In this week’s brew:
Inflationary Downturn: Living through the Snowy Winter by Neelendra Nath
Visual Thought of the Week featuring creative by Tracy Tang
The top 1% new ideas - a twitter thread by Sahil Bloom
POST
Inflationary Downturn: Living through the Snowy Winter
In last couple of years, the world has changed and how? It is obviously not news at this point of time that we are in an inflationary downturn, staring right into global food shortage and headed to some sort of ‘post free trade’ political economy. A snowy winter has been proclaimed in bold lettered doomsday headlines. Businesses have been warned of VC pullback, and employees of massive attrition. Food and energy prices are already soaring in most markets. The political environment has also been getting strained, even among the allies and friendly nations. It has not been said in so many words, but the underlying sentiment is definitely of ‘each to their own’. In a nutshell, the doomsday headlines aren’t too off the mark.
But the headlines are not the whole story. We have been here, and if anything, today we are far more equipped to tackle the situation than we were ever before. Make no mistake, there is a winter on the horizon, but we will see the sun on the other side.
Is winter here, and is it snowy?
Yes, unambiguously yes. And one indicator that most effectively have captured the magnitude of the bad weather, is the pull back in the revenue multiples of technology businesses. It has been if not worse, then as bad as in the earlier recessions, during the financial crisis of 2008-09 and the dot com bust of early 2000s.
We have been on the brink of a global recession since the pandemic induced shutdowns across the world. If we seem to just escaped, which we have in past year, it was just an extremely hard effort pushing the inevitable a little further ahead. That further ahead is now. The pandemic and then the war in Ukraine ensured that. Between Chinese lockdown, and the capacity shrinkage everywhere, the supply chain continues to be disrupted.
The bull ride of the last decade is definitely over.
What to make of the doomsday headlines?
When situations like these arrive, the public narrative turn negative very fast. It is indeed hard to keep head high and cool, when the ground seems to be burning. The headline hunters do not help, specially in an environment, where sensational sells more than the rational. The trouble in the market has halted the run we had seen in the past, but what many would like to proclaim, this is not the end of the road.
Differentiate between the progress and growth. While growth is cyclical; progress, especially in technology, almost always move forward. Market slumps impact high risk high cost endeavours dearly in immediate and short – term; might also impede progress a bit but doesn’t change its direction. And, for that reason, despite the headlines predicting doomsday, you should be optimistic about coming times.
What to expect in this period?
If you are in the consumer business, expect a very slowed down adoption of whatever new you have been rolling out in the market. Over past few years, we have seen a surge in offerings which catered to needs higher up on Maslow’s hierarchy. If you are or planning to earn a premium from consumer on account of prestige, ethics and morals; you might want to let go of that premium and try to be price competitive. Rising food and energy price inflation have pushed a lot of consumer to care more for self than the planet. Also, expect them to hold a bit longer on appliances and electronics, lengthening the depreciation & replacement time for existing technology.
From the funding perspective, there is a pullback in VC money, but trend doesn’t seem to be that bad on early and pre-seed investment front. If you are already in post Series – A rounds, then expect the further rounds to dry up. It is unlikely that for coming couple of years we will be seeing alphabets going too far beyond the first row. Revenue multiples will give way to good old DCF, and valuation drops are expected.
With those two things happening, the period is particularly not good for those working at technology startups. Companies will correct their assumptions, business model and growth predictions. They will seek to improve their unit economics and will cut losses. That means there will be attrition, some of which we have already seen.
What businesses should be doing?
A tough capital environment demands strong fundamentals. This is the time for the businesses to go back to the storyboard and cut off the fluff. Reconsider your growth assumptions and organization designs.
In the period of the easy capital companies grew rapidly and to certain extent the cash inflow afforded them some inefficiency. The crunch of talent in the market had spurred a short of renumeration competition which took feet independent of business rationality. It is probably the time to revisit headcount and rationalize company size.
It is also the time to reset your KPIs, identify your true north and hone your business model to deliver on them with highest efficiency achievable. In short, realign your business to deliver on unit economic. Profitability is no longer a metrics which can be kicked too much down the road.
Don’t let a good crisis go waste.
If anything, the history of recessions has shown us that those who put their heads down and rationalized business, have emerged stronger after the market has gotten back to normal. Think of all the business built in the wake of 2008 crisis, the AirBnBs & the Ubers of the world. It is the time to prepare for the disruption that is about to come.
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WEEKLY ROUNDUP
Visual Thought of the Week
Inflationary Downturn: Living through the Snowy Winter