This may be the perfect week to cut unnecessary growth spending

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A few weeks ago, I wrote about a gutsy decision Poshmark’s Manish Chandra made back in 2013: Slashing his marketing costs by some 80%, damn the high-growth consequences.

He’d gotten caught up in all the same paying-for-growth mania as the rest of the Valley, but noticed that as commerce companies posted impressive numbers for a while that way, eventually it topped out. Poshmark took an initial hit, but wound up growing far faster, more cost-effectively and more organically. It was a decision against raising a mega round to keep gaudy growth numbers growing. But, he argued, one that saved the company.

It was visibly unsettling for him to think about what could have happened if he hadn’t made that call. I compared it to narrowly avoiding a car crash because you weren’t paying attention and only realizing after the fact how close you may have come to death. “Exactly!” he practically screamed.

Lemme give a bunch of startups out there some advice: Do this right now. Your growth numbers will take an immediate hit, but this is the perfect time. No matter what happens you are probably worth ⅓ less than you were a few months ago. Some of the best startups created in recent years are all taking hits right now in mutual fund write downs and other negative reports on slowing growth. Remember Zenefits, aka one of the fastest growing business software companies in history?

It’s experiencing something similar to what worried Chandra. From the Journal:

Since late summer, Zenefits has frozen hiring in certain departments as sales teams have repeatedly missed targets, according to people familiar with the matter. It has cut the pay of some employees and dozens of people, including at least eight executives, have left or been fired, the people said.

Zenefits has said it aims to reach $ 100 million in expected annual revenue, based on its number of users, by January. A customer milestone hit in August suggested the figure had reached about $ 45 million by that point, according to people familiar with the matter, who say it will be difficult for the company to reach its target. 

Not a story anyone wants written following a $ 4.5 billion valuation that some people called the peak of the market. But it’s the best possible week from a PR perspective, because so many unicorns are looking wounded right now. It seems more the market than mismanagement.

Stalling growth will just look like something everyone is experiencing. And if employees, investors and the press get wind of the slowing growth and start to freak out, you’ll have a seemingly responsible excuse: We wanted to reduce our customer acquisition cost and run the business more conservatively.

Not every company should do this, obviously. A slowing market can be some of the best times to invest and grab share if you are in a position of strength. For instance, you could argue it makes sense for leaders in a crowded market who have a massive fundraising advantage, to continue to bleed out less-well-funded rivals.

But there’s one “truism” in the Valley that Poshmark – at least – proves is not true: It’s always a good idea to invest in growth if you are network effects business. In recent weeks, I’ve asked VCs to explain to me the concern trolling over burn rates, given they serve on the boards of and fund the companies in question. Is this seriously a case of naive entrepreneurs just wildly spending with no regard to investors’ sage advice?

One thing I keep hearing: Well, if it’s a network effects business, it makes sense to pay to acquire customers.

What?

There are two problems with that rationale: Network effects businesses are not all created equally. Poshmark is certainly a network effects business. There is a 1:1 seller to buyer ratio, which is one thing that keeps both parties so engaged. The more people who enter the system, the more everyone benefits. And yet, paying up for that was not the best way to grow, as it turned out. Chandra – in fact – argued that because of its strength as a network effect business, it shouldn’t have to pay up quite so much. It should be able to grow somewhat organically.

The other problem is that a lot of companies think they are network effects businesses, and they just aren’t. It may look like it on a whiteboard, but not on paper. Consider HomeJoy. It’s unclear that anyone really benefitted more from others joining. Retention rates were horrible, they paid too much to acquire customers, and more cleaners joining wouldn’t have done anything to change that. I guarantee there is a deck somewhere describing the network effects HomeJoy would enjoy.

Network effects is one of those dog-whistle terms entrepreneurs throw around, because a high percentage of companies worth deca-corn prices in the public markets were network effects businesses. But that, in and of itself, doesn’t mean a company will succeed – or that it justifies heavy spending to acquire users. This should be obvious, but these businesses only work if large numbers of people see value, join, and keep using it. Every social network ever attempted was a network effect business too. And thousands still failed.

