The Great Valuation Correction Has Become the Great Profitability Correction

Has your company gotten the memo yet? Cost-cutting projects targeting tens of basis points of margin have become significant.

Yesterday, I saw a note that Flexe had 33% layoffs. LuluLemon shutdown their Mirror division. Thrasio engaged a restructuring advisor ( 🔥 🚒 👨🚒 sale on Aisle 12), and Nike missed their revenue targets, although they did hit their margin targets.

Something I see in company after company right now:

* Soft traffic and revenue targets being missed.

* Extra discounting or marketing spend to recover some of the lost traffic.

* Supply chain costs rising, resulting in near constant prioritization, cost-cutting, targets, focus on inventory levels, for the last year.

* Brands are now moving to second and third-order cost-cutting measures (limiting options for unprofitable customer segments, returns abuse).

* All with the goal of hitting that EBIT goal in the face of top-line challenges.

This affects startups acutely. Let's look back at Flexport for a moment.

One simple way to look at the entire drama is a sharp disagreement over when Flexport would need to raise money. Dave Clark was clearly comfortable raising money in 2024.

The entire Board seemed to think otherwise. Get ready for the knock of the restructuring advisors soon.

If your startup is in this bucket:

* Costs are rising

* Less than 12 months of financial runway

* ...Regardless of if there is revenue growth

You will see almost every startup in this realm start hiring freezes if they haven't already, or layoffs. Some of them will be quite significant in the realm of what Flexe just did. Particularly in the retail world, after holiday peak it could get ugly.

Hang on tight, and employees would be wise to increase their emergency savings funds from 6 to 12 months if they haven't already. Job seekers I'm talking to are reporting that it's more and more difficult to find a company fit right now, which is different than a year ago now.

The forces of: protracted elevated interest rates bullwhip effect, student loan repayment restarts, persistently high food and housing costs, supply chain labor costs continuing to tick up, and expectation of higher discounting are all headwinds.

The list of broad-based tailwinds seems small to this observer, and they tend to be company, brand or industry situation specific. If you're in one of these situations, don't look for the greener grass. You have found it.

Remember in startup-land, there is only one way to go out of business: zero balance in the bank account. If you can avoid this, there is always the chance to live to see another day, despite the short-term pains.