Good News for People who Hate Bad News

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best, Jason

Location: Mahalo HQ, Santa Monica, CA
Monday, October 27th, 12:00PM PST.
Word Count: 2,585
Jason’s List Subscriber Count: 9,400
List management:
Message type: Startups
Forwarding instructions: startups, VCs
Republishing: PLEASE DO NOT REPRINT (This includes Mike Arrington and
A month ago today, I wrote an email to you guys about about “(The)
Startup Depression.” When I wrote it, I obviously knew there were
rough waters ahead, but frankly I didn’t think a financial tsunami was
coming. Since I wrote that post on September 27th, we’ve seen the Dow
Jones drop from 11,143 to less than 8,000. One year ago, the Dow was
over 14,000. Think about the sheer destruction of wealth that has
occurred based on that fact alone.


The severity of what has happened can’t be underestimated. There will
be no white knight. Even the massive coordinated government
action–including the first global rate cuts and bail outs–has done
nothing to stop the panic or create a bottom (at least from where I

Bottom line: there is zero chance of a short or medium term-rebound.


As a startup, you are now, officially, on your own. You can’t count on
your VCs saving you or some magical offer from Yahoo or Google showing
up to bail you out. Chances are Yahoo and Google are going to be
shutting down and/or selling off companies they’ve already
bought–like EBAY and AOL have started doing. Parents don’t adopt
while they’re putting their kids up for adoption.

What you do in the next 30 days will probably make or break your company.

The storm is upon us and the death spiral has started. Once that
happens, you can’t stop it–you can only ride it out. Let’s take a
moment to see how this movie will play out. Since I’ve seen it two
times, so I think I know what the second and third acts will be.

What is “The Death Spiral”?
The death spiral for startups is like the condition that occurs to
pilots when they fly into “weather.” The “weather” right now is the
massive confusion and uncertainty of the financial and consumer

In other words, it’s so choppy and dark out there that none of us can
simply look out the windshield and know exactly where we are. The
greatest pilot in the world is a blind man in these conditions.

When a pilot flies into a mess like this, the only thing they can do
is look at–and trust–their instruments. Nothing else matters,
because what you see out the windshield is pure black and gray. What
you feel in your gut is just the choppiness and uncertainty.

Your instruments will tell you what is true and what is false, and if
you listen to them you will not do what ill-fated pilots do: turn into
the death spiral. When this happens you accelerate the process of the
plane going down because you’ve made a turn that eventually leads you
right into the ground. By turning into it you’ve increased your
acceleration and decent–at the same time. (At least that’s my
understanding of the death spiral in flying).

The paradox of the death spiral is that many pilots actually believe
they are stabilizing their plane when they are actually tilting it.

Enough of the metaphor for now. You should understand the basic point:
you must trust your metrics (revenue, burn rate, page views and
earning), not your senses. Your senses and emotions are FUBARed right
now, but your metrics are not.

The Death Spiral of the American Economy
Startups and established companies have started their layoffs already.
The list of layoffs on TechCrunch’s tracker is growing, and sadly it
now includes Mahalo. EBAY and Yahoo will shed thousands, and most
savvy folks I’ve spoken to expect to see Microsoft and Google cut some

Yes, there is chance that even the mighty Google might lay folks off.
Not because they have to–they’ve got a ton of cash–but because they
must show earning growth or risk a stock collapse. The best way to
show earning growth in a down market is by cutting costs. Google’s big
cost? People.

These layoffs are turning us deep into the death spiral.

The poor folks being laid off are going have a hard time finding jobs,
and as such they are going to curtail their spending. They are not
getting that new car or laptop any time soon because, well, anyone can
get an extra year or two out of a car or laptop.

Even the “not poor” and the rich are going into penny-pinching mode.


Well, the pull back in consumer spending is half-emotional and
half-necessity. In times like this, emotion becomes a major driver.
That new iPhone or crazy weekend in Vegas probably won’t make or break
most folks financially, but they just won’t “feel right” doing it.

Ask yourself: Have you put off a purchase because it just “didn’t feel
right spending that kind of money” in the past month? Exactly.
Everyone is feeling it, even if it’s opt-in and guilt-based.

The days of $2,000 bottle service in the clubs of London, New York,
and Los Angeles are coming to a close–even for those who can afford
it. Simply put, you look and feel like a jerkoff if you spend like
this when people are suffering.

… and so the belts tighten.

The Group Belt Tightening Effect
In anxious times, folks like to take action, and the easiest actions
to take are the little ones.

This creates a massive ripple effect. Folks from dotcom companies and
investment banks stop coming into the Apple Store, so the Apple Store
lays off five people. Those Apple employees stop going to the
Starbucks on the corner, so Starbucks lays off a couple of folks.

