’t think the adoption or utility of web3 will be anywhere as swift as mobile apps. But who knows, I’ve been wrong before. I do however think that companies and their boards will be quick to realize that the last two years were an anomaly and they can’t expect to get to similar levels anytime soon. They’d be wise to do that, anyway.