So you’re driving along the highway in your SUV, counting on cruise control and AEB to keep you from having to pay too much attention. You blink.
Now you’re on a mountain road. About to go into a blind corner. Too fast. What do you do? You might:
- Die. Not interesting. Would make for a very short post. Also worthless stock options.
- Brake, downshift, and steer. Position for the next corner, whatever it is.
Expand->Extract
In 3X terminology we are looking at an Expand->Extract transition, but not the usual one. Expand->Extract is usually a business decision. (Professional CEOs have a perverse incentive to transition too soon.) Usually the trigger for the transition is changing returns from growth investment. As the market approaches saturation, further investment shows diminishing returns.
WeWork is a lovely natural experiment in Expand->Extract (lovely if your net worth wasn’t denominated in WeWork options, anyway). In their case, the available capital shrank dramatically because the market’s belief in the possibility of further growth changed.
Now all Expanding companies (at least the ones not already profitable) are seeing their growth capital shrink dramatically. Belief in the potential for further growth hasn’t changed but everyone hoards capital in a crisis. There’s a revenue minus cost hole in the bottom of the bucket & now there’s no next round of funding to pour in the top.
Compounding the shrinkage in available capital is a stall or reduction in revenue. The hole in the bucket just expanded. If you had cash in the bank for 20 months before you needed to raise capital again, reductions in revenue will shrink that calendar (and the sooner you have to raise, the harder it will be to raise).
This is a big shift in thinking for conventional startups. Three months ago the choices were “get big” and “get really big”. Now the choices are “survive” and “die”. Goals go from “hit growth numbers” to “hit profitability numbers”.
Remember that the potential market hasn’t shrunk. There are still all those folks out there who could use your service (well, eventually — maybe they’re distracted right now). Potential market used to matter but for now it doesn’t, not in comparison to “likelihood of survival”.
To Do
Your thinking, your priorities, and your actions have to change. (Here’s the short form — ask me personally if you want more detail):
- When evaluating activities, ask yourself which provides the largest potential cost savings, the best revenue per dollar invested, and/or (in these times) the lowest churn (the easiest customers to find are your current customers).
- Work in smaller steps, even at the cost of efficiency, because the cost of mistakes just went up.
- Take on dependencies if necessary. You need economies of scale in Extract even at the cost of some risk.
But But But
“But Kent, doesn’t Extract mean no more big growth? How am I going to fund my yacht?” Relax, oh nautical one. Plenty of companies went from Expand to Extract and back successfully to Expand. Facebook did it twice, when they went from colleges to open signups and then again when they went from browser to mobile.
The time will come again to grow, it’s just not now. Paddling in when the tide is going out is a losing play. Downshift, steer through the curvy bits, and re-assess on the other side.
Stay safe.
