Batten Down The Hatches: An Anonymous Submission
I received this Letter to Founders as an anonymous submission to the newsletter last week. I love the idea of anonymous submissions - the fact that someone took the time to write out their thoughts and share them with me (exclusively) is thrilling. I've edited parts of the article for brevity and clarity - you can read (and share) the full submission here or in the link below.
As for the message itself - I largely agree. Not because I think we are entering a 'shit storm' but because in some sectors of the economy it has felt like the Roaring 20s for the last several years and we have been over due for a correction.
There appears to be a major disconnect between many early-stage founders and economic reality, so let me just rip the band-aid off: the startup world is headed straight into a Category 5 Shit Storm, and it is time to batten down the hatches at your startup, now.
Like you, I am a venture-backed founder of an early-stage company. If you've been following the news, then you may have heard about a downdraft in the public markets. Based on recent interactions I've had with fellow early-stage founders, most of us seem to think (or worse, are being advised to think) that this is just a temporary fluctuation. Sorry to be the bearer of bad news, but it is not. Early-stage venture funds have raised record amounts of money and they have to deploy it right so we are insulated right? Wrong.
What is going on in the public markets is not a fluctuation.
We are in the midst of a structural paradigm shift in market psychology and early-stage companies are not immune.
Given the extreme focus that it takes to build something from scratch, it is easy to tune out the noise but that only works while the music is playing. The music stopped playing in the public markets last November. What happens in the public markets typically shows up in private markets (i.e. VC) with a 6-12 month lag.
There is currently zero fear among early-stage founders or prospective employees.
Zero! Why? Because demand is still strong! There is a labor shortage! Engineers have 5 different job offers! This might be true currently, but unfortunately, markets are reflexive. Investors don't base their decisions on reality, but rather on their perceptions of reality instead. The actions that result from these perceptions have an impact on reality, or fundamentals, which then affects investors' perceptions and thus prices.
The economy may be strong today, but the mere fact that investors view the future as being bleak makes the future bleak.
When a public company sees its valuation cut in half (or more) it is forced to start cutting costs whether they had planned to or not. That means they reduce their spending on products and start laying people off. That crushes demand for your startup's products which in turn forces you to lay off people and it spirals from there.
Here is the playbook I am implementing at our startup to survive:
- Effective immediately, you are the founder of a bootstrapped startup. Operate on the assumption that there are no new rounds of funding coming for the next 12 months.
- No new hires for the next 12 months. Make a ranked list of who you would lay off and plan contingencies for who will take over responsibilities.
- Cut all nonessential company expenses immediately. The extra month of runway could prove crucial.
- Product Market Fit >> Narrative. Do whatever you have to do to get there.
- Partner attention will be focused on the winners in their portfolio and/or their next fund. If your calls stop getting answered, don't take it personally.
- Study this chart:
This chart is taken from an infamous deck entitled RIP Good Times that Sequoia sent their founders on the eve of the Great Financial Crisis. Slides 40 onwards contain advice that is relevant to us today.
IF THIS ESSAY SEEMS ALARMIST TO YOU - IT IS BECAUSE IT IS MEANT TO BE.
The time to act is now, not in 12 months when it is too late. It will be hard, and it's going to get ugly. Remember, however, that great companies are forged in the fire.
If you do persist however and your company gets chewed up in this macro carnage, remember not to beat yourself up. Separate the process from the outcome. At least you tried, and that's already more than most ever had the courage to do.
Good luck, god speed, and see you on the other side.
— STARTUP CASSANDRA