Startup PSA: Stay Vigilant!

Q2 2020 is not a stable baseline on which to plan the future of your business!

That we are living through a bizarre period is obvious and easy to understand intellectually. This is perhaps the most uncertain era in my lifetime. Yet if you look at Wall Street, you’d think these are the best of times. The NASDAQ just hit its all-time high last week.

Wall Street is implicitly saying that the tech industry is stronger than it has ever been — including four months ago when we had record low unemployment and a relatively stable macroeconomic environment! This is not at all what we see in the startup world.

Recent positive job numbers are great news but I would urge founders to resist being overly influenced by them. Unemployment is still at generational highs. For those with jobs, COVID has forced the biggest change in working arrangements in a hundred years.

Meanwhile, centuries of injustice are being challenged and leading to mass protests across the country. COVID numbers are on the rise in states that have reopened and a second wave is still predicted by most experts. We’re not even close to being out of the woods yet.

We live in undoubtedly strange times, and founders are adjusting to this “new normal” quickly — but I fear too quickly. Nothing about this moment is normal, and over-indexing on tempting signs a fast recovery could be perilous for startups.

Tech hasn’t been hit as hard as other industries, and remote work is shockingly effective for broad swaths of startups. Be that as it may, Q2 2020 is not a stable baseline upon which you should plan the future of your company — even if you are weathering it well.

We seem to have avoided the worst-case COVID scenarios for now, but a rise in new infections or the simple failure to renew PPP funds could send the markets and broader economy tumbling. In fact, any number of exogenous factors could disrupt Wall Street’s euphoria.

Beyond COVID, the geopolitical situation is fraught, both internationally, a potential new Cold War developing with China, and internally, with civil unrest. Add to that, we’re entering an election season which increases volatility.

Some of the smartest founders I know are agonizing over hard decisions.

Should I hire an extra salesperson or engineer?

Does it make sense to increase ad spend now?

There are no definite answers, but I urge the founders to plan for the worst and hope for the best.

These may seem like half measures/overly conservative strategies for what are supposed to be high-growth startups, but the goal through this period, at least, should be to protect capital. Treat each dollar on your balance sheet as if it’s the last capital you’ll raise.

Most importantly, it’s not safe to assume we’re ”through the worst of it.”

We may be benefiting from warming weather in the fight against the virus, but cold and flu season will soon be upon us again — soon.

Even countries with exemplary responses to COVID, like South Korea, have had secondary flare-ups that have required further shutdowns. And most of those countries had much more disciplined reopening processes. The US/EU are nowhere near as well prepared for what follows.

There’s a lot of talk about V-shaped recoveries and today’s number will only encourage this. That said we should not discount the potential that we aren’t near the bottom yet. I don’t think that’s the most likely scenario, but it’s not unlikely either.

I sincerely believe that our best days are ahead of us. Don’t give up or lose hope. Still, it’s wise to prepare for unprecedented volatility over the next 6–18 months. Investor confidence could crumble — rapidly. Sales could drop — precipitously. Stay vigilant.

Managing Partner Eric Paley recently shared this as a tweetstorm. We collected the tweets as a post for your convenience.

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