People often ask if it’s possible (or even sane) to start a company during down markets. Moreover, they question whether existing startups will be able to deploy any of the sort of high-growth tactics critical to becoming an enduring business.

My short answer is always “Yes.”

In fact, times of economic downturns can be a great time to start and grow businesses, but only for those with the differentiating leverage points that push them far ahead of the competition. Understanding how to use those levers comes down to smart decision-making in the context of numerous factors, from the macro technological trends that inspired the product you are building to the support of your personal and professional network. All of this dictates your ability to secure capital, operate efficiently, and ultimately achieve revenue in economically compromised environments.

Just like doing business in any economic environment, being bold enough to run a company during bear markets is not just about having irrational belief in the success of what you’re doing, but about approaching it in a risk-intelligent and strategy-intelligent way.

I sat down with my Blitzscaling co-author Chris Yeh on the Greymatter podcast to discuss the mindset and tactical frameworks startups can apply to decision-making during economically challenging times. Based on examples from my own experience at PayPal and LinkedIn as well as those of other successful companies started during downturns, I outline strategies and considerations startups should have in order to start, grow, and thrive during bear markets.

You can listen to our conversation at the link below or wherever you get your podcasts.


Chris Yeh:
Hello, I’m Chris Yeh, the co-author of Blitzscaling, and I’m here once again with my co-author and old friend, Reid Hoffman, the co-founder of LinkedIn and investor at Greylock Partners.

Now Reid, let’s start with the broader context. A lot has changed since we released Blitzscaling in 2018, both in the startup world and the world at large. What are some of the changes that you think affect the way entrepreneurs should Blitzscale today?

Reid Hoffman:
Well, Chris, let’s start with a quick rehash of what’s important about Blitzscaling. First, the definition: prioritizing speed over efficiency in an environment of uncertainty. Naturally, part of that is [the question of] how do you spend capital – whether it’s financial capital, human capital, or other capital – in order to prioritize speed.

Then, when capital becomes much more precious, (when the capital markets aren’t flowing as much) then the degree to which you will spend capital inefficiently is much lower. It’s a natural outcome. Then people would naturally say, “Well, that means that of course during times like now where you have a strongly troubled market, Blitzscaling goes away.” That would be a natural inference.

The reason why that’s incorrect is because Blitzscaling is always relative because of speed; it’s relative motion. It’s still the question about business, and that business is fundamentally about competition. How do you essentially compete for products and services, compete for markets, compete for customer affection, compete for employees, compete for capital, all of this. Speed is always a critical function in competition.

The times where speed isn’t a highly relevant variable in competition are very obscure and are more minor things. Then you say, “Well, okay, what are some changes you might think affect the way entrepreneurs should Blitzscale?”

Well, the certain thing is you’re going to be very careful about your capital – and you’re going to be very careful about where you might be choosing to spend that capital in order to outpace your competition – but it’s still the case that you will be outpacing your competition. You will be seeking to outpace your competition.

Now you may outpace them in longevity, in surviving in order to thrive, so you might be doing things that way. Whereas most of the competition, for example, might be telling stories of endurance, you might still be telling a story of market growth because, by the way, investors still know that that’s what they want. Presume that you can get there, presume that new capital is hard to come by, but you’re still trying to get there. Those are the knobs by which you would be looking as an entrepreneur during a bear market about how you would think about Blitzscaling. Whereas, of course in a bull market, every possible idea that you could have to possibly use capital to accelerate, you might just experiment with and deploy. Here, you might be much more careful. Obviously the knobs are tuned much more narrowly, in a much more contained fashion, but those are the frameworks by which entrepreneurs should be thinking about Blitzscaling.

“Speed is always a critical function in competition.”

What are some examples of how you or the entrepreneurs you work with have updated those investment theses in order to be successful?

As a refresher, part of what investment thesis is, what are the things that you’re betting on the way the world is – the way the world is moving and what you can do in the world in order to achieve an outcome as a result?

