Batten Down the Hatches: Massive Waves Coming
Lots of talk around Silicon Valley circles about the upcoming capital drought and recession. As I write this in May, it definitely feels like the wave of capital that came into the industry in 2018 is gone. This capital that crested as a massive tidal wave in 2020-2021 has left behind in its wake, massively overvalued companies, high salaries and tonnes of VC markups in their portfolios. The 4 most dangerous words in investing “This time it’s different.”
The reckoning is here as the Tigers, D1s, Coatues and Softbanks of the world pullback. Basically they thought they had the ultimate arbitrage between private and public market valuations and this bet has gone wrong as the Fed has increased interest rates.
If you want to learn more about this: this podcast is worth listening to: https://www.youtube.com/watch?v=ezOIBfZcwbQ
We are going through a downcycle not just in Silicon Valley but in the world. My view is that we are in recession now and it will get worse. Job listings have shrunk, costs of food, goods and energy are skyrocketing.
I wanted to share a couple practical tips for those founders and individuals going through this.
I’ve had the fortune or misfortune of living and barely surviving several down cycles before. Canada in the mid-90s, Asian Economic Crisis in Taiwan/HK in 97-98, Silicon Valley 2000-2001, Silicon Valley 2008-2009, and my own self-inflicted financial & pandemic lock down mess in 2020. Learned a few things coming out of these.
Hope for the best but prepare for the worst. Get on the same page as your team. From a company perspective these are your board, your investors and your cofounders. From a personal perspective: this is your family. Make sure they understand your perspective and what is coming
Cut Burn Rate: You need to manage your cost structure ahead of the slowdown. I have been speaking with a bunch of founders who have crazy cost structures and not enough revenue to justify it. You need to cut costs NOW so you can survive. At company level, these are two good threads to follow. https://twitter.com/DavidSacks/status/1528102541723979776
https://twitter.com/refsrc/status/1527238287471292417
Cut (Personal) Burn Rate: This is why I write down all my spending. You should be reviewing these at least twice a year in my opinion to make sure you are not getting ahead of yourself. And truly understanding what is essential and what is not. I just did my review of monthly costs and even I have gotten somewhat lax over the last year.
Just because you spend less does not mean you need to suffer too much in life. My friend Per wrote some good tips in this excellent write up (https://fewerbetterthings.substack.com/p/tips-for-the-looming-recession) which i recommend on preparing for & thriving during the recession:
Raise cash by selling stuff you never use. I cleaned out the surfshack last weekend and organized the “useless” in three cardboard boxes marked resell, donate, and freecycle for further action.
Eliminate unnecessary recurring bills. I canceled online subscriptions I hardly ever use, like streaming video and cloud storage (by cleaning out the storage).
Repair stuff instead of buying new. I’m repairing our wetsuits with Aquasealfrom GearAid and learning how to take apart, fix, and clean my bikes.
Design a simpler, healthier diet. I’ve switched to a Mediterranean diet to increase energy, performance, and well-being. No processed foods or takeouts.
Learn how to love what you have. By only owning what I frequently use I appreciate my fewer better things more and don’t feel that I lack anything.
Bike, walk or take public transport everywhere. I’ve parked the car for all local trips and chosen to bike or walk everywhere within 5-10 miles. I save on gas and insurance, as it’s pay-per-mile, plus I’m getting fitter.
Wait out the sales. I need a few outdoor things but I’m waiting out the upcoming summer sales to get 30-50% off my favorite brands.
Leverage what’s free online – from learning a new language to fixing stuff around the house and listening to music, watching movies, and reading books.
But my point is not to scare you. Recessions can be okay despite the pain around you. Keep a calm head. If you have the cash, there are lots of investing opportunities at bargain prices, amazing new talent to hire and even advertising becomes more affordable.
Remember your long term goals. Remember your mission. You just need to survive. Keep going. As the immortal Gordon Gekko in Wall Street the Movie said: “You win a few, You lose a few, but you keep on fighting.”
Sometimes that is enough.Then you reap all the amazing opportunities that come out of it. Exactly just like what happened in all the previous recessions we’ve been through. Going to quote my friend Per again:
“The great thing with recessions, especially if you are well prepared, is that they flush out the irrational exuberance, greed, and excess to offer perspective on what really matters in life. Plus it’s the best time to start new ventures, when no one cares, or invest in depreciated assets, when everything is deflated.
But what happens if I’m wrong and overreacting? Well, I’d just have a cleaner shack, better use of my time and attention, and cash on hand to upgrade the essentials when needed in the future. Either way, it’s a win.”