An economic slowdown could be the reset Silicon Valley needs

By Leah Solivan

Interest rates are up, markets are down. Inflation continues to haunt the economy while the supply chain continues its wild, chaotic swing.

 
 
 

While we look for hope in employment stats and public market upswings, economists and pundits are arguing about just when NBER (the National Bureau of Economic Research, the government organization responsible for identifying a U.S. recession) is going to officially utter the “R” word. Companies and firms throughout the startup and venture ecosystem are trying to figure out how to come out on the other side of this downturn as (relatively) unscathed as possible.

As the broader economy continues to contract, uncertainty and fear permeate the sector that self-identifies as risk-taking, innovative, and future-focused. Founders are nervously looking at their runways and thinking about how to reduce burn to avoid raising a flat or down round (or folding) in this environment. Layoffs are rife. A significant number of founders—even some of tech’s most notable ones—are headed for the exits.

Many venture firms, skittish from watching public and private company valuations tumble, are shying away from their historic bold bets and advising their portfolio companies to curtail spending and operate more efficiently while holding their reserves for those in dire need.

An economic slowdown could be the reset Silicon Valley needs
 

Not everyone working in the market today may want to remember it, but we’ve been here before. During both the Global Financial Crisis of 2008 and the early days of the COVID-19 pandemic in 2020, companies and VC firms alike looked for things to jettison to stay afloat. Many of the first items overboard were the ones these leaders claimed to care about most.

Instead of spreading money to different types of founders, investors leaned heavily on pattern-matching. Instead of taking a chance on exploration, money was yanked out of R&D investments. Resources dedicated to developing the next generation of founders, operators, and emerging managers slowed. Commitments made to innovation, diversity, and work culture quietly dissolved.

If we want to emerge from this downturn more resilient, more sustainable, and more profitable, we can’t afford to repeat these mistakes. There are four lessons we can take from previous downturns to take advantage of the one we are in:

 

Trust the tools you’ve created

The most frustrating thing about an economic downturn like this? No one can say how long it will last. Like pilots flying into heavy cloud cover, we must trust our navigational tools to guide us through to the other side. For startups and venture firms, these tools are our financial models, KPIs, and core values. We’ve created these instruments to help us grow, and now’s the time to trust them to get us to where we need to go.

Things that can be easily measured and speak immediately to our bottom lines tend to draw the most focus during tough times. But we also must pay attention to our missions, visions, and core values to keep us steady when times get rough.

Complex initiatives that reflect our values (such as diversity and inclusion, professional development, or creating a family-friendly culture) are often the first things relinquished in turbulent times. But our commitments aren’t luxuries holding us back. They are the way forward. To come out of the cloud cover not just right side up, but ahead of the crowd, it’s necessary to keep prioritizing the things that matter.

 

Now isn’t the time to panic or overcorrect. Now’s the time to keep our eyes on the horizon and trust the tools we’ve created to guide us.

Don’t just cut—look for what you can add

In an economic downturn, quickly making significant cuts to extraneous costs should be one of the first moves of any responsible leader. That’s obvious enough. What’s less obvious to many first-time leaders is that investing money in things that provide real value to customers or employees can drive meaningful ROI.

[pullquote]Crisis events help reveal who we are.[/pullquote]Customers aren’t going to pay for something with minimal value during a recession, or if one seems imminent. If we’re feeling the pinch of the economy, they are too. Giving people their money’s worth is the way to earn loyalty.

 

During the Global Financial Crisis, my company TaskRabbit suddenly became a primary source of income for thousands of unemployed Americans. We invested heavily in product features to help them earn more on the platform and take more control over their time. By the time the economy began inching back up, thousands of our Taskers were earning a better living with their TaskRabbit business than they did before the crisis.

If you’re not sure where to invest to pump up the value for your customers, it’s a pretty good indicator that you need to do some more work on your offering. Distressed times really put a spotlight on companies with little to no product-market fit.

If your product is not yet in a position to add substantive value during this downturn, take advantage of this buckled-down time to get out there and talk to your customers. Understanding their needs now will help you emerge from this period of uncertainty with an offering that has a better chance of scaling.

