Someday, there will be an upturn.
The 2000 downturn lasted about 3 years. The 2008 downturn was about 14 months in the technology sector. The current downturn started approximately Q1 2022, so we’re almost 2 years in.
But the markets will come back. The gut punches will stop coming. Others will realize it slowly. But if you can be well prepared and are the first to take steps forward, you will have a dramatic advantage over your competitors.
These first steps forward matter so much because of a mathematical principle in networks called preferential attachment. In any network, the nodes that are ahead get further ahead. It’s also called The Matthew Effect: “For to every one who has, will more be given…but from him who has not, even what he has will be taken away.”
Your company exists within the broad network of the economy and the sub-network of your competition and customers.
Whoever starts ahead, gets further ahead. Your job is to get two steps ahead of everyone. Then your lead will compound.
Here’s a framework for how you do it.
You need to move your mindset from the appropriate mindset of play-not-to-lose, to play-to-win.
At the beginning of the downturn, the best founders shifted their mindsets in a few weeks to get tough, get frugal, do layoffs quickly and with grace, and plan for the worst.
Most founders, however, painfully fought shifting their mindsets. Some resisted for 18 months. They didn’t want to shift their mindset from infinite capital and paper profits. Many didn’t want to get tough with their team or themselves.
The same thing will happen when markets thaw and an upswing begins.
The best founders will shift their mindsets just ahead of the new information. They will prepare for the upswing. They will move into a play-to-win mindset. A play-to-dominate mindset.
Shake the money out of the tree before others do.
When an upturn comes, everyone will recognize it and try to raise capital then. If you are capitalized a bit ahead, you’ll be a step ahead.
Pound the pavement with VCs now. Don’t be as sensitive to valuation, show the best metrics, paint the picture of good times ahead, and explain why you’re raising now – to get ahead, to dominate.
You have to move the investor to join you in the play-to-win mindset.
Magical thinking about what valuation you COULD have gotten in 2021 will only hurt you. No one is coming to save you. Just get yourself capitalized with steady, long term investors at the market price, and give yourself a chance to dominate in an upswing. What matters more is whether your business is worth $10M or $1 billion, not if you have a few more percent because you squeezed out a little higher valuation on one of your rounds of funding.
And be prepared that fundraisings at the end of a downturn are still in a downturn, so they will still be more complex and take longer than you hoped.
Here’s perhaps the hardest and most valuable mental gymnastics you can do as a Founder: staying really frugal while playing-to-win.
If you stay frugal through a boom you win twice.
Most Founders think that just building a great product will spark product-market-fit if the market rebounds. That rarely happens.
You’re staying frugal, and, if they’re smart, so are your customers. If you, or anyone you know, has lived through economic depressions, hardships, etc. you’ll notice frugality habits that linger. A famine-proof pantry. A drawer filled with carefully folded holiday wrapping paper. Canceled subscriptions that never renew. A newfound preference for DIY.
These habits last decades beyond the initial event.
And even once spending does rebound, it often looks different than it did pre-downturn. After the 2008 downturn, many consumers stuck with cheaper brands, or became more interested in more basic products compared to bells and whistles.
Since your customers will linger in their own frugal mentality, the answer to this problem for your startup is to get more commercial.
Make sales part of your DNA now, while others aren’t thinking as hard about it.
You do this by knowing the impact of every click, every ad, and every piece of language. You do this by using AI to make your sales team better, faster, more efficient. And you build the customer connections, before everyone else comes knocking.
This pays off. I saw it in 2010 when we had an app on MySpace and they shut down their MySpace app store. Think of it as a downturn in our little market. We sat in MySpace’s office for 4 hours until the head of the app store came out. We talked to him, and he ended up putting up our app 48 hours before anyone else’s. That put us a step ahead. By the time our competitors got up, our viral loop was already running. Our preferred attachment in the network was already building. Our small advantage then compounded every day, and within three weeks, we dominated the market.
There are some channels right now that are probably underpriced because of the downturn – everyone has cut their marketing spend, and few are leaning in.
If you’re one of the first to hunt down the underpriced channels, your CAC will be significantly lower. You’ll be able to cut really good deals if you’re coming to the channels when few others are.
Your culture has probably been damaged. If not by layoffs, then by overall downturn malaise. With this leanest possible team, now is the time to review your culture and fix it. Get it prepared for the upswing. You’re going to need to move fast in an upswing if you are to take advantage of your small lead, and only good cultures move fast.
Review what your team thinks the culture is. Review your values, and figure out what to “put on the wall.” Decide what words you use and don’t use. Create mechanisms with teeth, dashboards, and awards to enforce these cultural elements. Get everyone focused on metrics, and speed, speed above all else.
You’re doing this now because the people still in the room during the downturn are going to be the champions of your culture from here on out. Everyone else you hire during the upswing will form-fit themselves to that culture.
You used to be able to get away with hiring specialists. Now, market conditions and AI have changed this – probably permanently. Companies are going to be smaller, and the people you hire will be decathletes, doing lots of tasks at a high level.
With generative AI, decathletes could replace entire departments. AI co-pilots will turn writers into data scientists, and data scientists into graphic designers, with little training.
This is the direction the whole startup world is moving. There are currently courses at Stanford where students are expected to turn in final projects outside their area of expertise, with AI as a guide. Engineers are expected to do full marketing campaigns. Designers are expected to code apps from scratch.
Be the first CEO to go approach the supertalent who is disillusioned, or has already left where they are, or is still in the husk of a dried out company that was overfunded during the boom.
It’s like getting a first round pick in the NBA draft, while everyone else is waiting for the second round.
Hopefully, you’ve learned your lesson in this downturn. Hopefully you’ve had a permanent shift to staying frugal, staying serious, and not believing your own BS.
Don’t let your ego and hubris get the best of you in the next upturn. Keep your back against the wall.
Save this essay. After you raise your big next round, reread this essay when people come up and ask why you’re still being so skimpy on lunch, or still using a door as your desk. When you have all the people around you asking you to loosen up, don’t. Keep the lessons alive from the last two years.
Prepare for the upturn, get a step ahead and adopt the play-to-dominate mindset. That advantage of being a few months early can compound over weeks and months into a permanent defensibility, and the chance to build something that matters.
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