Oct 11 2015

When Greed Turns To Fear

There is a cliche in the financial world that has been around forever.

“Two things drive decisions: Greed and Fear”

For the past few years, we’ve been a zone where greed has been dominating. Every now and then a little fear creeps in and then gets squished into the corner by chants of “things are different this time” and “that’s just PTSD from the Internet bubble.”

Recently, the fear seems to be sticking around. There are plenty of people trying to kick it away, shake it off, or ignore it. But it lingers. And the smell of it gets stronger.

I had an exchange with a CEO the other day who was at an event in the bay area and commented on the attendees at the event. The telling line was:

They’ve never read the RIP Good Times deck, they don’t remember the Bin 38 fiasco, they think it’s the first go round.

I once again rolled out my favorite BSG line.

All this has happened before and all of it will happen again.

I’m a strong believer that you can build great companies in time of both greed and fear. But you have to be paying attention and operating under the right assumptions. You don’t have to believe history repeats itself, but you should accept that history rhymes. And one big rhyme is that the shift from greed to fear happens much faster than the shift from fear to greed.

If you are a founder running a high growth, VC backed company, here are a few questions to ask your investors today.

  1. What is the maximum amount of monthly net burn you are comfortable with for us right now?
  2. Based on our current course and speed, we run out of money in X months. If we can’t find a new lead investor, will you write us a check? How much and on what terms?
  3. If companies start failing left and right, do you think it will impact us in a meaningful way (either good or bad)? If yes, how?

There are no correct answers to these questions but they’ll give you a sense of how your investors are thinking along the greed – fear spectrum. You get bonus points if you ask the investor to walk you through what they were doing the last time things shifted from greed to fear and to tell you stories about things that went well for them, went poorly, and what they learned.

Don’t be afraid to explore what could happen well before it does. Our history rhymes with the famous John Galt quote “Nobody stays here by faking reality in any manner whatever.”