?? Startup founders, this is the real shape of the recovery

This is an excerpt from a post I shared with the members of Exponential View yesterday. You can subscribe here to receive my regular analysis first.

It is tough times for start-ups. Even the strongest rarely have more than 12-18 months of runway, predicated on hitting milestones and raising more money. The venture capital spigot won’t dry up, but it will tighten dramatically. And consumers and businesses will similarly clamp down on their spending or, locked-in, be simply unable to spend. 

There is a Z-axis

Despite what founders or analysts or consultants think the recovery won’t be V-shaped, W-shaped, I-shaped, nor a slow tick ??, with a long recovery. 

How deep we go is up for debate. Goldman Sachs has suggested a 6.2% decline in US GDP. McKinsey & Co, whose lovely chart I use above, reckons an 8-13% decline to trough as of April 2nd (a pessimistic revision to their numbers the week before). I’ve suggested here that I think Goldman’s numbers are optimistic. The bottom end of McKinsey’s numbers seems more reasonable. 

But these types of models, captured by the economist’s limiting art of a two-dimensional graph, ignore the structure of the recovery. 

They imply that economy obeys the rules of turntablism, Adam Smith is replaced by Grandmaster Flash. Covid-19 is just a bout of scratching, and then the beat goes on.

Nope.

The recovery graphs touted by analysts today lack a Z-axis. Their X-axis shows time, the Y-axis the size of the economy. The Z-axis tells us about the structure of the economy driving the response. I’ve tried to illustrate this below, and write extensively about it here.