During a recent Twitter Space, M13 Partner Anna Barber and I looked back at the dot-com crash in search of lessons operators can use to avoid missteps founders have made in past downturns.
In our conversation, Barber spoke about how founders can better align with investors and employees while managing uncertainty, the dangers of growing too quickly and the economic, social and emotional impacts created when so many companies close their doors at once.
I was part of the first wave of tech workers who flooded San Francisco during the dot-com era.
So many companies were flocking to the Bay Area that the vacancy rate for rental housing was less than 1% when I arrived. The apartment complex my employer used for temporary housing became my home for several years; a co-worker who’d moved cross-country euthanized his cat because he and his pregnant partner were unable to find a pet-friendly landlord.
I was clueless about startup operations, financing and venture capital, but I didn’t need to be an economist to realize that most of the companies I worked for lacked solid fundamentals. The very startups that offered in-house massages, catered meals, laundry service and oil changes in the parking lot were also purchasing Super Bowl ads and freeway billboards as their stock prices fell and quarterly losses mounted.
Still, our team-building exercises included cooking classes, go-kart races and trips to local driving ranges. One black-tie work party I attended caused a run on several area tuxedo rental shops. When my company’s softball team played against Yahoo! (which insisted that everyone use the exclamation point), you should have seen the other players’ faces when we announced substitute players Barry and Bobby Bonds.
“The macroeconomic market is just noise”
“Line goes up” is not a new vibe. As Wikipedia’s Dot-com Bubble Crash page aptly explains, the Nasdaq composite rose 400% between 1995 and 2000, and everyone who mattered acted as if the party would never end. The economic conditions that created the current downturn aren’t the same as those that burst the bubble, but many of the lessons learned are relevant to today’s founders and startup workers, most of whom have never experienced lean times.
I have crates from Webvan, a grocery delivery service that failed so spectacularly that MBA candidates still use it as a case study. Like Kozmo.com, Petstore.com, eToys and other companies that delivered consumer packaged goods, Webvan hemorrhaged cash, earned tons of enthusiastic press coverage, and its backers were content to ride things out until it left behind a smoking crater. (And thousands of reusable plastic storage bins.)
Previously the managing director of Techstars and a founding partner at the Fund LA, M13 Partner Anna Barber was on the front lines of the pet-food wars: She was VP of product at Petstore.com when the company was sold off in a fire sale.
“We laid off our staff except one person who stayed around with the CEO to help wind down the company and settle up with all our creditors,” Barber said. “That person was me.”
“The macroeconomic market is just noise that you have to cut up. Don’t believe your own press, right?” Anna Barber
Although Petstore.com launched early and aired a Super Bowl commercial, other cash-rich startups also took to the airwaves to announce themselves and drum up new customers. Its founders raised $90 million, but without any effective means to target their advertising, “we found ourselves in this bloodbath of customer acquisition,” she recalled.
The company initially set up shop in a small facility in Emeryville, California, just a short distance from the Bay Bridge, but a year later, demand forced them to scale up to a 100,000-square-foot warehouse. Like a horde of unprofitable startups, Petstore.com’s founders planned to go public. Instead, the company ended up in the clutches of Pets.com, a competitor that had squeaked through the IPO window before it slammed shut.
“The market changed so quickly, we weren’t kind of given the time and space to figure it out,” said Barber. “One thing that was different from today is that a lot of people thought the whole tech industry was just going to go away.” Inside hundreds of startups, this sudden reversal of fortune challenged Silicon Valley’s prevailing narrative that these were world-changing companies.
“The macroeconomic market is just noise that you have to cut up,” said Barber. “Don’t believe your own press, right?” Instead of instinctively going into survival mode, she said founders should ask themselves existential questions like, “Why did you start this business? What are the fundamentals? Who are your customers? What problem are you solving?”
“Trust is more important than ever”
Many first-time founders have been encouraged to believe that good storytelling and social skills are enough to convince investors that things are moving according to plan, but they are mistaken.
“At a time like this, trust is more important than ever,” said Barber, adding that she tells entrepreneurs to stay in close touch, “particularly around bad news.” Before problems arise and between regularly scheduled meetings, entrepreneurs should get comfortable with asking for help and advice.
“Tell them what you need. This is what we’re here for: to roll up our sleeves and help problem-solve with you. Nobody expects any of this to be smooth sailing.”