💡 Lessons on operating in a downturn

_lessons-on-operating-in-a-downturn.md

💡 Lessons on operating in a downturn

These are insights shared by various people on operating in a downturn. These notes are incomplete by nature, but I'm sharing this to learn in public.

Contents:

1. 💡 Lessons David Sacks (Craft Ventures)
2. 💡 Lessons from Fred Ehrsam (Paradigm.xyz)
3. 💡 Lessons from Y Combinator

craft-vc-downturn.md

💡Lessons from David Sacks on operating startups in a downturn

🔗 Source: YouTube - Craft Ventures: Operating during a downturn

🌠 Slides: PDF

TLDR

• inflation and interest rate expectations are causing corrections in valuation multiples of public growth stocks
• this trickles down as VCs take their cues from public markets (it's their exit price)
• crossover investors (i.e. not pure VCs) who drove most of the VC liquidity in recent years are largely depleted (e.g. Tiger Global almost fully deployed a $12bn fund raised in less than 6mo last year)
• dot.com crash resulted in layoffs and bankruptcies
• raise if possible, be open to lower valuations (you want to start raising with 9mo of run-way)
• adjust now to ensure 30+ months runway and you're in the "great" column (incl. hiring plans), "act fast"
  • 

Raw notes:

Public market are compressing multiples for growth companies (not necessarily a change in revenues yet)

Indices are heavily weighted towards large caps (Google etc) so they hide the drop in growth stock prices

Public markets are adjusting SaaS multiples down

How does this translate into VC

Ventures markets have basically followed the same trajectory as public markets

Even Tiger Global which raised a $12bn fund last year has already deployed most of that capital. VC funds are also slowing deployment down from 1 to 3 years.

Historical context

What you can do today

Read more about burn multiple by David Sacks: The Burn Multiple

top up if possible, be open to lower valuations.

You really need to raise money with 9 months of runway.

a lot of other things get easier, e.g. hiring. In these markets it gets easier hiring, companies are doing layoffs and hiring less aggressively.

Q&A

The first thing you have to do is basically assess your eligibility to raise (see great, good, danger columns). Merely good numbers may not be enough. If you are in the danger zone you have to adjust your metrics asap. Don't wait too late.

Corrections in public markets are mostly coming multiple compression not necessarily changes in revenues.

anyone that isn't helping you reach product market fit doesn't need to be on the team yet.

paradigm-on-surviving-crypto-cycles.md

💡 Lessons from Paradigm on operating in a downturn

🔗 Source: Surviving Crypto Cycles

Surviving Crypto Cycles

Mar 15, 2021 | Fred Ehrsam

Originally sent as a private note to portfolio companies: PDF

Founders,

In the first 2 months of 2021, crypto prices have already doubled and continue to hit new all-time highs. Bitcoin has crossed $1 trillion in market capitalization. Pixelated crypto art regularly sells for millions. Senators even have lasers for eyes! Euphoria abounds.

As co-founder of Coinbase through 3 prior market cycles (2011, 2013, and 2017), I’ve experienced these euphoric highs before. I’ve also experienced the communal despair and disillusionment that have followed. Below are some observations and learnings I’ve taken from living through these past crypto cycles. I share them with the hope they help you, your team, and your community prepare for whatever is ahead, so that you can avoid potential pitfalls and maximize your chances of success.

While it’s impossible to predict the future, past cycles give us some sense of what to be ready for. They can help us imagine the potential aftermath of this latest wave of euphoria. And they serve as a reminder that bouts of uncertainty and volatility are to be expected given the scale of the opportunity for crypto: a technology that could transform not just money, but the financial system and the internet broadly.

