Lessons from the Techwreck + Some News on the Book
18 months into growth underperformance, what have we learned?
Sidenote: I’m sure many are wondering, “Hey, what happened to the Ethereum book?” Well, I’m working with Waterside Productions to get a real copy available on Amazon soon. Stay tuned!
Plummeting Rolex watch values. Sad crypto parties. Lambos for sale.
As “recessions” go, it ain’t the Dust Bowl.
But while the dust hasn’t quite settled on the tech downturn, a year and a half after ARKK’s peak, what have we learned?
The 2010s were the glory days of “flywheel” theories of strategy: spend big to unleash a positive feedback loop (usually platform “economics”). That created the bad business flywheel:
(By Big Tech, I mean pretty much anyone in the Nasdaq-100).
But in 2022, a lot of those flywheels reversed, and the Schelling points of valuation shifted from growth to profitability too fast for many tech companies to react. Why? The sudden pivots in Millennial behavior pre and post COVID - going from experiences to stuff to YOLOs - led to strategy whiplash, causing companies and investors both to misallocate billions of capital. And the rise of “tech-enabled” businesses like Peloton tying bits to atoms made them more sensitive to the economy than traditional software - turning the flywheels into buzzsaws and the conditions for a two year tech drought as the cycle continues to turn.
Slapping an iPad on everything
Aside from proving that fitness tends to be fad-driven - ever heard of Fitbit? - Peloton is a great reminder why people love software businesses and bits over atoms. “Scaling” is always cited as a positive of tech - a million downloads in a day! - but software has a hidden advantage in that it never has to scale down. You don’t end up with warehouses full of SaaS when you miss guidance.
This is the problem for Peloton, Latch, Zillow, and many other businesses that try to tie together apps and goods. All of them could be good businesses, but the market encouraged bad behavior with software multiples that everyone tried to chase, to bad ends. It’s not the death of “tech-enabled,” but they might learn a lesson from oil companies.
OTOH, it’s hard for tech companies to adjust strategy in such a fast changing environment. In my experience, while tech companies can change strategy on a dime, there’s a hard minimum on how fast you can release software. On small time scales, tech might even be slower than traditional companies. Nine women can’t make a baby in one month, and if you have a decent lead engineer they will excoriate throwaway work so you can’t just duct tape things together. Delivering a 1 week MVP is a b-school fantasy: it’s a quarter to design and a quarter to build something shitty, at least, and that’s if you manage to dodge summer or Christmas. (Throw in an extra quarter for trying to hire and organize teams during COVID.)
COVID opened many Pandora’s boxes, including the surge in retail trading from late 2020 to early 2021. Hence, you had Robinhood launching crypto a year later in 2022 when no one cared.
And Meta’s products for the metaverse, based off our COVID hybrid lifestyles….well, who knows.
And it’s good to fail! But public markets operate from quarter to quarter, while product-market fit in tech usually takes two years. Pity Brian Armstrong, getting asked on earnings about when Coinbase would do NFTs, and releasing the product much later to total silence.
The lesson of the iPad slap and slow strategy is that you can actually do worse than round trip. Worst case, we all thought, is life after COVID goes back to normal. But if you spend CAC on customers that quit en masse, you’re actually worse off than before.
Are we VCs? Or are we dancer?
Manias always tell us a lot about human behavior as well. I’ve already spent plenty of time here railing on VCs…but why stop now? People went crazy over crypto and blockchain, and the reality is a lot of the investment came because of social proof from big name VCs who put their names on the line. a16z crypto is the canonical example, but Fred Wilson kept writing about Helium as one of the “good guys,” so he either didn’t read the fine print or he’s just as subject to optimism bias and gambler’s fallacy as the rest of us. It’ll be on them to resurrect their reputations.
The real egg was for trillion dollar asset managers like Fidelity, Wellington, and T. Rowe who regularly jumped in the pool too late. The era of the Series H mega round driven by the hope to latch on to a16z/Benchmark/Greylock coattails at the last second before an IPO pop is likely done, for now.
And that actually might be a good thing. Series A and B investors were getting diluted into oblivion, and only mega-VCs had the deep bank accounts to participate in the late rounds. On the flip side, shorter runways will mean more judiciousness from startup CEOs over becoming the 19th neobank to market student loan refis.
Boomers will never die, because we’re boomers too
VCs weren’t the only players on the techwreck stage. The real deer in the python in this cycle were millennials, who suddenly went from basement-dwelling losers to gorging on McMansions in record time.
It turns out my generation had everyone fooled for a decade. After convincing everyone we were the anti-boomers and would live in cities forever and never buy cars, we turned out to want even bigger homes and bigger cars than our parents.
Even our love for planet-saving veganism may have only been a flirtation, as millennials sought out comfort foods during the pandemic. In econ-nerd terms, we might say the income effect of millennials being in peak earnings years is probably driving up consumption (i.e., being able to eat out more) which could outweigh any lifestyle shifts and help driving meat prices to record highs. Apologies to Beyond Meat - I’m sure it wasn’t the taste that led to the McPlant’s failure.
The whiplash in millennial behavior is a caution against buying into any headline about generational trends. (What “gen z” trends are being over-extrapolated now? My guess is a preference for video.) The reality is you need a well-balanced information diet.
Rebuilding the narrative
Too many investors extrapolated trend lines forever - whether that was crypto prices or ecommerce sales - and as a result, capital got misallocated to unproductive investments. And taking my lessons about pivoting strategy above - a ship can’t turn around in a year, and there are a lot of big ships in tech now - that means it’ll take another year to find the next hot story. What’ll it be?
There have really been 5 pillars of the last decade of growth in tech, and COVID taught us different lessons and a different outlook for each:
SaaS, especially B2B, are the biggest long term beneficiaries, with low rates of churn and high margins
Infrastructure (cloud, “web3”) - web3 is in quotation marks, since it hasn’t proven anything, but cloud is upstream of SaaS, so can ride on that
Social networks remain a knife fight for eyeballs
E-commerce is a real question mark. COVID was the greatest opportunity ever, and yet post-pandemic adoption has completely mean reverted and these companies are struggling more than ever
It could easily be that the cost savings of not having stores are more than outweighed by the cost increases of relying on ads for traffic, high rates of returns, and logistics challenges. The jury is still out here.
Mobile apps like delivery and ride-sharing face challenges with tight labor markets, while trying to overcome bad unit economics
Markets are trying to make sense out of all of this, trying to find that needle in the haystack for the next great company. And the good news is eventually Wall Street cynicism will turn back into hungry appetites. But figuring that out while require sorting some financial mysteries that the techwreck created:
Should we drink from the Cathie Wood kool aid that tech will cause massive deflation…or will it cause inflation…or both?
Did the sector get Too Big to Grow?
How do you diversify the “innovation” beta?
More on that next week!
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