David Heinemeier Hansson

May 26, 2022

Who's been swimming naked?

"Only when the tide goes out do you discover who’s been swimming naked", says Warren Buffett, and now we're indeed seeing just how many tech companies have been indecently exposed as the investment mood snaps from greed to fear.

Bolt, for example, just announced a brutal 1/3 cut of all staff, after touching the sun with a $11 billion valuation just a few months ago. The secondary market for that stock has since been cut in half. Klarna and Robinhood both announced layoffs of about ten percent of staff. Klarna chopped 650 positions, after raising mad money at a $45 billion valuation less than a year ago. Robinhood chopped ~300 positions, after its public stock got crushed from a peak of $85 to less than ten bucks today.

Of course none of the companies are making any profits, never have made any profits, and did not have any plans for profits in the foreseeable future. They were financial instruments first, real companies second.

Across the industry, job offers are getting rescinded, open positions closed, and venture capitalists warning that the next couple of years will be deadly to startups.

And these are just the anticipatory moves! The funding winter has barely begun. The reserves are still there. Nothing is actually hurting yet. Imagine what things will look like if or when the winter actually starts to bite.

The receding tide is of course hitting the economy broadly, not just startups. But it's hitting startups and unprofitable tech public companies far harder and faster. We've gone from some of the wildest go-go markets this industry has ever seen to doom and gloom in a blink.

I must say it's rather curious to watch this from the bootstrapped and profitable side of the fence. Our business may shrink from a general economic slowdown, yes, but there's no need for emergency meetings. Drastic reconsiderations. Frazzled calls to nervous investors. Brutal lists of who to cut.

If anything, there's simply a renewed sense of obligation to preach the gospel of profitability. Of raising only as much money as is necessary (or nothing at all!) to get to break-even. Of funding growth with the proceeds of a successful operation. It's not rocket science, but it does take a strong conviction to sit out the funding game as the rounds get bigger, bolder, and more preposterous during the good times.

It's also hard to sell that message of basic business fundamentals during those good times. Who cares if the product ever has a path to profitability, if all investors value is growth uber alles. This is how every damn startup ceases to be a company and just becomes another "case". When every damn "journey" is actually just a death march between funding rounds. When nobody can stop talking about exits.

The sad truth is that nothing recalibrates the conversation as effectively as a crisis. In fact, our entire economic system, and the tech startup scene in particular, needs a proper crisis at regular intervals to tame the natural forces of exuberance. Like timely recurring burns prevent The Big One, we should not look at this with undue dismay, but with a form of systemic gratitude.