 

As managing partner of a venture firm, I think about our responsibility to add value to our “customers” a bit differently now. VCs have two sets of customers: founders and limited partners. As I wrote in “Here’s how venture capitalism needs to evolve in 2022 and beyond,” this is a period of great disruption for the venture capital market. A healthy future for the entire startup ecosystem will be driven by the diverse class of investors and funds now on the rise.

It may seem counterintuitive to invest resources in your competition during an economic downturn, but that’s exactly what more seasoned venture firms and managers should be doing during this contraction. Continuing to offer mentorship, access, operational resources, and capital to emerging managers will help move the entire VC community into a new era.

Carry a little crisis with you to the other side

Memories are short—especially after hectic times laced with adrenaline, fear, and urgency. After pulling your company through a crisis, the last thing any leader wants to do is dwell on it. But crisis events help reveal who we are. Those revelations should be baked right into the culture of your company to increase your resilience for the next scary event (and there will always be another one).

 

Building TaskRabbit in the shadow of an economic calamity required us to learn how to be scrappy. Early on, our monthly marketing budget was a comically low $5,000.

As companies froze their hiring around us, we decided to prioritize a key hire: our first marketing generalist. We brought in a candidate who punched way above her weight class, a generalist who could figure out how to DIY pretty much any project from any part of the marketing stack. This hire wasn’t just a crucial driver of our growth strategy. In many ways, her approach informed the culture and the attributes we looked for in future hires. Her grit, inventiveness, and willingness to get in the trenches became something we looked for in every new employee.

Merely outlasting a crisis is a wasted opportunity. The pressures of the current downturn will challenge every single aspect of what we do: who we hire, what we build, how we set objectives. The adaptations we make in order to survive are full of lessons. Pay attention, take notes, and keep those learnings close once money starts flowing again.

 

Acknowledge your core competency

For years, the startup ecosystem has existed in a founder-centric context. We’ve seen bold actors with big visions excite the hearts and minds of investors, employees, and customers alike. This dynamic has given our sector momentum, not to mention a lot of media and cultural attention. It’s caused some of the best, most impatient minds to come and build things. It has also resulted in some inexperienced entrepreneurs wielding too much power over people’s livelihoods, causing the shuttering of some promising young companies (not to mention embarrassment and turmoil at some companies that managed to survive despite poor leadership).

It’s also led to a rash of pattern-matched investments in founders who looked like the founders who came before: young, hoodie-wearing, mostly white, mostly male founders. All while high-potential founders wait on the sidelines for scraps of venture funds, and talented operators wait in the wings for founders who never exit.

[pullquote]For all of our founder-centric culture’s faults, there’s something wonderful to be preserved.[/pullquote]An economic downturn is an opportunity to clear the stage. As The New York Times’s Erin Griffith reports in “The Boy Bosses of Silicon Valley Are on Their Way Out,” some of the most bold-faced names in tech are leaving their posts. What if we put our innovative minds to the question, How do we fill that stage with a more diverse cast for the next show?

 

For all of our founder-centric culture’s faults, there’s something wonderful to be preserved. We celebrate imagination here. We look for ways to say yes to things unknown. We believe a better future is possible and we want to help shape it.

But not everyone who has an idea and gets it off the ground is the right person to scale it. In fact, that’s rare. Starting a company, scaling a company, and running a successful company are different skill sets. Some founders have them all, yes. But many don’t. And that’s okay.

Now’s the time for a little soul-searching about where you are. Are you doing what excites you? Should you go build something new? Every founder at the top of a company should ask themselves these questions. So should every operator.

 

Chances are high that there are a few next companies waiting to be built in the minds of people stuck scaling their last ones. Chances are also high that some of today’s founders and operators could become the investors who open up doors for the next generation of founders.

Decisions are clarifying. We choose to spend money here instead of there. We prioritize making this hire instead of that one. We opt to back away from one idea and double down on another.

A sustained economic downturn is an extreme pressure test for a sector that values rapid growth. The many difficult decisions we make during this time define who we actually are. They reveal our true character and our true capacity. For founders and investors alike, this just might be the reset required to shake us out of the status quo and set a new precedent for how to build the future.

 

Leah Solivan is the founder of TaskRabbit and the general partner at Fuel Capital.

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