Part of that is, for example, you might be saying, “Okay, in the early days of the internet it was about transferring files.” Whether they’re HTML files or video files or other kinds of things, and it’s the distribution of that through search, through kind of portals, other kinds of things. That was what was key to what was empowering a whole bunch of different businesses on the internet. Then you get to web 2.0 and you say, “Well, it’s about identity and how networks of people work together.”

[Then you can] say, well okay, the LinkedIn investment thesis is that web two identity’s going to grow. People are going to be willing to use their real name to their advantage. It’s “real life” kind of activities and work that actually, in fact, even though there’s a lot of counter memes against putting up your CV, LinkedIn will enable that.

There’s a set of different business models which will include job seeking and recruiting, but also others that will build over time that LinkedIn. That network can be a platform for all of these things and that both individuals and organizations will all participate in this. That was essentially the LinkedIn investment thesis: it was a combination of what’s currently happening in the world, [thinking about] what are the technological trends, and then what are the specific things including providing a service that’s focused on individuals owning their network versus, by the way, the competition, which is saying, “Well, the companies own your professional network, not you, because they provision your computer with your address book and your communications, and so they own your network because they thought that owning that data – versus your social relationships – was the way that you navigate.

That was the investment thesis LinkedIn, which obviously worked, and elaborated (and kind of generated) way of doing it.

Now, if you were to be part of changing times, you change the substance of that investment thesis. It says, “Well, okay, so what’s your availability of capital? What will you have to prove in order to get the next round? How quickly do you need to get to revenue? Do you need to get free cash flow? Do you need to get to profitability? What is your competition doing in terms of the investment thesis? What do you need to do in order to beat the competition?”

That’s, of course, part of the Blitzscaling thesis; that there’s a number of important areas, especially in the consumer internet with network effects. It’s where we describe as Glengarry Glen Ross markets where first prize is Cadillac, second prize is steak knives, third prize is you’re fired. It really makes a big difference between first, second and third places. That speed to that and realization of that matters, even (of course) in bear markets and everything else. But competition makes a difference because you say, well, actually in fact the competition is all falling by the wayside. The competition is going to die or is going to be totally retrenched and not focus on growth. It can be something if you can; that can become a differential advantage.

It’s one of the reasons why people say, well during recessions or during bear markets, is that a good time to start a business? The answer is yes – if you can get the capital and you can grow, because your competition will be far more impeded. It’s actually easier to start great businesses during down markets, than it is to create great businesses during up markets because of that competition fact.

That again, one of the things that most people misunderstand about competition is thinking that primary competition is the large tech giants like Google or Microsoft or others, and actually in fact, it’s other startups. And other startups are most influenced by capital availability of markets, capital availability of talent, ability to hire talent, et cetera, et cetera. That’s part of the reason why it’s such a great time to do that. That’s part of how you would look at updating your investment thesis because you’d say, “Well okay, where does my competition fit in the investment thesis? What is the gameplay that I need to do to get to the next stage of capital and what do I need to be demonstrating either in the market or in revenue?”

Classically, during bull markets, in the consumer net you go, “Hey, I’ll get to revenue much later, everything else is really important, market captures are most important.” Whereas you say, well, actually in fact in capital scarcity markets, demonstrating that you can be capital efficient, that you can get to revenue, that you can get to revenue break even, et cetera, then become much more important even in raising money, let alone in getting to revenue, profitability and demonstration. That’s the kind of thing that you’re looking to do and that’s the kind of thing you would look at as updating your investment theses as entrepreneurs.

“During recessions or during bear markets, is that a good time to start a business? The answer is yes – if you can get the capital and grow. Because your competition will be far more impeded.”

I think that’s such a brilliant point because it’s underscored by our experiences in the past. If we look at a company like Amazon, one of the things that was so great about what Jeff Bezos did there was to shift from growth to profitability as necessary. In fact, Amazon shifted back and forth several times from focusing on growth to focusing on productivity. Of course, the overall objective was always growth to be everything store, but there were times when Amazon demonstrated its ability to generate revenues or to be profitable in order to enable it to continue financing its growth, and that was actually a part of their adaptation.

