2 minute read / Apr 26, 2020 /
Bullwhip and Base Rates - The Two Major Forces Impacting Startups in Q2
A few weeks ago, I wrote What I Expect in the Next Few Months in Startupland, in which I mentioned two fundamental forces: Bullwhip Effect and Startup Growth Rates. We are seeing the impact on both in full force today.
A quick refresher on the Bullwhip Effect: “The idea is that small changes in retail demand amplify into big swings up the supply chain.” A few readers asked for examples. Today, it’s hard to dodge them. A barrel of oil cost -$7 last week. Electricity in France was better than free, hitting -€20 per megawatt hour. And coincidentally, beer brewers are suffering the effects of overproduction. These are examples of adverse demand shocks: demand disappearing for energy and liquid courage overnight.
There have also been massive positive demand shocks. Netflix added twice as many subscribers, 16m, as it had projected this quarter. Zoom grew to 300m monthly active users, approaching an infinite growth rate. You can’t buy a puppy, a puzzle, or pork chop. This is the Bullwhip Effect in force.
This dynamic affects startups just as much as the rest of the economy. More than 30k startup employees have lost their jobs. Layoffs arise from volatility. The less predictable a business becomes, the more conservative its management must be.
Which raises the question for a CEO: how should a startup model growth from here? If a company was growing at 10% monthly before February, will it continue to grow at 10%? If a company is benefiting from remote work trends, and the growth rate has tripled overnight, how long will that growth rate continue? If a company has seen a 25% downturn in new lead generation, is that a blip or the new normal?
All of these questions are forms of the same deeper question: is the company’s base rate an accurate projection of future growth?
In the public markets, investors are projecting consistent base rates for some software companies. Public software companies growing 30% or more annually have seen only a 6% decline in their valuation multiples. But, slower growers’ multiples have contracted 30-45%. Perhaps the fastest growing businesses will see less of an impact.
Uncertain demand is the root of both of these phenomena. When will consumers spend again? How will software buyers’ preferences change? That’s the key question today.