David Heinemeier Hansson

November 28, 2022

Hard times make strong companies

The past decade+ of decadent funding has produced a generation of flappy and fragile tech companies. Fed with excessive capital as early startups, stuffed with absurd rounds of funding as wobbling scale-ups, and finally lobbed onto exuberant public investors at grotesque multiples. Many of these companies have never known real distress, and are thus unfit for the coming financial environment, let alone ready to fight for survival.

Because if your company comes of age in the easy times of infinite investments, it's hard not to develop bad habits. From marketing campaigns only measured in top-line lift to hiring drives that overstaff as a point of pride. The resource curse wrecks havoc on critical thinking, prudent projections, and risk management. When the going is good for so long, many are deluded into thinking it'll carry on forever. But it never does.

This is the nature of the business cycle. It's been like this since the advent of capitalism. But few industries have indulged in the excesses of The Good Times to the degree of tech in the past decade. Fueled by investors gorging on loss-making moonshots to fight zero or negative interest rates. Now these investors are seeing their bets burn up 70-80-90% of recent-high valuations as they come crashing back to earth.

But while the business cycle has many ill effects, it also has redeeming qualities. It clears the brush of dead wood and puts zombie companies out of their misery. If, and only if, it's allowed to do its job. The trouble is when we go too long without a modest burn. The chaparral accumulates, the risks grow larger, so when it finally rips, the consequences turn catastrophic. That just might be where we are right now.

It's been a very long time since the tech industry has had to face the full brunt of a business cycle turning south. Even The Great Financial Crisis, as tough as it was, didn't match the dot-com bust for most tech companies. It's impossible to predict how far this financial fire that's just started will spread, but it's prudent to be prepared for a big one.

And that'll be a key differentiator between those who get through the next 12-18-24 months with a few scratches and those who'll loose their heads. The preparation for either outcome is being put in now, and that's when the return on those bad habits come to play.

See, it's one thing when you've developed bad habits as an obese monopoly, like, say, Google. When you own several crucial tollbooth on the internet, be that search or one of the two mobile app stores, your ability to muddle through is just entirely different from those lesser companies without a monopoly spigot.

Sure, Google might have 2-3-4x as many employees as they really need (the company now employs a scarcely believable 187,000 people!), and many of those employees might be dilly-dallying the day away in luxury canteens, but the world still runs on digital, and the tollbooths will keep printing money. In some ways it almost doesn't matter whether they're running an actual tech company or a set of adult day cares (at least until activist investors show up to complain about depressed stock prices).

It's another thing entirely, if you're merely mimicking the habits of such an obese monopoly, but you sell, say, enterprise business software with no viral vector or intrinsic moat. Suddenly anything resembling Google's largess will look ridiculous in the harsh light of the present economic conditions. Suddenly those hundreds of millions of dollars you've raised and burned will be judged as a capital vice. Suddenly the party is over.

But out of decadence rises redemption: 

Good times create weak companies.
Weak companies create hard times.
Hard times create strong companies.

As a founder, owner, or executive, your mission, should you choose to accept it, is to let these hard times forge a strong company. And to do so without complaining, without blaming. But by taking the steps necessary to meet the challenge. To embrace this crisis and improve the long-term prospects and habits of the business.

That's the ideal of antifragility. Not merely to withstand hardship, but to become stronger from it. With a leaner organization, with a clearer mission, with stronger fundamentals.

Good operators have been deprived this challenge over the past decade of this artificially-juiced economy. Seneca encapsulated this deprivation poetically:

I judge you unfortunate because you have never lived through misfortune. You have passed through life without an opponent —  no one can ever know what you are capable of, not even you.

That doesn't mean it won't be difficult. In fact, it means it'll be all the more difficult because the conditions that are now gone went on for so long, and made so many companies desperately out of shape for the challenge.

But today's difficult adjustment for existing companies is also the fertile grounds to grow something new. While existing players wobble about trying to get down to fighting size, anyone starting something new enter the world having known only the current conditions.

That's why so many strong companies emerge from hard times. Forced to be prudent, self-sufficient, and focused on getting the basics of the business right quickly, they engrain this ethos in the company. When that's done successfully enough, it'll carry forward even when the hardship is over (but rarely forever).

Either way, whether you're having to rejig an existing business to deal with the pressing circumstances or you're starting a new one to take advantage of them, accept your lot. Hell, be thankful for it. Any energy wasted on wishing you could get back what once was is futile.

Meet fate with a smile.

About David Heinemeier Hansson

Made Basecamp and HEY for the underdogs as co-owner and CTO of 37signals. Created Ruby on Rails. Wrote REWORK, It Doesn't Have to Be Crazy at Work, and REMOTE. Won at Le Mans as a racing driver. Fought the big tech monopolies as an antitrust advocate. Invested in Danish startups.