Yep, exactly. Look, one of the things that is a really key part of entrepreneurship, part of the reason why we say that great entrepreneurs are infinite learners is because you’re learning a whole bunch of different things, and that learning is not learned once and then that’s it. Because competition changes, the market changes, technology changes, go-to-market strategy changes, market for customers, market for capital, you have all this stuff. And what you’re doing may be different depending on what’s your current position, what are your current assets, what are your current capabilities? All of this changes what your strategy might be, what your investment thesis might be. The fact that it goes well right now…

The thing that people like to say is “growth at all costs,” and that’s never quite true. It’s always a good slogan rhetoric because it’s not at all costs. The cost is a fundamental part of business and how you’re doing, you’re spending that cost in a differential strategy to create a long-term valuable business. That’s what good entrepreneurship is, what good business strategy is. Sometimes you may be growing at highly efficient spends as a way because you’re prioritizing growth, and other times you go, well no, we need to have growth but we need to have efficient, economically-spent growth in order to be navigating the next phase.

That’s part of the [mindset of] “Okay, focus on profitability here.” There’s a lot of different ways of focusing on profitability, focus on the fact of demonstrating you could be profitable, that an investor might be willing to give you money. Focus on getting profitable, then you don’t need money necessarily other than possibly for funding growth. Focus on operating margin. Well, then investors might buy and sell your stock at higher multiples and higher prices. All of that kind of fits into being an intelligent entrepreneur, CEO, founder, business leader.

Now, it feels like we’re in a bear market right now. Certainly, there’s a lot less money being invested by the venture capital industry. Does that mean that this is a good time to start a great company? Is that the message that you want to send to entrepreneurs?

One hundred percent. Now, it doesn’t mean that it isn’t hard, much harder to raise capital. When you’re a first-time entrepreneur and don’t have a lot of background, don’t have a lot of network, you may not be able to start a company in this kind of time. You may need a more open, more bull capital market for someone to be able to take a risk on you, because capital will be far more constrained, far less generally available.

On the other hand, if you can start a business and you can raise the capital and you can get going, it’s a way to get a lot of differentiation between you and the rest of the possible competitors. This is actually one of the funny things that I see in talent flows. A lot of talent flows are going, “Oh, I should go back to safe companies like Microsoft and Google and everything else and do that.” It’s like, well look, that you can do that, totally fine, but it’s also a very good time to join the startups that will get through this because they’ll actually be worth a lot more because they will have succeeded past competition. Because joining companies is another form of investing and it’s a good time to invest in the ones that actually, in fact, can get through the down times because their value on the other side will be highly magnified.

It’s a similar reason for potentially starting a company. Now, you have to start a company that’s a higher beta to a higher alpha kind of outcome where you say, well, if you can pull it off, if you can get financing, if you can get it started, now’s a really good time. It’s harder to pull off, and so therefore you might also decide to defer because making intelligent ABZ decisions about what your efforts to refer to the start of view is a key thing to do.

“When you’re a first-time entrepreneur and don’t have a lot of background, don’t have a lot of network, you may not be able to start a company in this kind of time.”

Now, speaking of investing, we’ve discussed earlier how there’s less venture investing going on than before. I also see a lot of venture capitalists out there telling the entrepreneurs, “Hey listen, I don’t know if you’re going to be able to raise any more money, you get five years of runway, you get the profitability however you can.” At the same time, I’m hearing from you that this is a great time to start a company. This is the period of time exactly when great companies get started. What’s the deal there? Should people be trying to just get five years of runway and is it right for venture capitalists to be so conservative right now? How should we all be thinking about this?

Well, look, it’s again, there’s not one simple slogan because it depends on the circumstances that you’re in. That’s part of the reason why and what you think you can achieve, what your level of risk appetite is, what your ability to navigate risk, that’s the gesture of the ABZ planning because it’s a risk planning and mitigation framework to navigate risk intelligently. It depends.

Example: if you said to me as an entrepreneur when I started working on LinkedIn in 2002, (which was still deep in the dot com winter and I was kind of working my way through that), that was a good time to do it. I was able to do it because of the success of PayPal. Similarly, I would do that as an investor. I’m active because I actually think the right projects done now will have a higher ability to succeed, and so that’s also positive in doing this.

