The Market Is The Greatest Critic

Maybe over 10 years ago, I remember a Twitter thread with @cdixon. He was defending startups against critique, citing that journalists and other startup ecosystem players shouldn’t publicly criticize startups because startups are really hard, most of them fail, and it’s the market that delivers the harshest critique. When this thread originally unfolded, I recall disagreeing with Chris, but a decade later, after pouring my heart into some failed startup experiences, it turns out Chris was right.

But, he was talking about private early-stage startups being hammered on social media.

When companies list on public stock exchanges, have thousands of employees, and hefty annual revenues, they are of course no longer early-stage startups. They are also subject to the whims of public market investors, ranging from institutional pools of capital, talking heads on TV and Twitter, sophisticated crossover funds, to celebrity hedge fund magnates. Unlike private investors who have their funds locked up for almost a decade and can only cheer from the sidelines through thick and thin, public companies can attract activist investors one day and lose long-term investors one random morning, sending their stock prices into oscillation or free fall.

I have only been an investor through a bull market. I wrote my first check in 2013. I lived through the GFC in 2008, of course, and felt the pain of that in the job market just finishing graduate School. I moved to SF for the first time right as the dot com bubble burst, but I wasn’t in tech or investing, but I do remember getting most of my furniture and a desk from a dying startup in the Mission, where I lived.

The crash from Nov ’21 to Jan ’22 (and maybe more?) is the first crash I’ve experienced as an investor. Yes, it is a crash, for those who may not want to hear such language. The percentage share of value destroyed, primarily in “tech,” rivals that of the dot com crash over two decades ago. While I’m not an experienced market prognosticator, the current crash we are living through feels like more of a massive re-rating of pricing and valuations, given that these companies do actually have network scale business models and wide user adoption and engagement, across consumer and enterprise. Like many private investors, I spent a good part of the last week just talking with friends, learning from them, and listening. Here’s what stuck out to me:

Public market investors pulled money out for a variety of reasons. End of the year drawdown. Fear of inflation. Anticipation of interest rate increases. The beginning of the end of the “Covid Trade.” Stocks that once seem to define a new world changed by a virus — Zoom and Peloton — came crashing back to earth. There are other victims, too many to list here. Just look at Robinhood, or Toast, or any other high flying tech company, save for Facebook, Microsoft, Google, and Apple.

For me, when the dust settles, and the market comes back — and it will come back, no doubt — here’s my the big takeaway in my mind: Companies big and small will be examined through the lens of growth narratives driven by product diversity. It’s no longer good enough to just handle online storage, or to just facilitate online meetings, or to just empower consumers to freely trade securities. Public investors and quantum computers who can vote with their feet every millisecond are likely going to reallocate their money into companies that demonstrate the vision and execution to not only acquire assets like Instagram and WhatsApp, but also key infrastructure like Parse and Onavo; or assets like Slack and Tableau; or assets like Minecraft, LinkedIn, and Activision. The public markets will likely reward those companies who can diversify their product lines into messaging, analytics, gaming, and more — those special companies and business leaders who continue to bundle value into their platforms.

Lo and behold, I am not a public investor. Well, I did buy a bunch of tech names on my list this past week, but those are for long-term holds and a feeble attempt to correct misses I suffered in the private markets. So I have to digest this take-away and see what it means for me as a very early-stage private investor. When I invest, it’s often just a few people, tinkering. There’s no way to know what will happen. Those kids have to get the product right. Their timing needs to be right. They have to stay together and fight just to have a chance. For the nine years I’ve been investing, the money has been easy. Follow-on investors have bought the growth story, have given entrepreneurs the benefit of the doubt. I still think they will, but the best Series A/B and growth investors will look for more than just top-line momentum. They will be affected by this crash, too. They will likely have some version of the same conclusion I’ve arrived at. A point-solution is great and can work. You can go public on it. But to suffer the slings and arrows and be durable, the markets — the ultimate critic — will ask for more.