A Loud Word of Caution From the Start-Up World

A Loud Word of Caution From the Start-Up World

May 20, 2022

Public agencies have been through a lot in the last couple of years: COVID lockdowns, civil unrest and protests, people moving out of state, workforce shortages, wage growth, supply chain issues…

But for some time, it looked like we dodged the bullet, if I may say so. The stock market crash of 2020 was quickly followed by an unprecedented market recovery and subsequent run-up. Assessed values posted a solid march up. Tax revenues remained strong. The historically low interest rates allowed for very cheap borrowing and debt refunding opportunities. Federal subsidies covered most of the lost revenues. State budgets posted large surpluses. Even pensions got a good boost for a change, with CalPERS posting a 21.3% return for FY2021.

The spring of 2022 is changing things fast. Inflation is no longer expected to remain transitory. The interest rates posted one of the quickest run-ups in recent history. The stock and bond markets are quickly giving up their gains. Our sources inside CalPERS are mentioning an investment loss of 4% year-to-date as of April, an equivalent of a 10.8% funding shortfall (with two months to go until the fiscal year end the final return is hard to predict). The housing market is showing signs of a slowdown. Crypto currencies collapsed.

Russia’s invasion of Ukraine and almost daily threats of nuclear weapons are not helping things either.

Rumors of recession are beginning to circle.

TechCrunch, a leading voice of the start-up world, just published an article on the Y Combinator’s advice to start-up companies around the globe to “plan for the worst.” Why should public agencies pay attention to the start-up community? It is hard to find greater optimists in the world of business than start-up founders and investors. And if the optimists are advising caution, who are we to carry on full speed ahead?

The suggested Y Combinator strategy can be summarized in a few simple words:

  • Plan for the worst
  • Cut expenses
  • Focus on building up reserves
  • Do not delay on raising funds… especially if you can do it in the next 30 days… even if you don’t like the terms

The state of the debt and equity markets is expected to be dire in 6-12 months and fundraising opportunities may be limited in the next 24 months.

Those who have only been following markets for the last 5 years should keep in mind that the overabundance of low-cost capital was anything but normal.

That being said, most organizations are likely to continue going on auto-pilot until it is too late.

There is also a reminder that “economic downturns often become huge opportunities for the founders who quickly change their mindset, plan ahead, and make sure their company survives… You can often pick up significant market share in an economic downturn by just staying alive.”

We at Ridgeline believe that this is a great and timely word that is just as applicable to municipalities. Even if the worst does not come, it is better to be prepared. The odds of an economic contraction appear to be greater than those of an economic expansion.

Prudent planning is paramount.

Cash is king.

Lower interest rates may not come back for a while.

An economic slowdown is the best time to show care for our constituents and prepare for the next expansion.

Good economic times are fun, but in the words of Warren Buffet it is "only when the tide goes out do you discover who's been swimming naked."