On Scope Creep & ZIRP Lessons
Meandering thoughts on how ZIRP rewarded scope creep and why the shifts in markets and company building today could now reward focus
2019-2021 rewarded scope creep
2022 rewarded swift action
2023-2026 will reward focus
With each passing quarter from the insanity of 2021, it feels we get further clarity of thought surrounding the stupid things we did as individuals and as an industry… and every now and then the things we were proud of.
A constant theme over the past two years has been about companies getting financially “fit”1. With this distance of time, it feels like the core themes of 2019-2022 and ZIRP broadly was that it rewarded scope creep and eventually swift action (a euphemism for decisive layoffs).
There was an insatiable appetite for all things growth and for all things built around what was next, where companies could go, how TAM could expand, and more, regardless of how it impacted fundamentals.
In startups, we are optimists and willing to give credit to people who show an ability to do something at a small scale once, and extrapolate that to believe they can do it at larger scales many times. This was pushed to its maximum during this moment.
On the founder side this manifested itself in startups continuing to push the boundaries on their roadmaps and expand how they defined their “core competencies”2 before proving out even the main insight the company was predicated and founded on (aka PMF and scaled economics).
On the investor side it manifested itself in a variety of products because they were so good, investing was so easy, and the opportunity was so large that it necessitated more.
Vertical focused funds, solo funds, quant funds, crossover funds, debt funds, larger funds, faster funds, and on and on it went. People were so bored with the idea of just doing “classical” venture that they needed to reinvent the entire asset class structure leading to a perpetual paranoia that if you weren’t doing MORE you weren’t doing enough3…all before proving out competency at scale or the core insight their firms were predicated or founded on (aka DPI).
Lessons from Uber and Carta
In 2019 I wrote a post called Narratives & Pseudosecrets looking at how founders can utilize narrative expansion to draw in investors and capture more capital. In retrospect, this may have marked the beginning of the local top of narrative premium in tech markets.
The post starts with a cautionary tale of WeWork and then focuses on two topical examples of Uber and Carta (among others).
Uber was positioning itself as the Operating System for Everything ahead of an IPO likely knowing that a company with 10 years of scary economics and rough press may not fair well in public markets.
Uber went public in 2019, quickly sold off, rode the ZIRP bubble, then fell again to near all-time lows in 2022, with the company selling off ancillary business lines in an effort to re-accelerate its stock price from 2020 to 2023. Uber proved pseudosecrets and the narratives that came from the business were valuable in a cutthroat, low-margin industry (it did raise $12B+ in private markets). However, perhaps the real understanding was that focusing on one to two core areas (mobility + eats) is where all the value is captured, not a ponzi scheme of ambition.
Uber had its first profitable quarter in July 2023 and the stock is up over 110% in the past year to an all-time high.
The story of Carta is now very well known and over the past few months it has become even more clear that the narrative of the company, despite being built around secondary markets, and despite investors writing incredible memos about how things could be upended, was not to be.
Carta was rewarded for its core business of digitizing and organizing cap tables across both sides of the investment marketplace, but its scope creep to enable large TAM on the secondary side ultimately landed it in hot water. Despite the lack of revenue (~$3M) it feels clear to me that this was as much a failure of execution (and of course, comms) as it was the industry not moving at the correct pace and the tech bubble not lasting long enough in 2021 to enable them to build a large enough business to long-term sustain a moat in private secondaries.
Execution at each core inflection point of a business enables continual narrative growth, and pseudosecret belief vs. erosion and doubt because in the end, narratives and pseudosecrets only accrue value to their relevant companies if they eventually become truths.
Thankfully, I managed to end this post by saying that narratives need execution in order to proliferate eventually, with the idea culminating in a post marking the death of how deep tech companies used narratives called The End of Narrative-Only Deep Tech Companies.
ZIRP’s Lasting Impact & Shifting Dynamics in Company Building
Standing here in 2024 I believe that there have been lessons learned, but there also has been permanent damage done to a class of builders and investors.
When we see our peer founders or investors manage to thread a needle during bull markets, scope creeping and making their way out with great paper wealth, realized fortunes, or huge management fees to sit on, it becomes very easy to let one’s mind wander and hypothesize why the collective “we” aren't able to do the same types of things (or why we are dumb for starkly not doing so).
Whether you literally started your career over the past decade (this is all you know), or you just made all of your money in this timeframe (this is all you know that worked), the reality is the vast majority of technology careers have been forged throughout this ZIRP environment. Because of this, it’s easy to understand why people are reticent to change behavior.
But as markets changes in how they value scope creep, they also change in how value is captured and distributed, and how dominant startups win.
Put simply, if the prior decade of technology as an asset class was about incumbent industries being swallowed up by tech, leading to an expansion of the market cap of “tech” as a category, than the next may be about disruption and market cap destruction within tech itself.
Focusing on the core mission of the company, while being precise on how to best capture value from that goal matters more than ever in the current state of technology.
Company building has shifting dynamics today which include but are not limited to:
A lower barrier to entry for creating software enabled by better human and technological infrastructure (cloud + distributed work) and accelerating with CodeGen and other AI tools to increase productivity and lower the ability needed to ship product.
A higher barrier for accumulating growth stage capital in order to win a venture scale market and competition.
Lower multiples which means larger market share and dominance is needed in order to create compelling venture outcomes when the vast majority of businesses are valued terminally at 6-12x revenues.
Expanding Product, Not Mission
It’s important when talking about scope creep to not mistake this with product completeness.
One result of this past tech cycle was a view that companies needed to build hyper complex ponzi schemes of ambition in order to accumulate capital and be valued. This led to a variety of shooting stars that never realized their main goal.
Another view was an insane amount of value ascribed to hyper-narrow features masquerading as companies, leading to sub-optimal value capture on the company side and what many call “zombie startups” today.4
It’s likely that this new paradigm of software development and a non-ZIRP tech market means you need to have an expanding feature-set that enables a complete, cohesive product, to drive meaningful value to an expanding number of users across multiple fronts in order to build a venture-scale outcome ($250M+ in ARR).5 Focus thus should be on sequencing product expansion as milestones beget conviction which gives rise to clarity to the roadmap.
Expanding the product, but not aggressively expanding the mission.
Life Is For Lessons
It’s very possible that this focus-centric mindset is idealistic and this is yet another one of my old man yelling at clouds moment, however until Series B+ markets turn around I think this will prove materially true.
The industry will mostly6 reward companies that go deep into extracting their TAM and accumulate substantial moats and commercial market share, over loosely reasoned, ever-expanding company missions or weak but polished-looking synergistic plans.
No startup advice (and perhaps life advice) is better than the canonical saying of “you can’t bring facts to a feelings fight.”
To the point of learning lessons and shifting feelings that have been engrained in us for the last decade, this reward mechanism will only come when people first learn the harsh lessons from ZIRP due to failure either from their company shutting down or their portfolios dying or re-rating to a significant lower valuation than they expected.7 However, it will force a variety of people to understand just how difficult these games that we play are.
Perhaps most notably capped off by Altimeter’s memo to Meta, which, idk I guess Zuck listened to for a few quarters while still silently yeeting a ton on R&D.
This is in quotes because it’s ironic that “core competencies” can be perpetually, infinitely expanded.
This was capped off by Playing Different Games by Everett Randle which caught the zeitgeist and had VCs re-evaluating themselves every day.
There are of course, many things in the middle of this.
I get this is a somewhat gibberish and completely obvious statement.
Because who knows what Adam Neumann might pull off at any given time.
We thought this would happen in 2023…it didn’t. It probably will in 2024.