Observations of Past Crypto Cycles A (large) caveat: future cycles will almost certainly look different than past cycles. We may not even be in another cycle! But markets do tend to go through cycles, with key elements that generally repeat themselves. To prepare for future scenarios, it’s worth understanding these elements of cycles past:

• They are highly emotional. Founders, employees, and customers quickly gain or lose large sums of money and have a hard time handling either, completely rationally. Compounding this effect, periods of “hype” have historically been short, while “normal/down” periods have been much longer. At Coinbase, we were riding high in 2013, only to experience 3 long, gut-wrenching down years until 2017. Many employees became dejected and over a third of the company turned over. Being a founder felt incredibly challenging and lonely.
• They attract massive public attention. The media want to talk to you. Family members ask you to explain what's going on. Friends press for investment advice. Companies or protocols are touted as “going to the moon” one day, only to have their obituaries written the next.
• They strengthen the ecosystem. Crypto has exited every cycle stronger than it entered. This is true across all key metrics: entrepreneurial and developer activity, academic research, infrastructural maturity, corporate adoption, public awareness, and simplistic price, amongst others. Zooming out, cycles can be reframed as volatile periods around a relatively consistent adoption curve. Despite the emotional gyrations, at Coinbase we came out of each cycle in better shape, by every metric and by many multiples, than at the end of the previous cycle.
• They wash out weak companies. While a rising tide lifts all boats in upcycles, poor fundamentals and flawed strategies are ruthlessly exposed in downcycles. Many fail to survive. Those who do have the tremendous advantage of having built while others perished and typically thrive when the next upcycle arrives.
• They draw regulatory attention. With public attention comes regulatory attention. At Coinbase we spared no expense in figuring out our regulatory strategy before regulators came knocking.
• They push infrastructure to the limit. This is true of companies, crypto-native apps, and the blockchains themselves. Exchanges go offline. Transaction fees rise 10-100x. At Coinbase we ran out of working capital to support the massive influx of customer demand in 2013, forcing us to pause the customers’ ability to buy -- not the best experience amidst the largest influx of customers we had ever seen!

Creating Resilience to Cycles It’s challenging to predict the specifics of any cycle, and thus wise to simply be resilient to them. The most important thing you can do in times of euphoria or despair is think for yourself. But sometimes the experience of others helps in that thought process. So, with that caveat, here is what I've found to be effective in creating resilience during cycles:

• Lead by example. Cycles draw focus to the short term. Remaining focused on the mission gives your team and community a fighting chance to do the same.
• Keep the main thing the main thing. Since it feels like everything is working in boom times, it's tempting to want to do everything. Maintain a high bar for changing or expanding your scope. The same idea is true in a downcycle. The crypto graveyard is littered with the remains of companies who pivoted away from their core mission in a downcycle, only to watch with anguish as their idea started to work in the next upcycle. In 2015, a Coinbase board member suggested we start constructing private blockchains for banks because it offered a short term cash opportunity -- a pivot we are glad we avoided as off-mission and temporary.
• Make a stress test checklist. Assume your product sees 10-100x its normal use. What breaks? Ask this of every team lead. At Coinbase, we attempted to estimate customer support caseloads, cash burn rate, and server load ahead of time -- and we still undershot the 10x+ load spikes at the peak of cycles.
• Consider fundraising. Ask yourself: "If crypto goes through a protracted down cycle, do I have enough cash to survive?" Cash that is easy to come by today may not be tomorrow. At Coinbase, we found ourselves running low on cash shortly after 2013-14. Luckily, we decided to fundraise before crypto was in serious winter; had we not, we may not have survived until the 2017 spring. When we completed a large fundraise, we put half of it in a separate bank account to create friction around drawing down our rainy day fund. If your personal bank account is near 0, consider taking a small, non-life-changing amount off the table. It may help you sleep better at night and maintain focus on achieving the most ambitious version of your mission.
• Caution newcomers. Remind recruits that they should prepare themselves for long down periods if they join your company. Coinbase had countless employees join during the highs of 2013-14 thinking crypto was on a straight line to the moon, only to become dismayed and leave when crypto "crashed" before picking up again in 2017. Prepare your customers and community as you prepare your team. When a down cycle starts, you can quickly go from being celebrated as a visionary leader to being crucified as a scam artist.
• Repeat your message multiple times, through multiple channels, from multiple people. It is harder for messages to be heard during noisy, heady times.
• Prepare yourself for a marathon, not a sprint. So many founders flame out. Stay healthy and allow yourself to take time to clear your head. Challenging situations become easier to deal with the more you have experienced them. Give yourself the opportunity to build that experience.

