The problem isn't that there's a recession coming, the problem is that there hasn't been one for a long long time.
Evolution had the same problem actually. Due to the way it works it took absolutely ages to evolve a way to recycle lignin, a problem that is now giving us issues millions of years after.
We're supposed to be smart though. If we'd not been scared of an occasional recession cleaning out various industries, we'd have more resilient businesses.
Now what we've bred is a generation of founders and investors that only know how to apply max pedal. Have a good idea? Eat the world, get a monopoly, exploit it. That's the only plan for a large number of currently famous firms.
That other plan, where you maybe grow into a sensible size and dominate a local market is what we really need if there's going to be an actual market economy.
> The problem isn't that there's a recession coming, the problem is that there hasn't been one for a long long time
Like forest fires in the southwest USA, you need one occasionally to clear out the fallen dead materials, or in our discussion the unprofitable zombie corporations.
>" The problem isn't that there's a recession coming, the problem is that there hasn't been one for a long long time."
I agree with you, but the persistently low interest rates have also fueled malinvestment and speculation on relatively low-potential, high-risk, long term investments.
This even spreads to technical architecture, many tech teams stopped exercising fiscal discipline in how they design services. This emerges in tiny low traffic micro-services, 4 teams building the same service, un-neccessary data allowed to accumulate in expensive data0stores for a rainy day and more.
When some of these startups need to layoff, I'm curious if they'll actually be able to maintain KTLO operations on their reduced staffs without making large product cuts.
Interesting! When I was running a VC-backed unprofitable startup, we chose speed over financial discipline. We built an infra that wasn't optimized to reduce costs. When we switched to profitability, we had to dramatically change our development practices to maintain the same app with fewer people and less code.
Now I actually wonder if there would be room for some type of consulting in cost optimization field. Someone coming in and making inventory of data and services run and then recommending how to save on running costs and so on...
As I recall, there was a market for that back in the 2000s to help determine what was salvageable from a dead/dying company. The business would probably be much larger and more complex today given that 3/4 of the problem will be disentangling what's actually needed vs. what's nice to have between 10+ teams which are no longer around.
recessions are usually jolly good times for all sorts of restructuring consultants and lawyers. good news for MBA students, they can ditch their Python classes, it's back to cost cutting /s
Yeah I didn't go into details but that's basically what I meant. Low rates are the reason we haven't had a clear-out. You need the occasional minor crisis as a check on crazy investments. It's also a time for your Madoffs to be revealed, rather than be given enough time to find a real business model and brush away issues. It's not even that bad if some properly well run firms are killed, if they're doing something useful they'll be reinvented.
I don't understand why this is a "but". That's the primary reason we haven't had a recession for so long. We 100% would have had one in late 2018 if there was no Powell pivot.
since you're so outspoken about it, you may be interested in learning that fractional reserves is not how banking works (someone with an Austrian econ bent might be tempted to say it's actually worse than that):
> Central bankers created a gigantic misallocation of resources - as they have always done since the dawn of time.
Lmao, we came out of a once-in-a-century pandemic with nothing more than a couple scratches and minor inflation and you find a way to complain? The real misallocation would have been seeing profitable, healthy businesses die in the months following March 2020 - has everyone just forgotten the mass panic until the Fed stepped in? A couple overconfident hedge funds and bad SPACs who have already been brought back down to earth is a very small price to pay (I paid very little since I did not invest in meme stonks).
> than a couple scratches and minor inflation and you find a way to complain?
it had very big bill attached: +6T national debt, and maybe several dozens T funneled through cheap loans with twice inflated stocks and real estate, rich became much richer, and poor are screwed dramatically in exchange to $600 stimulus check.
Of course he's cherry-picking "pandemic businesses". A lot of these businesses that he uses as examples are actually bad businesses, pandemic or not. There are plenty of great enterprise SAAS businesses that will have a slight slowdown in revenue growth for a while, but will more than thrive in the long term.
These bloggers always act like everything is binary. "It's a shite business or a great one."
> Ok, what about the silver lining?
>
> Good business will have the time of their life. Fast-growing, profitable startups will have the opportunity to buy out struggling competitors, invest in an environment where CAC will decrease, and hire people with fair compensation packages. Startups with positive cash flows are the cool kids again - until the next exuberance of course.
