Headwinds or tailwinds?
19% - That's how much the S&P has dropped year-to-date (YTD) - a chunk of it post-Fed's interest rate raise. Not quite as dramatic as Terra UST's debacle of course, but it's plenty in TradFi terms. There are many reasons driving this decline but the war in Ukraine, or rather the retaliatory steps against the war, is most cited. Other (more salient, in my opinion) drivers include a frothy market enabled by more than a decade of unfettered access to cheap capital.
In times of market correction, knee-jerk reactions, scrambling, and I-told-you-so's abound - regardless of whether you're an investor (retail or institutional), business owner, wage earner, or even student. It is amidst this din that I wanted to take a pause. Whilst I'm realistic about the current climate and doing what's needed to stay the course as an entrepreneur - I am also cautiously optimistic. Here's why.
Bear markets are usually the best time to go back to first principles. And those that dig deep have a higher chance of coming out stronger the other side. Prior to transitioning into digital mental health, I was in finance. Whilst both industries seem almost paradoxical, I have since discovered that there are a lot of transferable thought-models. One thought-model that I have found particularly applicable is the rule of 5 P's.
What is the 5P's?
The 5P's represent - People, Philosophy, Product, Process, Performance. In finance, the 5P's served as a rule-of-thumb guide for our evaluation of whether to invest in a particular fund - hedge funds or private equity funds in my context.Here's how the thought process went:
Now to be clear, the 5P model is not an almanac for determining winners and losers. There is no cookie-cutter "best profile" or checklist that has a 100% hit rate of success. The infinite permutations to these 5P's is where the arts take over from the sciences. That said, it is a solid set of first principles to which we can anchor our considerations.
Differences: 5P's in finance vs. startups.
Whilst diligence in both finance and startups is of course, important, one may argue that it is even more critical in the startup world.
Firstly, the financial industry is highly regulated compared to startups. Across all levels, there are (purportedly) regulations that dictate what products can be created, to and by whom it can be distributed, in what quantum etc. It's so regulated that you have whole new industries created just to overcome it - think FinTech, Crypto. It takes funds an average of 1-2 years to raise compared to startup averages of 3-9 months (or for the early stages, even a day/week/month? This is not the norm, I assure you, but it happens).
Secondly, the open sea of startups. As we've seen in recent TV Series hits such as the Dropout (Theranos), WeCrashed (WeWork), andSuper Pumped (Uber), the variations in People and Philosophy are far greater than in finance. In fact, those examples are barely the beacon of diversity, but you see the variations. Unlike in startups, rarely are dropout profiles glorified in the world of finance. With greater variations come greater possibilities for success and/or failure.
Of course, the main difference and caveat to this is that we are not comparing apples to apples. Finance = 1 industry + mature vs. Startups = Many different industries + early/varied-stage(s).
How do the 5P's apply to startups?
Because of how much more nuanced startups are, the first 2 P's - People and Philosophy - are the most important because the next 3P's are derived from that. The Founder(s)' philosophy and worldview usually frames their business thesis and sets the stage for how they go about executing. In short:
Why is going back to first principles important?
The 5P thought-model comes in handy especially in these times. Over the last 10+ years, quantitative easing*has created a buoyant capital market and a chase for alpha predominantly in riskier segments of the market (a.k.a. tech startups). Bigger dreams = bigger valuations = more exciting (naturally). Profitability and fundamentals? Those will presumably come at some (distant) point. This is not to say that this approach is right or wrong - it is what it is and good does come out of it.
The question is - will the rules of the past 2 decades (yes, dotcom included), still apply moving forward? How different will the next 10 years look? Will inflation from war and two years of a global pandemic (finally) lead to a period of market normalization*?For later stage companies (>Series B/C) whose valuations were set amidst a frothier market - are down-rounds going to be more commonplace? For earlier stage companies - how well do you actually know the problem you are solving for and how "leanly" can you solve it without distractions? How sustainable will the growth-at-all cost and high burn models be?
Clearly, there are more questions than answers right now, regardless of who you are (investor, entrepreneur, wage earner, student etc.) and which stage you're in. Just as how in mindfulness we acknowledge the noisy mental chatter and go back to our breath for grounding - the same applies here. There will be consistent headlines - some gorier than others. There will be analyses, predictions, and theories from all sides. Amidst this chatter - we take a pause, and go back to first principles - the 5P's.
*Alpha: Simply put, make money
*Quantitative easing: Fed printing money to encourage spending/stimulate economy in the wake of the 2008 financial crisis
*Normalization because if we zoomed out from the headlines of the past months, markets are in fact, still very much buoyedvis-a-vis start of pandemic (2020), or even the financial crisis (2007/8).