On the other hand, there’ll be lots of startups that fail or fail to get off the ground. That’s not saying, “Oh no, no, it’s going to be great times all around.” That’s part of making good decisions, having the intelligent risk frameworks applied, navigating and pivoting and changing based on the things you’re finding, and getting really good advice. And having that advice be on [questions of] why would this fail? Why would this not work? Because it’s not just about having an irrational belief in the success of what you’re doing, but approaching it in a risk-intelligent and a strategy-intelligent way. Those are all the concepts applied – which in some cases will be really spectacular – but obviously, you have to navigate more landmines and speed bumps and death traps and potholes as part of doing it, because that’s part of what a bear market means.

It sounds like obviously, risk management is always important, but it sounds like in a bear market, risk management becomes one of the most important things you do, and you have to do it intelligently. It’s not just “slow down and don’t do anything,” but it is not the “Go, go bull market! Hey, try as much as you can!”

“It’s not just about having an irrational belief in the success of what you’re doing, but approaching it in a risk-intelligent and a strategy-intelligent way.”

Yes. One of the key differences (which is well teased out between bear markets and bull markets) is what is the cost of error? How severe might the error be? In bull markets, you can frequently just kind of raise more capital, kind of readjust to the mistake. In a bear market, you tend to just get hit and it can be unrecoverable. You’re much more careful about errors.

Again, part of the thing about all entrepreneurial business is that you will be taking risks. Taking it intelligently and how to navigate it is still there. There’s no way to be risk-free. [But in bear markets] you’re taking fewer risks, you’re managing them more carefully, you are adjusting more quickly. The fewer risks with higher cost is the usual pattern in a bear versus a bull market.

We’ve spoken a lot about playing defense, but how about the opposite? How about playing offense? The entrepreneurs can’t win solely by playing defense. They have to think about how they’re going to find those silver linings and figure out what they can do to go ahead and win that market.

Well, generally speaking, during bear markets (because of that higher cost and incidence of a failure costing a lot more, a mistake costing a lot more), what you first do is kind of crosscheck all your defense. It doesn’t mean you stay there. There’s subtle second order effects. Okay, what’s going to happen with my customers? My customers will be buying less, buying more slowly, asking for discounts, failing to renew, going out of business themselves. Advertising is one of the more optional spends that businesses throttle down during bear markets versus bull markets and so forth.

Now that being said, whatever you can play on offense, usually, is a massive differential because a lot of your competitors won’t be able to play offense. If you can spend money on advertising, advertising would be a lot cheaper, and then you can grow in that way. Once you’ve the defense game, then playing offense is intelligent and important to do because it’s precisely you get a magnified outcome and it’s part of the reason why you can create a much more successful entrepreneurial business. When you can do it, you get a magnified outcome because so few of your competitors will be able to play offense.

One of the things that I think really helped along the way at LinkedIn is I think, you know mentioned before how our friend Dave Sze, gave you great advice to raise money right before the global financial crisis hit and LinkedIn was well-capitalized at that point in time as a result. What are some of the ways that you’re able to take advantage of that and play offense under those circumstances? What are some of the things that you did to take advantage of this kind of advice?

Well, so the kind of things that we did was, (and obviously, this is survivor’s bias, so I think it was smart), but it was like there’s always a certain amount of fortune and luck and all this stuff. Like for example, we said look, because I had money from PayPal, I did the initial seed where it might have otherwise been very hard to raise a seed. I then, because of the success from PayPal and getting money from great VCs like Greylock and Sequoia could then say, “Oh, we’re going to be one of the ones that’s going to be really successful.” We could recruit talent that way.

Then we said, well, we aren’t going to be focusing on revenue but we’re going to keep costs really tight and we’re going to go consumer as a way of doing it. Whereas, when you’re an enterprise [business], you have a SLA, high cost of serving, you also have a Salesforce, account management, all the rest. But we can say, look, we’re not going to have any of that. We’re going to focus entirely on product and development. We’re going to use viral marketing as the way we operate.