He nails the fundamentally poor businesses, but points out how it is a prime opportunity for sound businesses.
YEP. We're very much in this camp. We cooled on VC for the last 2-3 years just to work through deep tech + business fundamentals in the graph space with good customers. That was very much against the grain because adjacent companies (graph DBs, while we are compute-tier graph intelligence) were raising megarounds to do self-similar things with little effective relative differentiation from the perspective of customers. By us instead focusing on things like category creation, profitability, & ease of use, each customer & hire now means growing the pie, not digging the hole deeper. That included some very unsexy things like valuing solutions engineers to work closely with customers to truly tackle their problems.
Maybe a good time to say: That also means we are now getting way more enterprise/gov customers than ability to support them, so if you are into rapids.ai (gpu dataframes), dask, seaborn, streamlit, igraph, graph neural nets, etc. esp for tricky core graph problems like detecting fraud, security breaches, mapping supply chains, ... plz email build@graphistry.com :)
I worked at companies that survived both the 2008 and 2001 crashes, and indeed perhaps were overall helped by those crashes. Nobody was having "the time of their life." It may be true that businesses with good underlying economics are ultimately helped by these crashes, but they're tense, uncomfortable experiences all around.
Agree. It's not enjoyable to work in a bad macro environment. My point is that companies that have significant cash flows won't have to lay off employees and might even continue to hire, acquire businesses and consolidate their business. They will expand, not contract like the rest of the market.
Sure, if you're working at Google in 2000, you're fine. However, cash flow isn't enough, and a lot of tech is very cyclical. If a business has already hired to sustain growth which doesn't appear, they will lay people off. Advertising is leveraged on the state of the economy, and in a contraction will shrink more than goods sales, so a company relying on it will lay people off or have some very ugly financials. If software is licensed by head or usage and all your customers are shrinking, your revenue will be directly impacted. It's very hard to forecast these effects, but so much of tech revenue is fueled by advertising, consumer discretionary spending, and venture capital [1] that assuming a business cycle contraction is irrelevant strikes me as incredibly foolish.
A fantastic and profitable business over the long term can be affected by macroeconomic effects.
1. Bridgewater estimates 10% of AMZN/GOOG/FB revenue, 44 billion/year, comes from startups. Startup revenue from other startups will likely be much higher on average.
One thing that I think works against businesses expanding right now -- even profitable businesses -- is that with it having been like 12+ years since anyone worked in a bad macro environment is that nobody really knows how their company behaves in a recession. Like, sure, you're profitable right now, but right now we're not in a recession, the bad times are pretty limited to just the tech sector. If the whole economy does go into recession, do your customers vanish on you? Even if you were around in 2008, your business is probably different now in 2022, and you don't really know what the pressures are going to be like.
In this environment, I think lots of companies that have fundamentally sound businesses are still going to be very conservative.
(Not disagreeing with you, exactly, just adding more thoughts and some context for why it's not enjoyable to work in a bad macro even if your business is ultimately the healthier for it.)
> acquire businesses and consolidate their business. They will expand, not contract like the rest of the market.
exactly, downturns are an opportunity for the big players to "buy cheap", expand their marketshare, then wait things out and "sell dear" when things get hot again
Hey, thanks for your comment! I'm not cherry-picking pandemic businesses. Monday, Lemonade, Oscar, Facebook, and Datadog aren't "pandemic businesses." All tech stocks took a hit and suffered from the reversion to the mean. I agree that average businesses that took off thanks to the "pandemic effect" will continue to decline while good SaaS businesses with significant cash flows will thrive long-term.
A great business as a fair price is always a good deal. Time to buy.
> The pundits lecture that it was caused by an acceleration of the use of software after covid
It’s frustrating seeing this straw man BS come up here. Everyone (on HN as well as at large) knew it was the Fed’s historic low interest rates that meant the easy money..
Thanks for your comment. IMO, a lot of people thought, and still think, that the appreciation of stocks was due to an acceleration of the penetration of software. I think it's a valid viewpoint. Gartner expects public cloud spending to rise by 20% next year to $500 Billion. Even AWS, Azure, and Google Cloud continue to grow by more than 40%.
