Is Winter coming for startups?

11 years ago Sequoia released the “RIP Good Times” Presentation. With the financial crisis meltdown, it was clear that “winter is coming” for startups.

Even though VCs are sitting on large cash reserves, many economists indicate a slowdown in 2020, so it’s prudent to prepare for winter.

So, is if it’s business as usual and the markets continue to go up is there even a reason to change anything? Like in the Ant and the Grasshopper fable, I would encourage entrepreneurs to keep chugging forward, but there are enough indicators to take a breath and think about what if winter comes early.

While VC investing is at an all time high, and funds remain with plenty of dry powder, take into account that capital may not always be so available. Brad Feld, recently advised funds to ‘slow down’:

“If you talk to LPs today, there is a lot of anxiety about the increased pace at which funds have been deployed, and there has been a two year cycle in the last kind of two iterations of this. I think you’re going to start seeing that stretch back out to three years”.

Brad Feld, Foundry Group

As capital becomes less available and upticks in valuation take longer to prove (unlike what Scott Galloway calls the ‘Softbank effect‘ of multiplying valuations in the billions), controlling cash and tightening the belt might become necessary. VC backed startups value growth above all else (search for “blitzscaling”), but as the recent IPOs showed (Uber, Peloton, WeWork’s prospectus, etc), business fundamentals, and margins in particular, say more about the health of the business than VC-dollar fuelled user growth (see Fred Wilson’s seminal post, The Great Public Market Reckoning):

If the product is software and thus can produce software gross margins (75% or greater), then it should be valued as a software company.

If the product is something else and cannot produce software gross margins then it needs to be valued like other similar businesses with similar margins, but maybe at some premium to recognize the leverage it can get through software.

Fred Wilson, AVC blog
What is Blitzscaling? growth that makes you feel ‘uncomfortable’.

There are also positives for companies starting up in a recession, as it’s easier to secure talent (Corporates, Startups, Universities) and the opportunity costs to embarking on a startup are lower. Has anything changed since 2008? What would a recession look like for startups in 2020? What would you add/remove from Sequoia’s list?

The 7 habits of highly effective people… in startups

I’ve just finished re-reading “The 7 Habits of Highly Effective People: Powerful Lessons in Personal Change”, a bestseller written by Stephen R. Covey 30 years ago; it might be old, but it is still extremely relevant.

Covey (1932-2012), was a business school professor and internationally respected authority on leadership. In the book, he walks the reader through a basic principle: true success encompasses a balance of personal and professional effectiveness. Most of the examples in the book are from Covey’s personal life and consulting experience, but I found that most of the lessons can be easily applied to startups, which are a reflection of the people behind it.

The 7 Habits of Highly Effective Startups

Before you begin: To accomplish real change, before diving in to the 7 habits, your company will need to go through what Covey describes as a “paradigm shift”– mainly a change in perception and interpretation of how the world works. The key for this change is proactivity: Setting priorities, understanding your productivity, time management and positive thinking, but this is more than just a primer. You’ll want to internalize some of the lessons. The first three habits are about self-mastery. Habits 4-7 are about interdependence, and working well with others.

Habit #1: Be Proactive.

The author defines proactivity as taking responsibility for every aspect of your life and having the power not to be affected by circumstances.  A friend who runs a successful startup in the bay area, noticed a sharp decline in sales in comparison to his projections. Rather than blame market conditions or make excuses, he interviewed each member of the sales team and realized that they were simply not doing their job and that deals were slipping out on a weekly basis. What did he do? he fired half of the team, rolled up his sleeves and met the potential clients himself. The results as you can imagine, were not late to come.

Habit #2: Begin with the End In Mind.

Does your startup have a mission and vision statement? This is a good time to think long term. To build a company like Google or Amazon you need to have a clear vision in mind and more importantly, you need an infrastructure to support that vision.  Set an organizational vision statement – Covey recommended getting all the stake holders involved in the process rather than dictating a set of guidelines. Great example in the book from a hotel, in which all the employees (from front desk to window cleaners) contributed to the mission.

Habit #3: Put First Things First. Here, Covey describes a framework for prioritizing work that is aimed at short-term goals, at the expense of tasks that appear not to be urgent, but are in fact very important. Delegation is presented as an important part of time management. Successful delegation, according to Covey, focuses on results and benchmarks that are to be agreed upon in advance, rather than prescribed as detailed work plans.

The decision making quadrant
The decision making quadrant

Habit #4: Think Win/Win describes an attitude whereby mutually beneficial solutions are sought that satisfy the needs of oneself, or, in the case of a conflict, both parties involved. Slightly connected to mission and vision, one example of this principle can be having a clear purpose as an organisation. Beyond ‘making money’ what else does the startup stand for? Can you adopt a cause or describe the social good of the company’s product or service? Thinking Win/Win can be implemented also in the product, culture, HR practices, fundraising… you name it.

Habit #5: Seek First to Understand, Then to be Understood. Covey warns that giving out advice before having empathetically understood a person and their situation will likely result in rejection of that advice. Thoroughly reading out your own autobiography will decrease the chance of establishing a working communication. I see this a lot with startups that are trying hard to ‘sell’ so much so that it’s hard to understand what they actually do. Avoid buzzwords and jargon – if you put the user first and show them you really understand their need/problem, you’ll get a much healthier funnel.

Habit #6: Synergize describes a way of working in teams. Apply effective problem solving. Apply collaborative decision making. Value differences. Build on divergent strengths. Leverage creative collaboration. Embrace and leverage innovation. It is put forth that when synergy is pursued as a habit, the result of the teamwork will exceed the sum of what each of the members could have achieved on their own. “The whole is greater than the sum of its parts”. In today’s world, remote teams are the norm. Creating a strong collaborative process (from communications internally to ‘solution selling’ in front of customers), team work makes the dream work. Great examples include Supercell’s micro team approach.

Habit #7: Sharpen the saw focuses on balanced self-satisfaction: Regain what Covey calls “production capability” by engaging in carefully selected recreational activities. Also known in Japanese as Kaizen (continuous improvement). Never stop learning and build a culture that reinforces sharing best practices and learning new skills, from the CEO to the new intern. As Ben Horowitz described in the book “The hard thing about hard things”, even McDonalds employees get training – so why wouldn’t your product manager?

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In the true spirit of Habit 7, I am also constantly learning. If you have feedback or habits that you’d like to share, please leave a comment. In case you’re a visual thinker, here’s a video with the 7 habits of highly effective people, a short summary of the book.

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