For years the investors have been slavishly devoted to the Silicon Valley-backed “Moonshot” start-ups with big ideas and total disregard for profits, or even revenues, or even sales. In startup land fundraising was the key to success, not ongoing profitability. Founders were hot and CEOs were distinctly not, being mere guns for hire who did the boring, unimaginative stuff.
The tumultuous events of recent years have reversed all this. We’ve had a series of crises: Covid, outright conflict in Ukraine and between the superpowers, the credit crunch + crypto’s implosion, the acceleration of the climate crisis and ESG demands, and the return of an inflation cycle. All this has profoundly reversed the investment culture. It has profoundly reversed many previous trends in the world economy. Instead of hunting for elusive and rare Unicorns ($1b valuation companies), Pentacorns ($5b) or Decacorns ($10b), money is now hunting for that old-fashioned creature called a “Going Concern”. Call it a reliable Work Horse. Investors used to be content that firms would make all their money on successive funding rounds. Now they want to find the firms that generate genuine cash flows, unimpaired by debt, and which may never need to raise outside capital again.
Globalization has also reversed, but not the way you think. Globalization used to mean all the manufacturing jobs went to China and all the investments went into software. But the practical problems the world faces today are reversing this. Supply chains are shortening and all the jobs are now going everywhere in a process called Glocalization, meaning production is relocating to local locations globally. The crises have made everybody realize that software and SAAS (Software as a Service) cannot fix the war-induced wheat shortage or invent new non-fossil fuel energy sources or create buildings, robotics, or even new medicines. What about baby milk? We rediscovered the facts. Even a software-engineered vaccine has to be manufactured somewhere. Baby milk has to be made somewhere by somebody. SAAS and smart manufacturing have reversed positions.
It used to be that the founders of Going Concerns had no love at all compared to the flashy founders of firms like Uber, WeWork, Netflix and Tesla. The founder of Uber once said his firm existed because of “horseshi*”, meaning horses were replaced by cars, and cars were replaced by access to mobility, meaning Uber. But the smell of this argument became pungent when Uber’s management was caught out behaving exceptionally badly. This matters because startup culture is about getting rich fast and big. Going Concern culture is about staying rich and becoming bigger, but sustainably. The culture question also matters because VCs like startups because they are easier to bully, easier to expropriate, and easier to ramp up in the media. Going Concerns don’t need VCs in the same way. They also aren’t as much fun. Who didn’t want to party with WeWork’s Svengali-like CEO backed by Softbank? Everybody wants to say they’ve been to an Elon Musk party. But, the crises sobered everybody up as Netflix just discovered. Though they were initially a beneficiary of the lockdown. Who didn’t gorge on Box Sets during lockdown? The reality is now crystal clear. The business models of the old startup culture were no longer adding up. The subscribers bolted when the economy threatened to tank and that meant the investors bolted too. Where did they bolt to? They’ve gone in search of a workhorse, instead of in search of a unicorn.
The crises also made investors and employees alike question motivation. The why matters more now. Those who believe in the market, the product, the sector, the cause instill more loyalty than those who are in it for the money, for the quick sale, for the media glory. Going concerns know there is no quick sale. They have to make it work in the long run. This means there is perhaps more room for heartfelt leadership. For making decisions that take all the stakeholders into consideration. Employee loyalty to going concerns matters because it’s these small and medium-sized businesses that tend to generate most of the new jobs in the economy. Startups are all about promise. Going Concerns are all about the delivery of reality.
The good news is that going concerns are now extremely resilient, having survived being buffeted by all these nearly simultaneous crises. The good news is that they are beneficiaries of a world where most people no longer want to work for a global megacompany or in a megatropolis. As workers become more mobile and prefer a higher quality of life, they are moving into places where SMEs can tap them more easily than before. The Tech Wreck has caused valuations to tumble to the lowest levels since 2002. The upside is that it’s become easier for Going Concerns and SMEs to find high-quality staff. Those employees are happier to be in secondary and tertiary cities or regions where inflation won’t bite them as hard. In the US that means places like Nashville, Charlotte and Austin now beat NYC, San Fran and LA. It’s why we see almost as many new jobs being created in the Midlands, Manchester and Leeds than in Greater London. Note that employment has already recovered in the UK to pre-pandemic levels. The US has a similar recovery picture, though not as evenly spread through all industries. China, in sharp contrast, having unplugged itself from the world economy, is radically slowing. China sent a clear message to its public. It is no longer honorable or acceptable to be market-oriented. If you become too successful in China now you risk disappearing, getting arrested or being expropriated. Marxism is making a comeback there.