Starbucks senses the lower same-store sales trend and shuts down their
lowest performing stores, letting go of their redundant managers. The
landlords renting to Starbucks are left without the money to take that
expensive summer vacation and buy new cars, which puts pressure on the
vacation destination and the car salesperson.

You understand the trickle down effect? This is the reverse: the group
belt tightening effect.

These little emotional reactions have not only started–they’re
building into a storm. That storm is going to hit in the fourth
quarter, when a lot of merchants see their order size drop and their
inventories climb. Some merchants will go out of business and flood
the market with tons of cheap merchandise, which will make the
profitable merchants suffer from competition.

Inventory will pile up, cash will dry up.

The fourth quarter is going to be a huge disaster: unemployment will
skyrocket, retail will crash and consumer confidence will flatline.
Some think it will be the bottom, some think it will half-way mark to
the bottom. No one really knows, and that’s really the scary part.

Emotional situations like these are impossible to stop–they have to
play out. The “cut spending now!” train has left the station and
there’s nothing that can be done about it.

How does “The Group Belt Tightening” stop?
At a certain point, folks feel more optimistic than pessimistic about
the future, and that’s when they start spending and taking risks
again. For entrepreneurs like us (I assume if you’re reading this you
are one), you’re wired to be optimistic, so you’re probably fighting
through this due to your internal fortitude.

That does not mean that you’re spending like a drunk sailor. It just
means that you’re wired to invest when you see an opportunity. That
makes you unique in relation to gen-pop (the general population).

The gen-pop doesn’t look inside their guts for guidance. Gen-pop
watches CNBC, the Dow, layoffs, and their friends’ consumption
patterns. They look out the windshield. The forecast for the next two
or three years is going to be dark, and as such, most folks will keep
their belts tight for at least two years.

At Thanksgiving and Christmas this year, your friends and relatives
will talk about cutting trips and not making major purchases. They’ll
recount stories of companies going under and kids moving back with in
their parents after college. It’s part of the morning process. Folks
have to vent, but on a psychological level, the venting causes
everyone to become more conservative than they actually need to be.

The conservative mindset leads to people paying down their debt and
otherwise cleaning up their personal balance sheets. This is the
virtuous part of the process: folks get their affairs in order.

At some point, the lack of competition in the marketplace results in
risk takers making impressive returns. Someone hears about a friend
who is “making a killing on Taser stock” or of a “startup making $250k
a month with five employees.” Then, folks think “hey, I’ve got a
little extra cash… maybe I should get in on that?”

Dentists start investing in startup companies again… We’re back,
baby! (Note: Too many dentists start investing and we’re in a bubble
again–careful what you wish for.)

The belt tightens out of fear and uncertainty.

The belt loosens out of greed and positive data points.

The way to leverage this, obviously, is to get greedy before everyone
else so you can take marketshare. Let’s look at all the good news,
shall we?

Good News Part One: Experiences Over Expenses
The good news in all of this is that folks are going to be spending a
lot of time online, playing video games and consuming things that are
not expensive. They’re going to be looking for “experiences over

If your service provides fun, social interaction and joy to the user,
you’re going to see it spike. Folks will start playing Mark Pincus’
Texas HoldEm on Facebook and the iPhone a lot more. Kevin Rose will
ride DIGG straight to 50m monthly uniques and five foreign language
versions in 2009. Garrett Camp will pry StumbleUpon from EBAY and
break the service out to the mainstream. If only Yahoo would give
Joshua Schechter back so he could finish the mission.

Why will there be a boom in traffic, engagement and participation?
Well, people will have time on their hands and the desire to
socialize. Group behavior makes people feel better. One of the best
cures for the blues is sharing a meal with friends.

Blogging became a phenomenon not because of some technological
advance, but because between 2002 and 2005 there were a lot of
unemployed–and underemployed–individuals with a lot to say and a lot
of freetime. Bloggers like Peter Rojas, Michael Arrington, Nick
Denton, Rafat Ali, Xeni Jardin and Om Malik broke out in the down
market–not the upmarket.

Social networking and podcasting were born and boomed during the last
internet winter.

Bottom line: Folks with time on their hands–and anxiety in their
hearts–will be drawn to communications, content, and community

Free time is good news for modern man.

Good News Part Two: Measurable Advertising Boom
The fact is that most advertising spending is in media without real
measurability–like outdoor, TV, radio, newspapers and magazines.
These sample-based solutions have a lot of inefficiency and lack the
real-time measurability of the internet.