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What the Debt and Spending Hike Abomination Means in Layman’s Terms

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Since the economic crash of 2006-2009 (often called the downturn of 2008), two things have been clear to economists who are paying enough attention and politicians who care enough to gain true understanding of the situation: the United States economy is only alive through artificial means and there is no feasible way to fix it without extreme measures.

They know this. They’ve been able to maintain a modicum of faux-stability through quantitative easing and the destructive effects of zero interest rates combined with an exceptional disinformation and propaganda campaign that has mysteriously (some would say supernaturally) kept the majority of Americans from feeling true negative effects. I’m not talking about people losing their jobs or living in poverty. Those things are bad enough and are clearly happening around us all. The true negative effects I mean would come from a complete and sudden “bursting of the bubble” upon which we’re riding that will have catastrophic consequences for every non-financial-elite American, not to mention in most countries around the world.

The propaganda has been so strong that it’s almost admirable. After all, if Americans were allowed to look down and see the depth of the precipice we’re currently dangling ourselves over, we would panic. That panic would cause the very bursting of the bubble that we’re trying to avoid, so I understand the reasons for it. However, the continuous debt and spending increases, including the one that just passed in the Senate, have to stop. There is only one possible man-made solution to the problem and it’s the extremely unpopular notion of deep cuts to spending and a renegotiation of the debt situation. Both options are exceptionally ugly as they would have different negative consequences, but it’s the type of hard choice that very few in Washington DC seem willing to consider.

Before anyone calls this a “scare piece” to rally support for Rand Paul, Ted Cruz, or Marco Rubio, we have to take a look at the situation. Here’s the best example I can think of in layman terms:

It’s like a family deciding that they need to take out a high-interest loan to pay off a credit card in order to continue to use the credit card. The sad part is that the family is not cutting back on spending and in fact has decided to spend more with their “clean” credit card. What makes it even worse is that the interest that they have to pay on the high-interest loan is paid by the credit card. It’s a circle of dysfunction that would sink any family, company, or organization. It would also sink any other country that wasn’t the home of the world’s reserve currency, the petrodollar.

Some might wonder how this has been allowed to continue if it’s so damaging. The reason is because we’re dealing with such a dramatic scale – trillions of dollars – that on the surface it seems insurmountable. The money to pay the debt would be borrowed from the lenders who own the debt in the first place. Sounds crazy, right? It’s one of those backdoor deals that only makes sense to those who are either in the middle of it or oblivious to it. In essence, the debtor (the US) is only allowed to keep borrowing money that it clearly cannot pay because the interest alone is so substantial that the lenders couldn’t imagine not receiving it. From the Federal Reserve to other countries, they’re all okay with getting the interest and letting the principle continue to grow. Yes, grow.

Don’t even get me started on Social Security and other government black holes that are so deep in the debt pool that reconciliation is practically impossible. We owe trillions of dollars to Social Security, military retirement, government employee retirement, and disability. In other words, the US government has borrowed money from the US government in a paper shifting scheme that puts Ponzis to shame for not being that creative. We are literally borrowing money from ourselves that doesn’t even exist.

This is worse than a scam. It’s worse than a racket. It’s worse than a con. At least with a scam there’s a winner and a loser. Raising debt ceilings and increasing spending is making today’s economy lose a great deal while making the future economy lose even more.

It’s my contention that if the American people knew how all of this was working, that they would cry at the top of their lungs to make it stop immediately. That would have a humongous effect on current politicians and would cause a shakeup never seen before in the country. That’s the biggest reason that nobody is being told exactly how bad the situation is. This isn’t like Greece. This is much more akin to what’s currently happening in Venezuela.

The greatest tool the government has is that everything is so utterly unfathomable that most people don’t know what’s happening while the vast majority of those who do know are unwilling to let the cat out of the bag.

Soshable

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