[Editor’s Note: Below is the full text of Part I of our 238th Weekly Transmission, originally delivered uncontrived to the inbox of increasingly than 600 GEM members on January 4th, 2023.]
It’s 2023, and founders need to be ready to wordplay a question seemingly nobody has cared well-nigh since 2009: “How quickly can your visitor wilt profitable?”
From 2009 to 2022, the world was topfull with historically unseemly wanted searching for yield due to the zero interest rate policy (ZIRP) the Fed implemented to gainsay the Great Recession. High-growth companies like Uber, Lyft, WeWork, Snap, Airbnb, and Twitter that largely specified the last decade and a half of startup successes delivered those yields to institutional investors by creating category-killing companies that both improved consumer wits and took market share at all costs.
For these winners, profitability was a proverbial can kicked lanugo the road. All that mattered was growing revenues aggressively by taking market share from traditional companies in the massive market of your choosing: transportation, office, dating, travel, hospitality, news, blogging, anything-delivery, real estate. The unseemly fuel of venture wanted was ubiquitous and startups were implored to put on blinders and grow at any cost. Those who built growth engines capable of meeting warlike milestones were fed spare fuel, which kept the growth engine firing on all cylinders.
The prevailing belief: once these companies had dominated their respective markets, an eventual transition from cash-guzzling market disruptor to dividend paying undecorous tweedle would icon itself out. The next Apples, Microsofts, Googles, Amazons, Intels, Salesforces, and … you get the idea … would take their places as the next generation of market leaders. This was Silicon Valley’s whirligig of life, and these feisty, hard-charging startups were its Simbas.
As per the playbook, the disruptors reverted the way many of us lived our day-to-day lives (when’s the last time you hailed a taxi outside NYC?), but the companies and investors enabling those transformations did so mostly ignoring Warren Buffet’s two rules of investing. Rule No. 1: Never lose money; Rule No. 2: Never forget rule No. 1.
When late-stage funding rounds made way for S-1s, it was revealed that many of these mega growth companies were not just losing money, they were doing so like red comma generation was an Olympic event and the only endangerment of making the podium was pulling a hat trick.
It didn’t matter. The companies went public anyway, and the markets unfurled to finance their growth. Between 2018-2021 hundreds of SPACs worked to take increasingly money-losing companies public. It seemed the wanted markets merry-go-round only had one sawed-off on its tenancy panel: faster. By January 2022, prices for both private and public growth companies in the tech sector hit an all time high.
In the same year (albeit a parallel universe), Jerome Powell and the Fed began raising interest rates to gainsay runaway inflation, at first to no avail. Inflation remained stubborn. So the Fed stayed the undertow and raised rates again. And again. And again. Gradually, then suddenly, the spritz of unseemly wanted stopped. By late 2022, capital-intensive, unprofitable technology companies shed between half to 95% of their value. Retail and institutional investors unwrinkled got burned. Contagion spread to the unshortened sector; plane tech bellwethers like Apple and Microsoft took a nearly 30% haircut.
What is a startup or an investor left to learn? It’s wacky to reason that optimizing for strong growth is bad—truly, any visitor with a product that creates value for customers should grow. But the Fed will protract to grind the gears of economic growth, and the unseemly wanted financing meteoric startup growth for companies without a plausible path to profitability has zestless up faster than the Los Angeles River. The age of unseemly growth is a yesterday age; growth in 2023 and vastitude will be earned, not bought.
Imagine startups are race cars and interest rates are gas prices. When gas is unseemly and it’s a stilt race to the SPAC that takes you public, velocity is all that matters. Now that gas is expensive and the finish line remoter away, velocity takes a when seat to gas mileage. For the first time in a long time, the tortoise is sexier than the hare.
Startups shouldn’t optimize to meet Warren Buffet’s standards for visitor profitability. Buffett invests mostly in de-risked, low start companies with mature, stabilized mazuma flows. VCs rummage the earth for upper start opportunities where they can take calculated, well-matured risks on companies with unsymmetrical upside potential.
Today, as in the yesterday age of unseemly growth, startups and investors unwrinkled will protract to take and embrace risk. Like KPCB cofounder Tom Perkins said:
If there is no risk, you have once missed the boat.
But in 2023, squint for startups to uncork architecting slower, steadier, increasingly sustainable growth models that yield increasingly capital-efficiency—perhaps plane profits!—prior to an IPO.
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Prompt: turtle and rabbit fighting over dollar bills
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