Going Concerns have a very different work culture from startups. They are more doers than dreamers. But, the reality is that humans work best when they are having fun. Startups are very good at fun, especially when it’s still about an idea and before execution. If Going Concerns were more fun, they’d own the flow of workers. Going Concerns tend to be flatter organizations than big corporates. This is an advantage. Humans work better and more creatively this way, which is why going concerns are actually easier to steer and more nimble in responding to crises. Read this interesting Forbes piece for a counterview on this. The corollary of Too Big to Manage might be Too Busy to Have Fun. SMEs need to spend more time on culture. Perhaps they can take advantage of the fact that workers are often happier to work as consultants and advisors now, which is less costly than having full-time employees. This new blood adds to creativity. It brings in a diversity of thinking and people who might not be afraid to mix things up and call problems out.
SME/Going Concerns are harder to invest in. They are rarely listed and may never be listed. In a world that is obsessed with exit strategies, the real question is what is the “stay strategy”? Is private the new public? Founder/CEOs of going concerns always wanted to sell in the past. But why does this make sense? They sell their company for cash. Now they hand their money to a fund manager who is looking for the one thing they just sold – a machine that generates genuine, reliable cash flow. The fund manager will complain that there are too few and those that exist don’t need the fund manager. So, the fund manager has to gravitate to private equity and venture capital which are both obsessed with unicorn hunting but usually fail to find them. The vast majority of PE and VC investment ends in failure.
Take a look at a new type of creature the markets are hunting for a Centaur. These are cloud-based firms that are growing at an annual rate of 100% and achieving 30x return on capital in short order. But, it’s only in the cloud. Meanwhile, what is the message for SME Founder/Owners of solid Going Concerns? Look in the mirror. You ARE the unicorn. But, in an effort to avoid confusion a new name is being used for this category of magical creature. Forbes calls them Zebras! “…zebras accelerate organically despite tough times like pandemics and inflation because they are lean and adaptive. Zebras solve real problems and fill a demand in the marketplace, rather than living in a fairy tale world like a unicorn.” Whatever you want to call them, the point is - Why would you sell a cash-generating machine in a world that is so full of uncertainty? Your task is to make it easier for others, whether staff or investors, to jump onto your ship as they jump ship elsewhere.
Remember that leadership used to be about waiting for the top guy (usually a guy) in a big company to tell the staff what to do. The advent of fast-moving tech, social media, and the radical transparency that the digital world brings have reversed this story too. Now leadership is more about the ship than the leader. It’s about getting the best performance from a team of people who all have very different views, skills, and gifts. Smaller, more agile SMEs are better placed to orchestrate these teams than big conglomerates who are often too big to manage. SMEs are also better placed to create coherence because they generate real results, not just promises about possibilities in the future as startups tend to do.
Think about trends at the macro level too. The consumption economy is morphing into a creator economy. As people become more conscious about their consumption, they buy less stuff more carefully. They value creativity more highly. SMEs tend to create real things whether it’s stuff requiring nuts and bolts of the creative artistic content that supplies Netflix. Sure there are SAAS SMEs, but not all SMEs are SAAS. The market now wants sassy creators who solve real-world problems profitably.
The crises have spurred a new generation to build something new. The wave of startups is swelling. But the wave of the entrepreneurial spirit used to aim at splashy stories foamed up by FOMO. This new wave of entrepreneurs has a different set of expectations. They feel they can’t trust the economy. They can’t trust the government. They can’t trust that technology won’t change. They don’t believe that anybody is going to deliver on the old social contract. The new social contract is a commitment to make on their own. It’s a promise to themselves. They want to build their own island of stability in a sea of uncertainty. They will prefer to become a going concern or to work with going concerns than to bet their future on unfunded dreamers who can’t clinch a sale. It’s not that SMEs lack imagination. Quite the contrary. Imagination in conjunction with implementation is the key to success now.
After years of searching for mythical unicorns, the market is now ready to appreciate the beauty, poise, performance, and profitability of SMEs and Going Concerns. That’s what happens when markets mature. It’s what happens when free money dries up. It’s what happens when crises have battered investors for so long. Now they want a real partner, not a dream. Startups look remarkably riskier now. The new magical creature is an old-fashioned workhorse called “Going Concern”. The “hot” find now is a CEO with a track record rather than a Founder with a new idea, though the economy needs both to progress.
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A Going Concern
I can't tell you how much happier I am to read about something that is not describing the impending end of civilization, only of techbros power :)