We also had the benefit as that was one of the times where the internet was boring and there was relatively little going on, so we could get a certain amount of attention from everything from individuals willing to experiment the service and send out invitations even though there wasn’t a lot of functionality to press writing about it. Again, the internet was boring in part because it was in the internet winter, and so a whole bunch of companies had died. Probably a lot of people, young people don’t even know, but older folks knew this and remembered it.

There was this site which was entirely about kind of the dancing on the graves, the soon-to-be graves of companies and describing them as totally idiotic ideas. This is again one of the classic ways that Silicon Valley and its learning network and entrepreneurs’ learning tend to be misunderstood. It’s like,”Ah, they were idiots because they would chart all these businesses. They didn’t have business models.” It was like, well, the next generation that are really valuable businesses didn’t really have solid business models either, whether it was LinkedIn or Facebook or others. Because what we learned was no, no, no, actually, in fact you still get the network to scale and then you have to innovate on the business on top of it and the different business models and one Facebook more advertising, one LinkedIn more subscription and enterprise services, et cetera as ways of doing this. That’s the way that these things kind of play out and that’s the kind of thing that you’re looking to do as an entrepreneur in these times.

Now, we’ve been speaking a lot to entrepreneurs and of course, that’s the primary audience we had in mind when we wrote Blitzscaling. The ideas of Blitzscaling and now Blitzscaling in a bear market are presumably relevant to other groups like the leaders at established companies, entrepreneurs outside the business world, the regular employees who just work at these Blitzscaling companies and their competitors. What advice do you have for the non-entrepreneurs about Blitzscaling in a bear market? What are the key lessons they should be thinking about whether they’re a company leader or just an employee?

Well again, just an application of things we just talked about. Treat the cost of risk and failure as much higher. Focus first on defense and then move to offense in terms of general strategic play. Try to get to offense, don’t forget it, but focus through that. Inasmuch as you’re choosing where to have a job, staying, moving, et cetera. It’s a similar set of principles. That was the reason why it’s a mistake when everyone goes to wealthy, large companies. That might be the right case for a number of individuals, but by the way, going to the right startups is a great time to do that as an instance. Those would be the kind of things to think about.

Then also, of course, by the way, part of how careers are made, just reflecting back on my own career, is PayPal was a canonical kind of go through the internet winner. It was one of the only two tech companies that went public in 2002. And to pull that off, it was by raising capital during that. It was taking a whole bunch of risks in order to get there, but to get through it, not only did it make a whole bunch of people a bunch of money – which then they went on to parlay to creating Yelp and creating YouTube and a bunch of other things. Also, part of it was the careers. That’s part of the reason why the PayPal mafia is still referred to, why even I’m referred to as the part of the PayPal mafia as part of my thing, but it’s the careers, that same kind of offense and amplification can be the right kind of springboard to a lot of amplification and whatever kind of professional you’re doing, those are good things to keep in mind as you shift to acceleration and offense once you’ve thought through the kind of defense and risk management.

I think that that is really important advice because I think a lot of us look at the balances in our bank accounts or brokerage accounts. We’re feeling a little down, maybe the numbers are smaller than they were before, but what your advice tells us, Reid, is this is actually a very promising time to either build a company or perhaps join a company that is on a track that no longer has as much competition for the financial and human capital that they need to grow. That this is something where all of us should look to our defense first, make sure that we have enough money whether it is an entrepreneur or as an individual, but then once we’ve secured our defenses, think about offense. Think about what we can do to take advantage of this particular time, all the change that’s going on, all the opportunities that perhaps weren’t open to us before. That’s something that really helps me be optimistic about the future, which is something I think we can all use right now.

Ultimately, entrepreneurship is one of the very key ways that you pull out of bull markets and recessions and other things, because you’re creating the new kinds of products and services that people will buy, will create jobs and then create that flywheel going. Fundamentally, once the economies get going, it has a natural growth characteristic. Entrepreneurship is the starter motor, the scale motor, the driving motor for how these new companies, these new product services, these new jobs are created. That’s part of the reason why to be not just optimistic, but engaged and to create the future.

Well Reid, I think that that’s a fantastic note on which to conclude.


Reid Hoffman

Reid builds networks to grow iconic global businesses, as an entrepreneur and as an investor.

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