VCs and the "do what we say not what we do" guide to the recession.

The nature of strategy is to identify, simplify, and focus on what really matters*. Never is that more important than when pessimism rules the day (and the market).

June 3, 2022

Start-up land collectively went into pucker mode last week following the reporting on the supposedly leaked Sequoia Capital ‘Adopting to Endure’ presentation which they gave to their founders on how to “avoid the death spiral.” Grim.

To be fair, “Please be profitable” is not, or should not be, considered a radical departure for business ventures, but for early stage start-ups, the key question is…when VC’s are singing from the ‘shut it down’ and 'avoid unnecessary risk' hymnals, whose interests and position are they really protecting, yours or theirs?

Let’s explore.

Having spent the last couple of years in valuation la-la land, VCs have been scorched by the market’s correction, especially among any late-stage and/or publicly traded companies in their portfolio. 61% of all software, internet and fintech companies are trading below pre-pandemic 2020 prices.

 But that over-exuberant funding feeding frenzy is not your fault, early stage start-up founder.

As Jeffrey Bussgang, a partner at Flybridge Capital Partners, told Quartz, “Valuing companies at 30-100x revenue was never sustainable. At some point, the market was going to correct, but no one wanted to be the firm that was left out while the music was still playing.”

And now they’re telling you to dial it back?

As imperfect of a human he is, Bill Clinton’s current event management advice still applies: “Follow the trend lines, not the headlines.”

All the major growth stage investors—such as Tiger, Softbank, Insight, Sequoia, Thrive, and General Catalyst among others—have raised massive new funds. Andreessen just announced a new $4.5B fund focused on crypto. You know crypto, the market that shed $800 billion in market value in a month.

So while your investors are telling you to batten down the hatches to survive the storm, they are telling and selling a bit of a different story to their investors; something along the lines of, “Give us all your money, we are going to crush it.”

Why the disparity? Because basic business principles still apply. As Uncle Warren says, “Be greedy when others are fearful.” Greed manifests on both the income and expense side of the ledger. For VCs they need to ruthlessly protect any potential existing exposure to stop the bleeding (that’s you) while simultaneously reloading their accounts for new opportunities created from the market’s “correction.”

So how does that more optimistic approach apply to early-stage start-ups? What can we learn from the winners from the 2008 and 2020 market disruptions?

Sequoia’s presentation makes the case, “But we also believe that winning in the years ahead is going to depend on making hard, decisive choices confronting uncomfortable challenges that may have been masked during the exuberance and distortions of free capital over the past two years.”

In other words, be strategic. And in our words, the essence of strategy is sacrifice.

Simplicity scales, complexity doesn’t. Dismiss the magical thinking of your overly-optimistic super app aspirations and creative math TAM, and get clear and concise on the problem you solve, the customer you serve, the core product principles, and why it all matters in the world. That strategic clarity will clean up a lot of the chase waste responsible for unsustainable burn rates and other wasted resources.

As V’s actions demonstrate, when markets pullback is the time to invest in your strategy and increase share of voice and mental availability, because the increased Economic Pucker Factor™ (EPF) will cause companies that lack clarity and conviction to retreat and double down on incremental approaches to product positioning. There will be less noise in the market, more demand for positive point of view, and more paid media inventory at more affordable rates.

For B2B, performance data from past recessions compiled by renowned marketing academic Peter Field shows the risk of playing it safe: “Now is a good time for these businesses to be building market share through a balanced mix of brand building and sales activation, assuming they can meet demand…B2B Brand associations created now are likely to bring the greatest sales benefit during the recovery period, precisely when the rewards are biggest. Brand advertising is not about profiting in recession, it is about capitalizing on recovery.”

While Fields’ work focuses on advertising, the overall approach to strategy and building differentiation and awareness applies across the board. The 2022 recession will create winners and claim losers. The difference will be in how leadership approaches it as an opportunity to gain market, or a threat to existing paradigms.

As Adam Harris, founder of Magid & Co. tweeted, “I get that investors want startups to cut burn and ‘survive’ because of how risky the world is. But startups are risks dressed up as businesses. They live if they grow. They die if they are static. Runway isn't the end goal. Don't sacrifice your ambition just to get more of it.”

The nature of strategy is to identify, simplify, and focus on what really matters (Martin Weigel). Never is that more important than when pessimism rules the day (and the market). 

Please enjoy.


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