Facing crises with honour
The Lindy effect... again
Again … survival first
This is not an option, it is not even likely or probable: it is bound to happen. If your business survives long enough, you will eventually face crises. Do not underestimate their probability to happen.
In the same vein, underestimating your opponent in a competitive boxing bout is pure downsides: you gain nothing by doing so. Ignoring potential crises and underestimating their effect on the market you operate in brings infinite downsides and limited upsides. This is usually where entrepreneurs and investors ignore tail risks because they think it should not happen. Well, it always happened, it is kinda happening now, and it will happen again. If you think long-term - and you should - underestimating potential crises and relying on a permanent bullish market is the perfect recipe for disaster. You can be extremely lucky and only have to experience mild stressors, but there are infinite downsides in counting on such luck. Here are a few examples :
A two-year-old retail business faced a supply chain shock due to the Russia-Ukraine war.
A five-year-old business had to go through the Covid pandemic.
A ten-year-old business in Brazil or in China faced severe downturns, and any bootstraped tech business had to deal with zero interest rates, inflated artificial competitors, and horrible shortage of software engineers.
A 15-year-old business got smashed by the 2007-2009 worldwide recession.
And so on.
At this stage, let’s ask the following question : Why is it that most online content on entrepreneurship focuses on growth and revenues, and not at all on margin, profits, robustness and antifragility? Probably because the collective digital memory is horribly short-term, and that the past zero-interest-rates years have given birth to hundreds if not thousands of non-sustainable, artificial tech companies and retail kamikazes willing to spread their “this time is different”1 business. Also, it is more appealing for potential followers and this-time-is-different entrepreneurs and investors. Surf on a wave, raise money on a hype, and sell equity to a greater fool.
In The systematic venture, I am talking to entrepreneurs who take no shortcuts, those who equate their business venture success to profits: if you are one of them, then you’d better build your business with survival in mind. I don’t like the term preparing for the worst, because I think it’s actually the norm: economic downturns happen, and most of your unprepared, bloated, and spoiled competitors will blame the entire world and eventually die. Recessions and downturns are amazing opportunities, if you build your business with survival in mind.
If you are an avid reader of this journal - which you are not - you may remember one of the very first articles on the chapter Core principles. I explained why long-term thinking is the only way, and robustness to tail risks a necessary but non-sufficient condition to entrepreneurial success.
Robustness : cost structure and margins
Building a robust business might seem simple… though it's certainly not easy. I find myself revisiting advice you've likely encountered here before… watch your god damn costs. But there's more to it than that. Both your costs and your margins are foundational to your robustness.
Costs
Maintain frugality as a core value; do not spend money on what does not bring direct business value to your customer. A dinner generally offers no great business value.
Don't subsidize growth: if your cost of acquisition eats all your margin, then you should try to stop subsidizing your growth. If your clients run away, then it’s critical.
Hiring is not always the answer; don't solve problems that don't offer direct value to your client. Client-facing team members should not be burdened with dealing with costly, zealous, and useless middle management2.
Eliminate bureaucracy: it's a significant operational cost. Cut all unnecessary meetings and meet only when needed. Write concise notes, provide autonomy and clear responsibilities to team members, avoid voice notes, and foster a strong bias towards action rather than excessive planning. 95% of meetings are totally pointless.
Don’t optimize stuff you should not be doing in the first place.
Margins
Iterate on pricing and leverage your pricing power: you may find that you can sell your services at a higher price while offering improved service. In my accounting software company, I doubled my prices overnight and … still attracted as many users as before3. If some smart-ass tells you about price elasticity of demand … well watch your hiring strategy.
Understand your margin: if your business's profitability depends on temporary macroeconomic conditions, it's time to pivot. For instance, some credit fintechs had access to essentially free money they could lend at 5-10% interest rates: this was obviously a temporary arbitrage opportunity... yet some suckers built entire business models on that.
Antifragility … product and clients
Robust is the first step, antifragile is the ultimate goal.
Antifragility4 extends beyond robustness. While robust entities resist change under stress, antifragile ones thrive and grow stronger. You want a business that gain from external stressors.
A crucial concept to understand here is the Lindy effect5
The Lindy effect (also known as Lindy's Law) is a theorized phenomenon by which the future life expectancy of some non-perishable things, like a technology or an idea, is proportional to their current age. Thus, the Lindy effect proposes the longer a period something has survived to exist or be used in the present, the longer its remaining life expectancy. Crucially, antifragile businesses maintain liquidity and the capacity to invest when others falter, positioning themselves to attract power-law returns precisely because they are designed to excel during downturns. Your goal is not only to be robust but to become antifragile. To achieve this, especially as a B2B provider, you need to target Lindy-compatible market niches.
Product
Solve a problem that will likely be relevant every single year for the next twenty years. If it's only relevant some years, that's not sufficient; if it's relevant for up to the next five years, that's also not enough. Focus on solving problems people will keep facing. Long-term only. Build your business on something unlikely to change.
Ideally, solve a problem that's somehow tied to the survival of your client. If it's a business, ensure they can continue spending on it during downturns; if it's a consumer, make sure it remains a necessity. For instance, dashboard analytics software connecting to the bank or digital marketing companies offering ads optimization on social media are likely to face cuts in the next downturn. Answer the following question: Will your clients need you when their revenues decrease? The ultimate examples are lawyers, doctors, and plumbers. The ultimate counter-examples are life coaches, tarot card readers, and Web3 enthusiasts6.
Market
If your company operates in a B2B (business-to-business) environment, calculate your Lindy-2-year revenue, Lindy-5-year revenue, and Lindy-10-year revenue. What does that involve? Group your client companies by their date of creation, and calculate your revenue considering that the survival rate of your portfolio is perfectly equal to their time of existence. This method will give you a preliminary estimation of your company's survival in downturns.
Choose your clients wisely. Growth-at-all-costs influencers and some VC-backed entities have trouble understanding dynamic markets and often end up facing difficulties.
Do not build a company dependent on fragile clients. For instance, absolutely all my clients in the construction sector in Colombia went bust during the last six months. I never increase my operational costs based on clients that are likely to fail. I consider them bonus cash flow that will likely not exist in the next 24 months.
A rule of thumb: only increase your fixed costs for businesses that are compatible with the Lindy effect for 5 years or 10 years, suggesting they have a track record or potential for long-term survival.
Title of a great financial history book : “This time is different” on why it’s pretty much never different… now you have no excuse.
Even worst if they have an MBA. Worst case : They have EX-STH on their LInkedin. Fire them immediately.
Don’t change terms on existing clients
Antifragility is a property of systems in which they increase in capability to thrive as a result of stressors, shocks, volatility, noise, mistakes, faults, attacks, or failures. The concept was developed by Nassim Nicholas Taleb in his book, Antifragile, and in technical papers
They did not even make money during the bubble … imagine now