Fire in a Crowded Forest
I was buying a bag of potatoes. A big one. Not because I liked potatoes, but because I wanted to pay my rent.
After years of eating every meal out, blowing money on clothes, and ignoring my bank balance, things had changed. A few weeks prior, I had been dreaming about what kind of sports car I was going to buy. Now I was trying to figuring out how to stay out of my parents basement.
MetaLab had been running for just under two years in November 2008. The stock market was in a free fall and my clients had stopped paying their bills. Some claimed to be unhappy with the work and demanded refunds. Others ghosted on me completely, leaving thousands of dollars of bills unpaid.
My bank account sunk to 3 digits as I built out worst case scenarios in my head, trying to figure out how I was going to stay in business.
I cut every cost I could think of, got rid of my expensive office, and scavenged around for work. Eventually, I landed an oddball project designing a website for a laser hair removal clinic.
I had been doing cutting edge work with high-flying Silicon Valley startups. I remember the client reading out the headline he wanted on the homepage: “SAY GOODBYE TO ACNE SCARS FOREVER”. Ugh.
How far the mighty had fallen.
It was depressing, but I rolled up my sleeves and got to work. It paid the bills.
I remember thinking, like a kid praying to Santa, that if things would go back to the way they were, I’d never complain again. I’d touched a hot stove.
Over the next few years the economy sputtered back to life, but it left a mark on me. In 2009 and 2010, I spent a lot of time reflecting on my close call. In a way, it became a fixation and grew to define how I run my companies. I never wanted to feel exposed like that again.
So I made some changes.
I started banking cash and learned accounting.
I never allowed any of my businesses to become dependent on outside capital.
I kept margins higher than average and eagle-eyed every expense.
I also started diversifying, buying or starting thirteen more businesses over the next ten years.
I was like a dust bowl farmer who had made it through the great depression. Three years of food in the cellar at all times.
Despite this experience, I still live in fear ten years later. A warm, all encompassing blanket of glorious, instructive, super protective fear. Because I’ve experienced what near business death feels like.
“All I want to know is where I die, so I’ll never go there.”
Of course, it wasn’t all doom and gloom. Surviving 2008 helped me turn my business into what it is today.
While I scraped by on funky projects from 2008 to 2010, many of my contemporaries packed it in. They took jobs at big companies or sold for pennies on the dollar in talent “acquisitions”.
After a few lean years, we started growing again. From 2010 to 2018, my company grew more than 30x. We were one of the few high quality product design agencies left standing and were well positioned to capitalize on the tech boom.
On top of that, learning accounting (something I always thought I hated) exposed me to the world of investing, which prompted me to start Tiny and buy tons of wonderful businesses.
All things considered, I’m much better off today having survived 2008.
Building Your Bridge
I worry that too many of today’s entrepreneurs don’t know what fear feels like. Times have been good for a very long time. Capital has come easy. The next venture round available at the drop of a hat. Investors fighting to give you their money. $6-million-dollar valuations, for first time entrepreneurs with an idea.
Believe it or not, that’s not normal.
The market is impossible to predict, but we can predict one thing: it will fluctuate. Sometimes a lot.
We can’t predict the timing of these fluctuations, but if you run a company for a long enough period of time, I guarantee you’ll experience a downturn.
Three things to stew on:
1. We haven’t had a major correction in over ten years.
2. We’re now in the longest bull market in history.
3. Investors have been very optimistic, plowing large amounts of capital into technology.
In short: it’s worth thinking about this stuff and using caution.
I like to encourage entrepreneurs to think of their businesses like a bridge. Well-engineered bridges are designed to support way more cars than they are designed to hold. This ensures that in all scenarios, even with double the number of cars they’re designed for, they’ll stay standing. A margin of safety.
A few questions to ask yourself:
- What would happen if you lost 40% of your revenue?
- What would happen if you couldn’t raise money for a year?
- What would happen if your customers stopped paying their bills for 3 months?
Yes, it’s uncomfortable spending time thinking through worst case scenarios, but think of it like wearing your seat belt. You only have a 1.3% chance of dying in a car accident (1 in 77 over your lifetime), but odds are you religiously belt up. The same is true in business, where the odds of failure are much higher. Why not do a bit of prep?
The worst case is you sleep better.
The best case is you save your business.
The last big recession turned out to be one of the best things that happened to my career. I hope you get to experience the next one in the same way that I did.
Just like in nature, we need a big forest fire to clean out the brush and make room for the next generation. They are devastating in the moment, but they serve a purpose and create opportunities for well positioned saplings.