A Recession is Coming
I go for a walk with our BD associate Holly every Wednesday morning to check in and talk shop (and also to get my pop culture updates), and she let it be known before a recent iteration of that get-together that she would like to use the time to discuss the potential for a recession and what that might mean for our portfolio. I said that sounded like a good use of time even though I know from Morgan Housel (who has forgotten about the little people) that predicting recessions is a fool’s errand. But with the stock market puking due to tariff uncertainty and who knows what else, it seemed worthwhile to discuss with her what might happen and how one might – personally and/or professionally – prepare.
What I ended up saying on my walk with Holly were two things. First, while recessions are unpredictable, they are also unavoidable, so it pays to stay prepared to weather one. This means operating at all times with a healthy dose of skepticism of how long the good times might last and how accurate your forecasting and modeling might be, with ample liquidity to meet your obligations should you need to. Remember, it’s only when the game doesn’t end on your terms that you lose.
Second, periodic recessions are good for long-term economic health and stability. That’s because if they never happened, there would be no risk and the world would become infinitely distracted by unproductive and inefficient uses of time and capital. After all, constraints beget innovation and prioritization, which are the driving forces of growth. (And, yes, I’m still bitter about us underperforming doge last year.)
Not unrelated, I had a call with a start-up investor in India later that day and we were trading notes about our respective markets. I asked him what valuations were like over there, and he said that in his space (mostly software), investments were being made at 5x revenue provided the company also had earnings.
When I remarked that that was much more expensive than the areas of the market Permanent Equity trafficks in, he agreed but noted that it was also a big change for his area. A few years back, he continued, valuations were 8x to 10x revenue and no one cared about earnings provided a prospective investment evidenced promising DAU, MAU, ARPU, CLV, and/or CAC trends. And if you don’t know what those acronyms mean, don’t worry about it. Because at the risk of sounding close-minded, when push comes to shove, they’re unserious if your business is not making money.
So don’t spend time worrying about a prospective recession. Instead, make sure you are prepared for when it comes and then use that challenging time to refocus on what matters. Because what truly matters will always matter regardless of the economic climate, and we all – personally and/or professionally – shouldn’t forget that.
– Tim
