The New Old Normal

Final Destination 3, the best of the bunch, obviously.

So the stock market is crashing. It’s scary, but it’s also not. Because this has happened before and it will happen again. It’s not predictable, but it is inevitable. Which is why so many have been so quick to yell “Bubble!” over the past 20 years or so. A correction was always going to happen. And so broken clocks were always going to be correct at some point. And yet, some people really did seem to believe this time might be different.

“Maybe this is the new normal” is a phrase you heard over and over again the past five-plus years as everyone waited for a collapse that never materialized. It felt like it was starting to and then COVID hit and threw the planet into a washing machine. The immediate shutdown of economies around the world caused a crash so abrupt and drastic that many people thought in hindsight it may have actually been a pressure valve release, in a way.

But if anything, it led to an even more high intensity pressure collection. It may have actually inflated a bubble of sorts in that it led to many companies seeing massive expansion in their businesses several quarters — if not years — ahead of plan. And with the world now returning to “normal” — somewhat on the COVID front, but more so in that the stimulus the US government was pumping into the system is over — the growth those companies were seeing during such a period has fallen back down to Earth.¹

In many cases, the companies have now reverted to how they were growing just before COVID hit. Which may have been good or even great, but literally can’t compare to the rate seen during the pandemic thanks to the aforementioned capital growth hormone injections mixed with COVID-at-home time compression. In that way, the new normal is the old normal. But we had that weird normal in between, which some kept saying was the new normal. It was not. And those companies unlucky enough to be or to have gone public during this rollercoaster got the credit — and saw expectations set — for that unnatural growth. And that led to many private companies getting the same type of treatment — or even more so — to echo the comps.

And what goes up…

In my decade as a VC, the one concept I come back to time and time again is timing. It’s perhaps the single most important part of the equation in all that makes up a company. It obviously matters in the early stages, but it also matters in the later stages. Timing can make great companies look dumb and dumb companies look great.

As it turns out, the worst time to start a startup is if you’re going to be in a place to need to raise hundreds of millions of dollars heading into a downturn. And this is now the world in which many companies unfortunately find themselves. Some will survive. Many will not. As the herd mentality of VC has shifted from “focus on growth at all cost” to “focus on cost at all growth” in a heartbeat.

If the “cash cannons” aren’t exactly out of ammo, their triggers are jammed. To take the analogy tangential, “too close for missiles, Goose — I’m switching to guns”. Which is to say: big funds are moving to earlier stages.

Everyone should have always known all this was coming, obviously. But it’s easier said than done. Even the best VCs are forced to “play the game on the field” in some regard. The most problematic thing about timing here is that it’s basically impossible to time markets. And so you can either do nothing and wait, or yell about fundamentals into the wind, or yes, go with the flow.

But again, it feels like this go around (also undoubtedly not unique), there were many who were quick to say that this time would be different. But it’s sort of like the plot of those Final Destination movies: you can cheat death for a time, perhaps even a long time, but in the end it will find you.

On the flip side, as will also be touted ad nauseam once again, the best time to start something is at the trough of a downturn when relatively little money will keep you alive for a long while as the big money starts to swirl again. You won’t have to worry about those cash cannons being pointed at your competitors. You can just focus on building something great.

And if it gets you into the position where you can raise a ton of capital when it’s slushing about in the next inevitable cycle, congrats, you nailed the timing.² Assuming you can get out before it collapses again. But that will be hard to do because everyone will be telling you that this is “the new normal”. And round and round we’ll go…

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.

¹ Obviously, inflation and the related interest rate hikes, not to mention the war in Ukraine factor into all of this as well.

² Though maybe, just maybe consider the value of methodical growth.