Forging Ahead Foundational technology breakthroughs carry both great opportunity and great uncertainty, the two key ingredients in the recipe for cycles. It shouldn’t be a surprise that crypto would be a more extreme example as it begins to redefine multiple large, global markets: money, financial services, and the internet itself. Cycles are neither good nor bad; they are natural. Peak euphoria provides the opportunity for the world to dream about the future. Rock-bottom despair forces practicality and clarity. When things are good, they're never as good as they seem; when things are bad, they're never as bad as they seem. I do not know how the current cycle will play out, or even that it is a cycle at all. I do know that every past cycle has left crypto stronger than where it started. Times when things feel like they are going well are the times to build resiliency and set yourself up for success no matter what the future holds. I hope you embrace that opportunity.

As always, we are here to support you. Fred Ehrsam and the Paradigm team

yc-advice-to-founders.md

💡 Lessons from YC operating in a downturn

🔗 Source: YC advises founders to ‘plan for the worst’ amid market teardown

Greetings YC Founders,

During this week we’ve done office hours with a large number of YC companies. They reached out to ask whether they should change their plans around spending, runway, hiring, and funding rounds based on the current state of public markets. What we’ve told them is that economic downturns often become huge opportunities for the founders who quickly change their mindset, plan ahead, and make sure their company survives.

Here are some thoughts to consider when making your plans:

1. No one can predict how bad the economy will get, but things don’t look good.
2. The safe move is to plan for the worst. If the current situation is as bad as the last two economic downturns, the best way to prepare is to cut costs and extend your runway within the next 30 days. Your goal should be to get to Default Alive.
3. If you don’t have the runway to reach default alive and your existing investors or new investors are willing to give you more money right now (even on the same terms as your last round) you should strongly consider taking it.
4. Regardless of your ability to fundraise, it’s your responsibility to ensure your company will survive if you cannot raise money for the next 24 months.
5. Understand that the poor public market performance of tech companies significantly impacts VC investing. VCs will have a much harder time raising money and their LPs will expect more investment discipline. As a result, during economic downturns even the top tier VC funds with a lot of money slow down their deployment of capital (lesser funds often stop investing or die). This causes less competition between funds for deals which results in lower valuations, lower round sizes, and many fewer deals completed. In these situations, investors also reserve more capital to backstop their best performing companies, which further reduces the number of new financings. This slow down will have a disproportionate impact on international companies, asset heavy companies, low margin companies, hardtech, and other companies with high burn and long time to revenue. Note that the numbers of meetings investors take don’t decrease in proportion to the reduction in total investment. It’s easy to be fooled into thinking a fund is actively investing when it is not.
6. For those of you who have started your company within the last 5 years, question what you believe to be the normal fundraising environment. Your fundraising experience was most likely not normal and future fundraises will be much more difficult.
7. If you are post Series A and pre-product market fit, don’t expect another round to happen at all until you have obviously hit product market fit. If you are pre-series A, the Series A Milestones we publish here might even turn out to be a bit too low.
8. If your plan is to raise money in the next 6-12 months, you might be raising at the peak of the downturn. Remember that your chances of success are extremely low even if your company is doing well. We recommend you change your plan.
9. Remember that many of your competitors will not plan well, maintain high burn, and only figure out they are screwed when they try to raise their next round. You can often pick up significant market share in an economic downturn by just staying alive.
10. For more thoughts watch this video we’ve created: Save Your Startup during an Economic Downturn

Best, YC

PS: If for whatever reason you don’t think this message applies to your company or you are going to need someone to tell you this in person to believe it… please reassess your beliefs on a monthly basis to make sure you don’t drive your company off a cliff. Also, remember you can always reach out to your group partners.

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