When Matt and I decided to make Bob's Bookkeepers a real business, we had three freelance clients. Most of what we did back then was build financial models and offer our clients advice on ways to increase runway. Our clients kept growing, though, and thankfully, so did we.
Over the last two and a half years, we've grown to partnering with close to 30 clients. Fortunately for Matt and I, we still speak with you all (founders) on a regular basis. We get to hear your thoughts and concerns on business and the industries you serve.
Over the last 3 months, we've both begun to hear more questions from you all about the macro environment. We feel that our unique vantage point allows us see the numbers and trends that matter to you - both your interests and needs. We're excited to start sharing our perspectives with you on a more regular cadence.
Starting today, we'll begin sending out a monthly letter with macro data and commentary. The hope here is for us to better inform and advise you all on where we are in the current economic cycle. We also hope to provide some tips on how to navigate and thrive in changing times.
Here’s our working theory (we’ll refine it over the course of the year):
- When interest rates are low, banks borrow but cut back on lending. They buy higher yielding securities. This leads to...
- The stock markets begin to rise driven by bank activity, which causes...
- Businesses and consumers that receive bank capital (larger orgs), seeing a lower weighted average cost of capital...
- The lower cost of capital results in excess net income and more cash on the balance sheets of households and businesses. That causes...
- Consumer spending to increase and companies to make investments in future growth.
- This process creates a virtuous cycle where as long as consumers and businesses are spending, corporate earnings continue to rise; hiring increases; and procurement of business services & products becomes easier
- During this cycle, stock prices continue to rise as earnings beat forecasts, forward valuations appear low, and valuation mutiples expand
- The cycle continues until there’s a change in sentiment that causes bank activity to change and the cycle reverses
We think this cycle has started to reverse.
- Treasury rates have spiked over the past 13 months, on the heels of The Federal Reserve increasing rates to combat inflation. We currently have an inverted yield curve where 2-year treasury notes are yielding more than 30-year notes. This indicates a lack of confidence in the sustainability of these yield levels. Interest rates have increased by 2x-4x, which should lead to increased bank lending.
- Junk bonds have also increased by nearly 75%. This increase will make it difficult for companies who grew reliant on high-yield debt capital to restructure their debt. The increase here will be a leading driver of consolidation (M&A activity) in many industries, especially at mid-to-late venture stages.
- Bank lending in dollar terms is picking up across consumer loans, credit cards, and business loans. Credit is more available. As interest rates rise, banks are incentivized to loan out dollars versus purchase securities to generate interest income. For borrowers with strong balance sheets, we expect credit to be easier to find. Offsetting this trend, lending standards are tightening.
- We're also seeing tightening at the early and mid stages, venture capital has dried up. The increase in junk bond rates coupled with a decrease in venture investment suggests that early-stage companies reliant on either high-yield debt or selling equity will find themselves in difficult positions over the coming quarters.
- Business Spend + Consumer Spending: we’re working on finding ways to quantify aggregate business spend within the US. But one metric we can track as proxy of expense cutting is initial jobless claims from the BLS. Labor is a significant cost to all businesses and seeing an uptick here is emblematic of businesses cutting back on expenses (in lieu of a better metric). We think this will continue to rise on the heels of the layoffs happening across big tech. Microsoft laid off 10,000. Google laid off 12,000. The larger ones won't show up in the numbers for a while given the reported severance packages are including 6-9 months of pay. There's a good tracker here: https://layoffs.fyi/ with lists of employees laid off and their LinkedIn links, for companies in a position to hire. Initial claims rose 23% MoM in December, but are still low in absolute terms. See the trends below:
- Although credit card spending is still growing YoY, there's a decelerating pace. Consumer spending in the economy is still rising as of Q4 2022, but the deceleration in the growth of credit spend should be concerning for D2C businesses. We'll get more granular in subsequent letters. We think this trend is linked to tightening bank lending standards and the trend in layoffs.
- M&A should be on the docket. There's a lot of inorganic growth that can be bought at cheap multiples. In our experience, times like now are where you begin to make plays to expand in a concentric circle around your core product offering.
- Accelerate hires you've postponed. Tech companies have let go of a bunch of great candidates. LinkedIn is replete with lists of people who were let go. It's a real opportunity to get talented people without paying recruiting fees.
- Be judicious with digital marketing spend if you're a D2C business. With YoY growth in credit card gross merchandise value (GMV) slowing, you'll begin to hit headwinds on your customer acquisition costs (CAC) that have nothing to do with having enough content or assets. If you see CACs drifting up quickly, pull back.
- If you have a track record of profitability, you'll likely find access to bank loans easier than it has been.
- You should manage your business to about 16-18 months of runway. If you have less than 12 months of cash left, you likely need to make cuts to push runway out.
- Pull on your venture debt if you negotiated it with your last raise if you haven't already.
- In conjunction with cuts, find areas where the dollar is strengthening and begin exploring outsourcing strategies in these areas. Bob's has benefited from the difference in the exchange rate between the dollar and the Turkish Lira.
- Do price increases if you haven't already.
- Expect sales cycles to elongate on B2B sales. We're hearing from different businesses that sales reps are seeing a slow down in conversions. We think as long as there is uncertainty in the macro market, businesses will wait on the sidelines to spend.
Consumers are still spending, and credit is becoming more available. There are some slowing trends we'll need to keep monitoring together. We think the most concerning trend is on the B2B side, companies are holding off on spending until there is more clarity. We'd also advise monitoring the major credit card company stocks.
Feel free to reach out with feedback or if you just want to chat about the market conditions.
e: rob@bobsbookkeepers.com
e: matt@bobsbookkeepers.com
Thanks everyone, Rob & Matt
Bob's Bookkeepers is a team of financial experts providing bookkeeping and strategic financial guidance for startups and later stage companies. We have a deep understanding that no startup's needs are the same. That is why we offer tailored services to navigate the complexities of sustaining and growing your company. We leverage our 20 years of working with startups to provide insights and guide founders. We use technology to assist companies in better managing their finances to sustain and grow. You can contact us here.
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