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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In the Middle East, Unnecessary Show of Weakness as Bad as Unnecessary Show of Force

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The way we invaded Iraq and Afghanistan were asinine. The debacle of our Middle East policies the first decade of the century created a terrible atmosphere. Rather than correcting it, we’ve decided to make it much, much worse the last five years.

Let’s look at the situation in reverse order. The conclusion is that we messed things up by going in and then we made it worse by getting out before the job was done. Too much unnecessary force followed by excessive demonstrations of weakness did not cancel each other out. The combination established the worst possible situation in the Middle East.

Things are only going to get worse from here if we don’t act decisively very soon.

Now that we have the conclusion, let’s look at the rant about poor choices followed by a rallying call for the only possible solutions.

The Middle East Rant

Barack Obama George W. Bush

It’s with soberness and no feelings of pride that I recall debates I used to have when I opposed the wars. Back in the days when even a good number of liberal lawmakers followed President George W. Bush into misguided demonstrations of force, I was labeled as unpatriotic. My arguments that we were creating instability for no reason by going after people who had nothing to do with 9/11 fell on deaf ears.

These policies helped to arm the enemies of our enemies. Doing so arguably helped in the short term but led to the creation of enemies who have the potential of being far worse than anything Osama bin Laden ever dreamed. It helped to bring about the Arab Spring. It weakened Iraq to the point of dependency and turned Afghanistan into the ultimate spawning point for radical Islam to build roots.

The only thing worse than starting a fight that should never have happened is to not finish it. It’s the worst possible scenario – destabilize and weaken those who were holding the Middle East together, then abandon the mission before it’s done. It doesn’t really matter which was worse. We shouldn’t have gone in and we shouldn’t have left when we did. These are concepts that the US government doesn’t seem to understand and that the American people have chosen to ignore.

There are two different factors at play, here. For the people, it’s a matter of conflicting politics. We went in with the approval of citizens and we pulled out at the request of citizens. With that understood, this is one of those all-too-common situations where the citizens have been manipulated to believe what the agenda wanted us to believe.

In essence, our accumulated efforts for the last 14 years have had the opposite effects of what we were told. Iraq wasn’t liberated. It was harmed beyond repair. Afghanistan wasn’t cleansed of dangerous enemies. It was built up as the safe haven for emerging enemies.  Peace and Democracy weren’t established through the Arab Spring. A crumbled semblance of governance was inserted to disguise the unpopular truth that the previous secular regimes, while obtuse to our western sensibilities, were better for the people than the turmoil that has followed.

President Bush lived up to his hawkish reputation. President Barack Obama is trying to live up to the Nobel Peace Prize he never earned. The results have been catastrophic for the Middle East and it’s now spreading around the world.

Weakness Invited Russia and Pushed the Migrant Crisis

Vladimir Putin Watching

It would be easy to write a detailed book about how the Bush/Obama policies have created the atmosphere conducive to Russia’s emergence as the rising force in the Middle East. They are rapidly taking the role that the United States has abandoned. We talk. We frown. How could we have expected anything else, particularly after the Syrian red line was crossed without repercussions?

The Obama Administration has demonstrated so much weakness that we’re on the verge of losing all influence in the Middle East outside of Israel and Saudi Arabia (even though the Iran Deal has changed the calculus with both of those relationships). It’s as if we barged into the Middle East unwelcomed, made a mess of things, and departed like a bad party guest who made a mess and bailed out.

The migrant crisis is a direct result of these combined policies. Those who are fleeing righteously feel like they have no choice based upon the atmosphere we created. Those who are “fleeing” with them to plant seeds of the caliphate in western culture are laughing at the situation knowing that we laid down the elements that could lead to our own demise.

Strength and Decisive Sensibility is Required

Voting

There is a good chance that by January 20, 2017, it may already be too late to salvage the situation. Russia may be so entrenched that they’ll essentially replace the United States as the dominant force. We have to act now.

Unfortunately, that may not be possible. The President is in legacy-building mode. The chances of him addressing Russia, the Islamic State, or any of the other players in the region are slim. That’s not to say that the citizens shouldn’t act; if it’s possible at all to create enough awareness of what’s happening, lawmakers may be forced to take the actions required over the next few months. It’s highly unlikely but if we don’t try, it definitely won’t happen.

Plan B is to push for the right person to take over the White House and bring the appropriate level of strength to our Middle East policy. The last time I worked on a Presidential Election was as a College Republican in 1992. Since then, I have only loosely endorsed or attacked candidates. It’s not that I didn’t care. It’s that I’ve always understood the power of the President rests in the sentiment of the people and the situations we’ve faced for the last two decades were minor.

9/11 changed that. Now the situations are dire, but I had nobody to support. Bush was wrong. His opponents were wrong. John McCain didn’t offer a strong alternative. Mitt Romney never had a chance and his opponents in the GOP weren’t much better. Despite the importance of the situations we’ve faced over the last three election cycles since 9/11, I allowed futility to push me towards addressing the issues in other ways.

This election cycle is different. We are in the middle of the most important primary season since Ronald Reagan fought George H. W. Bush for the nomination in 1980. Who the Republicans choose as their nominee will have a dramatic effect on the course of the world. We are facing multiple existential threats and the right person must be nominated.

After carefully weighing the opinions, track records, and abilities of the major GOP candidates, I’ve come to the conclusion that Ted Cruz is the only one who will handle foreign affairs properly in the coming years. There are other good candidates; four or five of them would have been a better choice than anyone in the field the last two election cycles. However, for America to sensibly and appropriately utilize our strength to address the tumult that surrounds us, Cruz is the most qualified by a long shot.

On January 20, 2017, certain things have to start happening for our country to move forward and for the world to not fall apart. If the right actions aren’t taken, we will be seeing a much worse situation before the 2020 election. We may even see a world that has crumbled.

Soshable

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