Figuring out which wave to ride (secular trends) is vital. Figuring out when to get on and when to get off is also important. You will never get the timing exactly right. It is like calling the top or bottom of a market. If you do manage to make exactly the right call, it is probably luck. But you can get the basic timing right. It doesn't take a genius to see which cycle you're in at any given time. What matters is figuring out what to do in each stage of the cycle.
Economic Cycles and Market Mood Cycles
The real economy is one thing, and the market another. At some point, they become related:
"In the short run, the market is a voting machine, but in the long run, it is a weighing machine." -- Benjamin Graham, The Intelligent Investor
The market's mood is what you tend to see in the headlines, in the swings of the NASDAQ, and so on.
11 Stages of the Market Mood-Swing Cycle
These are impossible to pin-point with accuracy, but knowing roughly where you are in these stages is useful:
- Wild, crazy boom time. Nothing could ever go wrong.
- Even wilder and crazier boom than anybody thought remotely possible. Publicly, no bears are around. Privately, some smart people are cashing out.
- The problems are obvious to anyone who bothers to see, but everyone is in denial, and even the perma-bears are starting to doubt themselves.
- Crash, panic, crisis, meltdown.
- Denial. "This only impacts those crazies, not me."
- "OMG, this is awful. When will this end?"
- "This could not get any worse... OMG, it just did!"
- "I see a light at the end of the tunnel." Bang! Train hits.
- Nobody will ever buy or invest in anything ever again. Time to stock up on canned food and plant a vegetable garden. (The recovery is well underway at this stage but largely invisible.)
- The media starts to see signs of recovery.
- It's official, front-page news: the good times are back! Go back to stage #1.
When Do Market Mood Swings Matter to Your Venture?
- When you are raising early-stage money. Confidence does matter at this stage. It has an impact on your valuation and, therefore, your dilution. But in the overall scheme of things, this is a minor issue. Start your venture when the time is right for you.
- When you are cashing out, exiting. At this stage, it really does matter.
The ideal timing looks something like this:
- Build in the quiet doom-and-gloom periods. If you were lucky enough to raise VC cash in the late stage of a boom, now is the time to cut back on your costs so hard that you look like a self-funded bootstrapper. If not, well, you'll have to live on ramen noodles and credit cards for a while.
- Raise money when the market shows early signs of recovery. Investors think ahead, so they look to invest before recoveries.
- Launch into an economic recovery. At this stage, you will need customers who can pay, and in a recession they do less of that. Sailing into a headwind is possible, just harder.
- Exit as the recovery kicks into high gear and morphs into a boom.
There Is No Economy, Only Customers
In even the deepest recession, people spend money. In the early stage of a business, you need so little revenue that the economy is fairly irrelevant. What matters is an incredibly strong value proposition to a very sharply defined set of customers.