My take on how the market plunge affects startup talent strategies

📉 Market plunge stokes fear: how startup leaders can navigate the storm

The "Magnificent 7" stocks just lost $1.7 trillion (with a T) in just a couple of weeks. Poof.

Why? From what I'm reading, investors are conflicted about the sky-high valuations of the major tech players, specifically because of the sticker-shock-inducing investments into AI & Cloud to the tune of nearly ~$400b a year.

Couple this with somewhat concerning earnings reports from M7, stemming from high cap ex (see above), slowing growth, margin pressures, and general skepticism about AI investments, and it's a perfect storm for market pessimism.

The decisions of these major players have a trickle down effect to the rest of the economy. Not only from a macro perspective, but from a sentiment standpoint as well.

I anticipate startup leaders will become more cautious about the next few steps, and rightfully so. Internal pressures aside, I believe investors & board members of these early stage companies will start asking more questions: "What are you doing to mitigate this situation? How are you managing burn? What's our runway and how did we get there?"

Here comes the scrutiny - as if there wasn't enough already.

That said, there's a silver lining (hear me out).

In downturns, things change rapidly. Business fundamentals become paramount. Do the right things every day and there will be results. But what does that mean for early stage founders? Here's my guess:

• Less competition - good or bad, the market will consolidate, giving you the opportunity to shine in a market that hopefully becomes less saturated.

• Less hype - the expectations reset and the pressure's off. You can focus on what you do best without all of the typical noise in a booming market expecting $100m ARR in a month from launch.

• More attention from your investors - with a market correction, it may mean investors will have more time to focus on their portfolio directly instead of sourcing new deals. I'm hoping this actually leads to stronger business results. VCs, especially former operators, have a lot to offer. Lean on them if you can.

Phew, everything's going to be fine! So now that we've turned that frown upside down, let's get back to the employee perspective.

What does this mean for startups who are already tasked with the challenge of attracting & retaining talent in a now even more uncertain market? What can you do to reinvigorate their loyalty & engagement?

Talent Retention, Retention, and Retention.

• ⚖️ Focus on stability: Stocks are down, pessimism is up, and employees look to their company to provide guidance & comfort. Provide that with clear & transparent communication about the direction of the company, its mission, and what's next.

• 😌 Highlight the differences between you & big tech: Many startup employees are in this ecosystem because they don't want to be in the majority. They would rather build something new in an innovative, high-paced environment than be at the quote "cushy" big tech job. Lean into that by showcasing the opportunities for growth and individual creativity.

Compensation & Benefits

• 💰️ Competitive Salaries: The market downturn is a shock the stock-based comp system. Not that equity is the carrot on a stick... but competitive cash comp is what keeps people engaged and comfortable in the short-term. In a volatile macro environment, establishing transparent pay-bands is key, because you can bet your bottom dollar (too soon?) that your people will be asking about them.

• 📈 Be honest about equity: To many startup employees, equity is the game-changer. But often, they're not educated on what the implications of this actually are. Is their equity in the form of Incentivized Stock Options (ISOs) or Non-qualified Stock Options (NQOs)? What's the difference? How does vesting work? How do taxes work when & if I exercise? How the heck do I even exercise? Employees will appreciate the education and feel empowered to make better decisions around their comp & equity packages if you, the company, are the one providing that guidance. Tip: offer leadership office hours for employees to stop by and ask questions, and open up the conversation.

• ❤️ Enhanced Benefits: The market news falls right before we head into the peak of healthcare renewal season. It’s important you evaluate different benefits or PEO provider avenues, especially this year. Focus on comprehensive benefits offering, stemming from healthcare quality/cost and branching through wellness, financial literacy, remote work, employee advocacy, and education. Offering health insurance doesn't make you a thoughtful employer - but designing a thoughtful program that meets the current & future needs of your current & future talent does. Reviewing this annually is key for your people’s wellbeing and for validating the company’s burn rate as it pertains to benefits spend.

• 🏡 Work-life Balance: If your employee has to submit a PTO request to go the doctor's for her lunch break at noon (or to go vote on election day, but that's a different story) then you're asking for resentful team members. Be mindful of your people's needs and emphasize that their work-life balance is a feature in this startup environment, not a bug.

Take the most recent news in stride. At the end of the day, the market is still up 9% YTD at the time of this post. It's not all bad. Taking this time to refocus specifically on what your people care about in times of uncertainty can result in high-levels of loyalty and stability.

👷Latest Jobs report: My takeaways

Job growth slowed in July according to the latest jobs report.

• US added 114,000 jobs, missing its target of 175,000 by a significant margin.

• Unemployment is up to 4.3%.

• Wage growth up just 0.2% and 3.6% annually.

• Stock market selloff & increased expectations that the Fed will cut interest rates in September stoked a dip.

My takeaways:

• The jobs report is one of the major indicators of economic health. This one suggests an economic slowdown on a global scale.

• Despite the pullback, there were still gains in the private education and health sector.

• Political implications of this jobs report are more staggering than ever given we’re 3 months away from the election.

• Will we finally see consumer confidence and spending go down? How long have we been talking about this?

• Jobs report may fuel either the optimism or pessimism around AI/Automation influencing job replacement. Good for tech, scary for the average American worker.

• There’s a psychological impact to this news that could impact employee’s mental health and productivity. Employers must act quickly to continue motivating their workforce.

• Gig economy/remote work jobs are tough to calculate (household surveys, tax records, LinkedIn, or employer reports). How much of that data is potentially missing, given the massive rise of “side-hustles” today?

What did I miss?

💴 Bonus: Why should we care about the Japanese Yen?

Here’s a fun little tidbit that’s not helping our current market situation!

Hedge funds engage in a popular financial strategy called “carry trade.” Basically, investors borrow a currency (in this case the Japanese Yen or JPY) at a very low interest rate, and then reinvest that money into higher-yielding assets in other currencies. It’s popular because Japan’s interest rates have been insanely low for a very long time, making it the cheapest money you could ever borrow.

Here’s an example:

1. Borrowing JPY: Suppose you borrow 1,000,000 JPY at an interest rate of 0.1% per annum.

2. Converting to USD: You convert the 1,000,000 JPY to USD at an exchange rate of 1 USD = 100 JPY. So, you get 10,000 USD.

3. Investing in USD Assets: You invest the 10,000 USD in a US bond that yields 2% per annum.

4. Earning Interest: After one year, your investment grows to 10,200 USD (10,000 USD * 1.02).

5. Converting Back to JPY: You convert the 10,200 USD back to JPY at the same exchange rate of 1 USD = 100 JPY, getting 1,020,000 JPY.

6. Repaying the Loan: You repay the 1,000,000 JPY loan plus 0.1% interest, which totals 1,001,000 JPY.

Profit: Your profit is 1,020,000 JPY - 1,001,000 JPY = 19,000 JPY. Nice!

Now, the Bank of Japan has raised interest rates to 0.25% from 0.1%, which is the largest rate hike since 2007.

And, to make things worse, the US 10-year yield rates have gone down 55 basis points in the last month.

This has caused JPY to strengthen and strengthen quickly against other currencies, making it very difficult for those who were banking on the currency remaining cheap to repay their yen-based loans. This means investors may be forced to sell off stocks, bonds, treasuries, or other assets to pass off the losses of these loans.

To summarize: The Yen Carry Trade, normally a “sure-thing,” has become a money loser.

Bonus: It’s affecting Bitcoin and Ethereum prices as well, dropping about ~12% and ~15% respectively at the time of this post.

What a time to be alive!