🤯 Ahhh, the market hurts!

👋🏼 Hello Novel Community,

Welcome back to another weekly edition of 🚀 The Journey Newsletter.

Today, we’re going to change it up a bit, covering a topic outside of marketing, but broadly relevant. Keep reading for my take on the macro environment and its impact on startups. Enjoy!

- Joe

TL;DR

We’re experiencing the 3rd largest Nasdaq downturn in 20 years, and startups feel it.

• The pandemic, government stimuli, supply chain issues, war, and inflation (among other factors) have led to a recent 28% drop in the market.

• More than half of software and internet companies are trading below pre-pandemic prices.

• Investment focus is shifting to companies with stronger business models and profitability.

✍🏽 History repeats itself

If you’re reading this, the years 2000 and 2008 probably bring some PTSD...

In 2000, the Nasdaq dropped 77% after the bursting of the “dotcom bubble”. In short, between 1995 and 2000, the market surged 500% caused by inflated business valuations that poorly represented their true financial stability. The market corrected.

Fast forward 8 years and another crash occurred. The market dropped 57% due to loose lending practices for subprime mortgages. Lenders offered home loans to individuals with poor credit, the bubble popped, and borrowers were unable to make payments creating a domino effect that became “The Great Recession”.

So what the f*!k is happening right now?

While oversimplified, 5 notable events stirred the financial pot: The pandemic, government stimuli, supply chain issues, war, and inflation.

1. The Pandemic - We’re all sick of the word “unprecedented”, but it's hard to find a more fitting adjective for Covid-19. The virus made its way to the states in early 2020, and uncertainty and panic ensued, impacting everything.

2. Government stimuli - In response to the pandemic, governments around the world took drastic fiscal measures including monetary stimulus, to fill a massive demand hole. Swift action prevented an immediate recession, but had long-term consequences.

3. Supply chain issues - Money printing during the pandemic increased consumer spending, most notably in the e-commerce space. This coupled with the full economic reopening of the world caused bottlenecks throughout the supply chain as demand caused process overwhelm.

4. War - Wars always cause market instability, but the war in Ukraine has specifically exacerbated supply chain complexities and commodity prices, like Oil.

5. Inflation - Growing during the pandemic, war, and supply chain issues, inflation further accelerated in 2022 and caused prices to increase across the board, leading the Federal Reserve to raise interest rates for the first time in several years.

🧠 How does this impact the world of startups?

The 3 year period leading up to 2022 was a Venture Capital bubble. Huh? Investors were overlooking fundamental business metrics, and tunneling their view around size of founder vision, and hyper-growth at all costs. This mindset, coupled with unparalleled access to dry powder (investable funds), made cash cheap. Startup valuations were uncharacteristically high.

Following the downturn in the market, Q2 2022 initiated an investor reset. VC’s returned to “fundamentals”, shifting their criteria to focus on companies that produce more near-term certainty like strong revenue growth, efficient margins, and clear paths to profitability. This drastic change decreased investment cadence, and made capital more expensive for startups raising funds.

“If the world outside your company is changing faster than the world inside your company, the end is near.” - Jack Welch

🎒 How to respond as a startup founder.

1. Stay positive - Apple, Microsoft, Airbnb, Uber, Groupon, Slack, and MANY more unicorns were founded during recessions. Market resets force businesses to focus on areas that result in strong, long-term business fundamentals. You may very well be the Unicorn after the story unfolds!

2. Adaptability - Change at this scale may call for an equally drastic change in your mindset. You were raising capital on a $20M valuation? Be open to cutting it in half. Had plans to hire an additional designer? Consider pulling down the job description. The faster you can humble yourself, accept, and adapt, the better off you’ll be.

3. Be a Cockroach - The name of the game is “Survive”. Take the necessary time to understand your business costs intimately, and be prudent in minimizing expenses to maximize runway. This may require cutting non-essential technology costs/services as well as lowering your headcount. Difficult decisions and conversations are inevitable.

4. Love the Customer - Once you’ve extended your runway, channel your energy toward your customers. Their love of your product or service will ultimately determine your future. Tighten up your understanding of the specific problems you are solving for your most loyal customer base. Then, double down on being the best at what you do best :).

Wrapping up this week's newsletter, I'll leave you with some wise words from a beloved icon...

“This too shall pass” - Tom Hanks

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See you next Thursday!

-Joe