Finally, The Downturn Has Arrived!

A crucial moment is upon all JP founders and their startups

May 16, 2022

The downturn many of us in JP have been hoping for such is finally here. Most high growth tech stocks are down > 60%, LP’s are cutting off the hose of cash to VC’s, and a sudden squeeze in valuations across the board. This downturn doesn’t look like the previous two, though:

The Dot.Com crash of 2000-20002 (2.5-3yrs) was fueled by the bull market of the late 90’s, and a large speculation around tech companies, as their valuations were solely being determined on the number of eyeballs they had, not on any dollar figures.
The Great Recession of 2008 (~ 1.5yrs) was a bubble that burst, tied to assets in the real-estate market. Forget about tech, the entire economy fell into shambles.
Now, the Post-Covid Recession is upon us. High growth companies in tech are most affected due to the last decade of pie-in-the-sky valuations on low interest rates, of which are now rising.
Note: for a deeper analysis, highly recommend a video by David Sacks of Craft.

Startups are going through waves of layoffs, a decline in customer acquisition spend, a shift in priorities from growth to sustainable business models, a massive pullback in VC’s cutting checks, and yet a higher opportunity amongst us. Let’s dive into each one of these for a breakdown:

Layoffs

Fresh off massive funding rounds, most startups couldn't hire fast enough. The war for talent was real, and the benefits companies were throwing in to woo engineers their way began, in our POV, to get out of hand. The days of not having to go into the office everyday, and instead get an Airbnb at a castle in Acapulco, Mexico, are over. In order to build something great, you have to want to roll your sleeves up and do the work. The jury is still out on building real culture via Zoom and distributed teams. The camaraderie, productivity, and “cult-like atmosphere” in-office dynamics create simply cannot be replaced fully by remote work & tools. Many founders today seem to balk at that notion, hence another reason we’re here today. However, there is a bright spot in all of this; there’s a plethora of great talent that’s freely flowing around the market looking for a new place to work. The next 2-3 years offer a major opportunity for startups to bolster their teams with A-grade players who helped their previous venture-backed org scale from zero to hero. Get after it, founders!

Profit > Growth

Ugh, what a 20th century thing, right? The act of actually making money from the goods and services your provide to the market has been back of mind for most founders in the last decade. In fact, most of the darlings that have gone public in the last few years are still losing money (Airbnb, DoorDash, Uber, etc). VC’s, IE the market, is now demanding startups show strong GPM’s, a track towards profitability, and even a short term strategy that gets you to break even (even though this is historically very difficult to do). Lastly, the days of buying artificial growth on Facebook, Amazon, and Google at no end are finally over. You have to actually prove you can get customers at a sustainable, affordable rate.

Huge Pullback in VC

Tiger Global just racked up $17B in hedge fund losses, and nearly depleted its VC fund, only after raising it in November of 2021. That’s only 7 months ago! Meanwhile Softbank said, “Hold my beer!”. Their Vision Fund just recorded a record $27B loss. Yeah, you read that right; $27B. On top of mounting losses at venture firms, many partners have now announced they will be deploying their fund across the typical 3yr timeframe, not what was not an absurd 12 month window. This means far fewer companies get funded, and those that do must have a decacorn or more in the cards. FYI, at current market multiples, that means the bar for late stage companies to get funded is a minimum of doing > $1B in ARR. Now that’s rare air. Furthermore, the likelihood of seeing high venture funds of > $1B is slim to none. Here’s why:

A VC usually ends up with ~ 10% when an early stage portfolio company goes through a liquidation event (IPO / M&A).
Just to break even on a 0% return, they need to hit 1 decacorn (startup with a valuation of > $10B), and then at least one more (!!) to return the typical 2.3x to their LP’s.
The likelihood of hitting 2-3 decacorns for most firms every 10 years is a long shot. This will lead to the death of many VC firms, as well as smaller funds that are within reach of strong returns.

The Big Opportunity Amongst The Carnage

This drought will likely drag for 1.5-3yrs, given the length of other sharp pullbacks we mention at the top of the blog. So, here’s a high level playbook to succeed in these choppy waters:

While it’s such a cliche, actually build something people want. Build an incredible product with novel technology, cutting edge design, and a value add of making the problem you’re solving better, faster, and/or cheaper for the market.
Stack up revenue and new customers like it’s no one’s business. ARR is king here. For early stage startups in the pre-seed to Series A stage, raising on minimal to no revenue is a death wish. Where-as raising on strong ARR (> $500k) with a growth rate of > 2x will give you immense leverage and get you funded without issue.
Ensure your current runway is enough to get you the results needed for the next round. Do whatever you can to extend it, even if it requires you to be ruthless. Not hitting necessary metrics for the next stage of funding could very well mean you simply don’t get anything.
Close, if not already break even & profitable!
Just build a great business. Great team, game changing product, rich financials, open & huge market, and timing. Simple, yet hard.

Remember, during downturns like this are when the next mega caps are being started. Notably, Airbnb, DropBox, PayPal, Amazon, eBay, Uber and more were all started in downturns. In fact, it's also one of the best times to start because of significantly less competition for customers & VC funding, wide open markets, plenty of great talent available, and more. Legacy industries like manufacturing, hospitality, finance, infrastructure and more are the next decades opportunity. Plant yourself on those rails, and go build.

We’ve all been waiting for the filth & status seeking monkeys in startups to be washed out, and here we are. So, it’s time to execute. See y’all in 2030.

AL