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Recession and (ir)Rational Confessions (1/2)

This is a going to be a two part post with some ideas on managing Customer Success organizations during tough economic times. In this first part, we'll discuss some of the economic conditions that led us to our current quandary. No, it's not COVID.


Economic theory will be touched on, but you don't need to be a mathematician to read on. Like most stories about the economy, this one is about people, not equations. And, its about time we all talk plainly about these things.


Before I continue, as a recent dad, I care about fixing the system, as much as I care about getting through the next few months. Recessions hit the poor the hardest, and not knowing where kiddo will end up, I'm concerned. We're smarter than we think.


Lets Play the Long Game


Once upon a time, in an economy far, far away, it was decided that economics and the market was too complex for normal people to comprehend. Volumes of text books were written on economic theory, and only an acceptance letter or janitorial role from a university somewhere near Boston, would give you access to the secrets of money.


The equations of the pages laid out the true nature of how money moves through the economy. For most, the closest we could get to understanding "Elasticity" was the waist band in our dad-bod jeans.


The equations hid a religious reverence for free markets. But, economics is more properly understood as the study of people, not equations. So lets go all mythbusters on the economy, and together, we can understand how we got here.


Lets focus on the myth that got us into this predicament - that the market is omniscient.


How Much is a Loaf of Bread?


If I asked you how much a loaf of bread costs, you could answer pretty easily, and would likely land somewhere between $1.50 for the cheap stuff (that makes excellent grilled cheeses), up to around $5.29 for the good stuff (that ALSO makes excellent grilled cheeses).


What if I asked you why a loaf of bread cost that much? Or why its priced that way relative to milk? That's a bit more complicated, but doable. We could point to things like unit economics, supply and demand, reseller and distribution models, and at some point, come up with a good reason why a loaf of bread is a couple bucks. Now, for the harder question: What if I asked you why a one-of-a-kind Banksy painting was selling at auction for $1 million dollars?


We don't really have other points of reference for this, as it's one-of-a-kind. The old answer was this idea of Market Omniscience. The arguments goes something like this: Markets are busy places, full of buyers, sellers, and middlemen. These players are all exchanging information, and generally, pricing is transparent. We know when a loaf of bread sells for $2. We know when the last Banksy sold for $750K. We know when OPEC cuts or increases oil production. And, we know when the price of Google goes up 15%. From this, we can usually assume prices are somewhat reasonable. We can do some research, and tell if we're overpaying for a loaf of bread, and if we are, we can choose to shop the pasta aisle rather than bread aisle.


Without a full history lesson, the 2008 housing bubble entirely proved this wrong. Markets are like your smart friend that drinks too much. Really smart sometimes, but when he gets tipsy, he's going to try and parkour off the roof into the pool, and probably break an arm.


What does this have to do with starting up?


I'm going to go on a limb and offer some critiques of VCs. I know you're not supposed to do that, unless you're meeting privately with other founders.Then half your time is probably spent talking shit about term sheets and lack of follow-on.


It's not personal, I'd done the same thing. Now lets continue.


We might ask, how does this relate to startups? After all, unlike public markets, VC, PE, and all other acronyms for risky investing is largely unregulated. As long as you're accredited, you can play ball. This makes sense, as it allows capital to flow into innovative and disruptive idea. And, by the time these deals make there way to the public market, Market Omniscience will be there to do its thing. Unfortunately, this lever is broken.


Simply put, valuations have gotten crazy. You can do some independent research if you don't believe me, but various sources have shown multiples have increased ~25% over the last few years. Slight overvaluations compound as companies move up the food chain, and with each round and eventual IPO or M&A, these are ultimately pushed into the public markets. Expectations of flywheel revenue, network effects, and economies of scale never convert to profit, and the cycle continues.


There are some considerations. Innovation has largely stagnated, and as VCs run out of unicorn ideas, innovation has come in the form of creative accounting and moving deals upstream. To fix this, we need to find ways to innovate in model that translate first to profitability, not deals. My guess is more holistic ecosystems to build and launch companies is the answer. Alternatively, investing in STEM research to build new things in atoms and quarks, not bits and bytes, is attractive.


[For transparency, there is an entire section I deleted which was more an angry tirade against the system and all that. It's frustrating. Short-term thinking means people are going to go hungry, and kids are going to miss Christmas.]


We should try and solve for everyones short-term pain. This will be the primary topic on the next post. However, to stay focused here, lets keep this theoretical. We're all a bit irrational sometimes. We're all in this together. And Customer Success can be our compass north for getting back on track.

The Market Knows Some Things


Markets may be bad at guessing how much WeWork is worth, or how much a gallon of gas is, in absolute terms. However, your customers are the ultimate keepers of truth. They are the steadfast reminders of whether you're building cool things that they will pay for. Before getting tactical in the next post, the over-arching philosophy of customer success can help get us back on course. Focus on building relationships, which become conduits for information exchange, which can then be converted into both IP and human capital. Not complicated. To close, I'll quote my favorite janitor. How bout dem apples?

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