Changing times
As inflation grows, Ukrain war lingers, and delivery delays plague commerce, the tech and crypto market crashed those last weeks.
I began investing in stock markets 35 years ago, and I found that it was consistently the best predictor of short-term evolutions. It is often a valid early indicator of what is about to happen in the broader economy.
For people like me, having known the Y2K boom and bust, the 2008 “RIP good times” Sequoia address to start-ups, and the 2019 Covid lockdowns, it feels like we are entering a new winter that may last weeks, or months, or years or decades (nobody knows for sure).
Still, I see start-ups continue to hire like crazy, investors accepting insane valuations, job seekers rushing to crypto, and other wishful-thinking start-ups.
We all want our start-ups to become unicorns, our financial assets to keep enriching us, our crypto dream to become a reality, and our rising awareness of climate change to save the planet.
Until a new world order, the money flow is still dictating what we can or cannot do; unfortunately, we have to accept that fact.
And the money is now changing its course, finding that inflated business plans may not happen in the wake of a changing economic environment.
How do we react to those new inputs?
It feels like Europe is reacting slower than the US.
I get a sense of US companies laying off employees, reducing expenses, and re-evaluating growth vs. EBITDA. I don’t have the same feeling towards EU companies.
In particular, I am concerned that EU start-ups forgo taking necessary adaptation steps: reducing expenses, extending their runway to prevent restricted access to capital, shifting attention from acquisition to retention, etc.
Rising inflation and interest rates will hurt purchasing power on the consumer side. It should tell us to reduce spending, take smaller flats, move closer to our office work, avoid investing in growth assets and find resilient revenues. Are we doing that? Not sure.
Why do we take so much time to react?
Latency. Delay. Procrastination.
We have a hard time changing our mindset.
It is especially true when we fight hard to reach a goal, and suddenly that goal seems to move away. Chasing a dream and then refusing to let it return to haze.
Did you ever see the Disney movie “Soul”? In this story, the main character is a music teacher that dreams of becoming part of a jazz band, and finally, the opportunity surfaces. Enthralled by this prospect, he crosses a street, falls down a sewer hole, and passes.
But his soul can’t handle this and will try to revive the opportunity, no matter what.
It feels like we can be like this Joe Gartner sometimes, refusing to get real when the reality is at odds with our dreams.
It takes time to digest adverse conditions and change course because it is a mild version of the five stages of grief.
Central banks have been pouring cash all over the place for ten years, and Covid lockdowns have created supply chain shortages. Now there is inflation; who could have guessed? When interest rates increase, why would LPs put their money in Venture Capital when they can earn the same with bonds?
But when your dream is to become a unicorn, and you raised a lot of money during the valuation bubble, and you need to hire 100 employees to achieve your business plan, why not wait a bit longer and see if inflation subsides or interest rates linger?
When the Covid threat decreases and people return to the office, why not wait and see if your Zoom shares rebound? After all, tech stocks have constantly been growing, right? Apple and Salesforce shares can’t go down, huh?
The problem with latency
It is okay to take time to ponder and not overreact.
But this comes with a risk: the black duck event amplifies instead of recedes.
In the beginning, it is always easier to adapt and fix the issue. Luna crypto-currency has exploded; let’s sell my bitcoins. The project is slightly late; let’s put in a few hours of extra work. My colleague starts to have inappropriate behavior; let’s talk with him.
But when the issue deepens, it is usually harder to correct. It requires a much higher energy level or can be downright impossible. I can’t sell my bitcoins now; my losses are too deep. I can’t satisfy the customer; the project would cost a fortune to fix. My colleague has created a bad mood within the team; 5 of my best people are leaving.
A good way to picture this is to imagine having to maintain a post in a vertical position with ropes.
If the post takes a slight angle, you can redress it with minimal effort. But if you wait a few seconds more, the post will become nearly impossible to straighten up. Until it is too late and it crashes.
Adapting quickly to a new situation is always less painful than procrastinating and correcting desperately.
Bottom line: It’s better to change course, even if the issue clears up, than to do nothing and find yourself in a chaotic situation.
What does coming to grips look like?
Let me tell you this story:
A few years back, I had in mind to take the US market. So I incorporated a subsidiary in Delaware, made a few trips to SF, rented offices near Union Square, opened an account at the Silicon Valley Bank, registered for DEMO, a famous start-up pitch event at that time, and hired a US PR firm.
Everything was ready for the launch of /community, our customer community platform for start-ups.
Alas, we were late 2008, and Lehmann Brothers and the subprimes crisis kicked in.
My flight to Palm Springs (where the event took place) was scheduled for Sunday. On Saturday, we had an emergency call with my co-founder. We agreed that the probability of success in this context was poor. The launch would cost a lot of money when our current business was already showing signs of weakness.
On Monday, I came back to the office.
The team was surprised as I was supposed to be on the plane.
I announced to them we would not launch in the US.
Instead, I told them we needed to part with a handful of them. The rest of the day, I had conversations with the ones we couldn’t afford to keep on the payroll.
It was a heartbreaking moment.
I was falling from a dream to a desolation.
Eventually, we came back to the US 10 years later, to sell the company.
Act quickly
When a new situation occurs, you should quickly assess whether it can endanger your plans. Get real about the fact that it may require you to ditch your dream or at least stash it for some time.
Don’t let that “I should have done this” voice invade your mind.
It is better to act on a false alert than missing to act on a real issue.
What do you think? Do you have examples to share?