Advertisers will start cutting print, outdoor, TV, and radio (probably
in that order) in favor of the internet’s action-based offerings such
as CPA (cost per acquisition), CPL (cost per lead), and CPC (cost per

Three weeks ago, I attended and spoke at WPP Group’s very understated
agency retreat at a–gasp!–Club Med outside of Athens. It was the
cheapest location you could imagine, but the people and discussions
were amazing. Sir Martin Sorrell gave a big overview of the coming
world and told his troops to focus on measurable solutions. He wants
WPP’s advertising spending to be mostly measurable (if I heard him

Measurable advertising means internet advertising. The internet will
take a hit in the short term, but gain massive marketshare in the long

Good News Part Three: No Competition
There are no longer going to be 10 companies pursuing one vision.
Twitter, Pownce and FriendFeed are going to fight over short blogging
and almost everyone else will go away or stop investing in their “me
too!” solution.

MySpace and Facebook will not have another major competitor for some
time to come. and DIGG will not face many more clones, and
many of the existing ones will go away (or stop innovating). If you’re
launching a product, you won’t have 5-10 folks copy you in the first
year. There just won’t be the funding for the fourth or fifth person
in a space.

That jerk off who stole our code and content to make his vertical
Mahalo knock off? He’s not getting his next round of funding, I can
tell you that.

Bottom line: Less fighting, more marketshare. Less competition for
great developers.

[Sidenote: I’ve already heard some CEOs talking about the overpaid
developers they have on staff and that they wouldn’t hire many of them
for the prices they paid just six months ago. That’s a really hard
position to be in, huh? Overpaying for developers and being faced with
better options just six or 12 months later? What do you do? Cut the
existing staffer’s salary or replace them with a new person? Really
don’t envy either party in that situation.]

Good News Part Four: The Zero Cost Startup
When we interviewed folks for the TechCrunch50 show this year, we
asked them how much was invested in their companies. Many reported
nothing. Zero. They had no office space, no server farms and no Oracle
license. No marketing budget, PR firm or headhunters to feed.

The cost of a pure, boot-strapped, startups today is really the time
the founders put into it. Don’t pay for software, don’t sign an office
lease, and don’t hire a PR firm. Stay slim, build something great and
wait. If it doesn’t grow make the product better and wait some more.
Keep that process up until you find something that makes people
absolutely rabid for your product. If you can’t find something that
delights folks, well, then you suck. Give up. No really, you suck….
give up.*

* Note: That’s just a test to see if you’re a real entrepreneur. When
you read that, did you think of giving up? If you did, than you really
suck and shouldn’t be an entrepreneur. If you read that and said
“frack you, Calacanis…WTF do you know anyway?!?,” then you’re a
gangster entrepreneur and keep up the good work.

Your best investment right now?
The best investment you can make in any market–up or down–is in yourself.

Take this down market as a time to focus on yourself, professionally
and personally. If you’re level eight PHP programmer, make it your
personal challenge to become a 10 of 10. If you’re 20 pounds
overweight, get a trainer and if you can’t focus, start taking Tae
Kwon Do lessons.

If you’ve got a great idea, find three friends and build it during
your lunch break and weekends, while your boss is too distracted to

Rafat Ali started PaidContent while working for me during the down
market. He asked me if it was OK and I said “yeah, sure… that
blogging thing will never go anywhere.” He sold it for $30m earlier
this year after six or seven years of hard, hard work.

Fortunes are built during the down market and collected in the up
market. Now’s the time to build, so turn off CNBC and forget the Dow.
It’s meaningless to you now. All that matters is your work and your
personal progress.

Eyes on your instruments please.

Sidenote: I was on the best podcast in the world, This Week in Tech,
yesterday talking about the economy and technology with Leo Laporte.
You can tune in here:

Press: In WIRED magazine Paul Boutin says you should shut down your
blog. His evidence? Our success with the email newsletter:

Question: Do you think I should post these emails to my blog, or
should I just keep them between you and I? I’m having a hard time
keeping these quiet, as folks like TechCrunch insist they are so
newsworthy that they can break my copyright and republish them based
on the alleged importance. Ugh. Is what I say really that newsworthy
that you can just take my work wholesale? I don’t think so.

Plug: We’re experimenting with a new feature called the “Mahalo Live
Blog.” Essentially if you go to you’ll see a
running list of breaking news stories that we maintain 24 hours a day
seven days a week. It’s sort of like the DrudgeReport but faster.
10-15k folks seem addicted to it. Your thoughts on the live blog?

Question: I was thinking about starting a group email discussion list
for Jason’s list. What do you think of an email discussion list based
on Jason’s list? I was thinking of maybe starting it, but limiting it
to folks who send me $1 in cash in an envelope with their business
card. This would keep the trolls out right?

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