The thing I wonder about is what does all these startups ARR look like when everyone's budget dries up and/or there are no startups to buy your startups neat(but not needed) software.
A word processor and spreadsheet is necessary. Everything else is optional.
The question isn't "is it neat?" The question is does the money expended save more than if a human performed the equivalent labor? Does Confluence and Jira save more money than having a human librarian and project manager manually tracking the status of projects?
There will always be room for "neat" software that replaces necessary human labor costs. If you can allow a team of 5 to do what used to take a team of 10, you will be able to sell that for the equivalent of the fully loaded cost of 3-4 people.
Do that for enough people and you have a successful business.
I'm talking about second order effects. if the company you no longer saved money for don't have a business need to slash money left and right you may have a problem. If you have software related to mortgage companies you might have a problem in this market.
Revenue isn't profit, you can have higher revenue if you spend 100 dollars to get 90 dollar return, this is the problem right now much companies allow to spend well over what they should, maybe bolt should be a 40 employes companies not 900(linkedin), and a marketing budget of 10 millions not 100 million (no data here)
Yes! If you were raising at 100x ARR it means that $1 of ARR generated $100 of market value. In that sense, it made sense to burn $100 to acquire $1 of revenue. Of course, when the reversion to the mean hit and companies trade at 7x ARR, it doesn't make sense to spend that much. Unfortunately, most startups won't be able to adapt their expenses to this new environment.
Interesting take! I agree that we will all reevaluate the software we are paying for and get rid of "nice to have". If companies fire employees in means software businesses will sell fewer "seats" per customer. The average revenue per customer might decline.
Here's the thing: Finding a solution to a problem, then making it into a business that is sustainable (read: had money influx) during dire times (read: economic recession), is a very good and healthy beginning for your start-up.
Doing startups when money is sloshing around, often leads to zombie companies that are on life support.
The panic in startupland stems from the fact that most of them are cut off from said life support.
One general concern that's bubbled around the FB's and SaaS's of the world. It's unclear how much of these very sound businesses revenue is due to profligate spending by startups. Smart SaaS businesses may find their top customers vanishing. It's easier to right size a smart business than a bad business, but we may see a (small) contagion.
It is obviously, very much company by company thing. However, I've seen some analyses that put it at between 35-50% for typical SasS (i.e., they are selling to each other and other start-ups). To me, if true, that seems like rough sledding for many firms in a funding down turn.
Is Zoom really a "startup?" It seems to me a better title would be "panic in Greedland." This is all just greed and FOMO, with the latest targets being tech companies and crypto.
Zoom is a 10 year old public company with a 30 billion dollar market cap and over 7000 employees. It is not a "startup" by any meaningful definition of the word.
I think the way many people get schadenfreude watching crypto crash, I get equally watching startups crash. So many people were loudly proclaiming what geniuses they were for understanding that all the mattered were network effects and hyper growth and that cashflow was for suckers. And it's not that there aren't cases where that's a valid model but it was used in so many obviously stupid cases. So, just honestly kind of enjoyable to watch it crash and burn.
> Good business will have the time of their life. Fast-growing, profitable startups will have the opportunity to buy out struggling competitors, invest in an environment where CAC will decrease, and hire people with fair compensation packages.
What will qualify as "fast-growing" in this climate?
They are certainly growing. But not much profits in many cases. The real question is can they generate a lot of cash once they are out of hyper growth mode? Or will they just never generate much cash flow ever?
I have been wondering this lately (naive question I am sure): is it possible for a company to hit a stable financial point and just stay there? Or is the only way to sustain a company in the US economy to always be growing?
Evolution had the same problem actually. Due to the way it works it took absolutely ages to evolve a way to recycle lignin, a problem that is now giving us issues millions of years after.
We're supposed to be smart though. If we'd not been scared of an occasional recession cleaning out various industries, we'd have more resilient businesses.
Now what we've bred is a generation of founders and investors that only know how to apply max pedal. Have a good idea? Eat the world, get a monopoly, exploit it. That's the only plan for a large number of currently famous firms.
That other plan, where you maybe grow into a sensible size and dominate a local market is what we really need if there's going to be an actual market economy.