Letting the Air out of the Bull Run Bus

By March 3, 2020 March 9th, 2020 Universe

Coronavirus is everywhere. Well, if you listened to the news you’d think that it was everywhere: in every home, on every corner, in every convention center, and on every flight. In truth, it’s still spreading, slowly, but spreading indeed. At the time of writing this, it is not an epidemic in the country. But you think it was based on the reaction of the general populous. The reaction to COVID-19 is spreading like… like a virus, only worse: a virus that can transmit from one person to one million in a single tweet.

Conference Cancellations

The first chip to fall in what could be the economic downturn of 2020 was Mobile World Congress. Driven by fears of contagion, a couple of big organizations pulled out. And then the rest of the world pulled out. So the organizers canceled it.

Next up, the corporate conferences started cancelling. Facebook. Adobe. Google. Microsoft. IBM. More. And then Expo West Natural Foods had major players pull out, followed by the entire conference cancelling. Then HIMSS.

Corporations are restricting travel. Mayors are declaring pre-emptive emergencies. (Does that defeat the purpose of declaring a state of emergency?)

And the 400,000 people that go to SXSW are holding their breath as they watch the mayor of Austin, the Austin City Council and SXSW organizers dance around the word “cancel” like it was forbidden fire. No one wants to be the one to cancel the event that brings $350+MM into the city each year.

Update 3/6 – they stopped dancing and the city cancelled SXSW.

All of this has me thinking about the economic impact to the country and the world.

Corporate Actions

First let’s unpack the corporate actions. Restricting travel and cancelling your own conference (that is purely a cost center) is a very rational thing for a company to do—not because of the health and safety concerns but because of the fiscal responsibility. The coronavirus provides the perfect scapegoat for saving a significant sum of money. Cutting your developer / marketer / influencer conference and saving $1-10MM in hard event costs “out of an abundance of caution” is a perfect excuse. Same with cutting down all but essential travel. This is a once-a-decade opportunity for big businesses to scale back costs without hurting employee morale, and you damn well better believe they’re going to take it.

With or without a SXSW, F8, MWC, Dreamforce or whatever your conference of choice is, corporations scaling back travel wil have ripple effects throughout the country. Those ripples alone are probably not enough to let the air out of the tires on the Bull Run Bus. Couple that cutback with media-fueled fears of large groups of people, and add in a solid dose of big businesses getting more restrictive with spending—done out of caution in case of an economic downturn—and we’ve got the making for an economic downturn.

The industries that are most exposed right now are anything reliant on travel, groups, or personal interaction. And then closely followed by consumer products, and its sister industry: advertising. But more important is the understanding that all industries are subject to belt tightening, and thus the most at-risk startups are those not mindful of their cash.

Drilling Down

My friend Eric Marcouliier on his website, ObviousStartupAdvice.com says that the CEO has only 3 jobs: 1) sell the vision, 2) hire the best people, and 3) never run out of money. Right now, #3 is all that matters.

As the cases of the coronavirus spread and grow, the fear factor will only get worse. As I write this, my mom is going through chemo and has a compromised immune system. I worry about her, though I know she and my dad are taking precautions. I live 2000 miles away (CO to Pgh) but if I lived closer, I would be very careful about going over to see her. And I sure as heck wouldn’t go see her after coming home from SXSW (and yes I’m still going to SXSW) . And if I lived with her, I wouldn’t go to SXSW at all. I’m not worried about me getting coronavirus—if I get it, I’ll fight it off and recover because our bodies are built to fight viruses. She might not. How many people are having the same thoughts?

Let’s play this out on a larger scale. Corporations cut travel. Conferences are cancelled. General public cuts exposure to large groups of people. The country turns inward, online, and closes its doors. For every 1 person that gets sick, another 10,000 are paralyzed by fear. Schools are shutting down—preemptively or reactively. With children at home instead of at school many parents will be unable to go to work, which puts financial burdens on the lower and middle classes. Many of those people do not have the financial resources to withstand missing work. Household spending begins to dry up. The economic ripples begin turning into waves.

Travel industries and tourist locales are going to get hit hard this year. Retail is going to take it on the chin, again. Events–whether sports, concerts or conferences–will suffer. As these ripples out into the economy more people will become unemployed. Families will spend less, resulting in lower consumer spending, and that is a massive driver of our economy right now. When consumer spending falls, so falls the economy.

It doesn’t help that supply chains are getting disrupted right now—and I mean “disrupted” in the classic “breaking” sense not the startup “innovation” sense. With less stuff to buy and fewer bucks to buy it with, the secondary effects kick in: less advertising. Lower marketing budgets. Less dollars to go around in that industry. (Poor AdTech, can’t win in a bull market, going to get slaughtered in a bear market.)

Side bar: I can imagine an alternative scenario for adtech where everyone stays home and digital ads and digital video ads take off. This is with the added disclosure that I’m an investor in an awesome video ad tech startup, Brandzooka.

I digress.

Bull Run Bus

My belief is that the underlying business fundamentals of most businesses are strong. That is, the Bull Run Bus has been based on solid fundamentals and not the “eyeballs” of the late 90s. And as far as I know, there’s no financial manipulation happening by Wall Street as with the 2008 crash. Even better, the public market is not buying the “cult of the CEO” shit (WeWork, Uber) any more. My hope is that there is truly no funny business being done by bankers (whether of the fed or goldman variety) that has created unnecessary risk exposure beneath the surface.

The reason we’ve experienced an unprecedented bull run is because we continue to unlock human potential by replacing humans. When Edwin Hubble proved that other galaxies existed and the universe was unimaginably massive, he did so by sending the data of his observations to humans (mostly women) who computed the results using pencil, paper and slide rule. Human computers. (h/t to Answers with Joe) We now have all that computing power in our pockets, and more. That is unlocking human potential by replacing humans. That cycle is accelerating. For this reason, I’m a long term bull.

But even with solid fundamentals, as consumer spending dips, as consumer sentiment is driven by fear, and all these little ripples sync up turning into waves. Add in businesses curbing spending—starting with travel budgets being cut—and the economy will take a hit.

Advice for Startups

Startups, now is the time to take a hard look at your cash flows. The venture capital model is predicated on a company continually raising more capital at higher valuations in every subsequent round. The underlying message is: growth at all costs. That is certainly one strategy. Another strategy, and more fitting in down cycles, is to keep the lights on at all costs.

What will it take to stretch your runway between rounds from 12 months to 18 months? From 18 to 24? What do you do if your revenue is cut in half? What happens if you can’t raise at the next higher valuation? Who is prepared to take salary cuts? What projects need to be cut? How will you handle all of this as a leader? Now is the time to buckle down, figure this out, draft a plan, and be prepared to move quickly, nimbly.

It’s been fun, bull run. I’m a long-term bull, but I’m ready to ride the bear this year.

Turkey Hat

As Nassim Taleb said, “you can’t make a prediction without being a turkey somewhere.” We’ll see where I end up being a turkey…

Losers
Consumer goods
Physical retail
Travel
Events
Marketing and advertising

Winners
Remote work enablement
Ecommerce
Esports
Streaming services

Could go either way
Supply chain
Logistics
On-demand economy
Digital advertising

Originally written Tuesday March 3, 2020. Updated Friday March 6, 2020.