“Experience is what you wish you had when you need it.”
Navigating market uncertainty amid tariffs
Last week, we shared a memo with Nyca’s portfolio company founders and CEOs with advice from our Limited Partner Advisors (LPAs) on how to navigate the current environment of economic uncertainty. Here’s what we had to say:
Only two months ago, startup CEOs and investors were assuming 2025 would be a reasonably optimistic operating environment: the possibility of reduced financial services regulation, improving liquidity and valuations, an expectation of lower rates, and a reopening of the IPO market.
How quickly things can change: even though much of what has happened has been the result of policies President Trump has been promising for months, none of this actually happening was in the consensus, and we now find ourselves in a completely uncertain environment. A good measure of this is the VIX index, which in April has been more than 3 standard deviations above the mean of the past 20 years (greater than 99.7% of all values). This has happened three times in the past 20 years: the Global Financial Crisis, the 2011 US Debt Downgrade, and the COVID shutdown.
Since many of you have never been CEOs in an environment like this, we decided to talk to four Nyca LPAs who have had leadership roles in extremely stressful periods to get their take: What does this macro uncertainty mean for startups? How might different segments of fintech be affected? And how should founders act at this moment?
What are the policy tools and implications?
Eric Rosengren, former President and CEO of the Federal Reserve of Boston: “It's a challenging environment for the Federal Reserve because this is more of a supply shock than a demand shock. Normally with a demand shock and inadequate demand, you lower interest rates. But if your problem is a supply shock, lowering interest rate doesn't help because it doesn't relieve the supply constraint. The result is you just cause more inflation.”
“The geopolitical aspects start getting interesting as well because if you're going to focus on trade not including the United States, you don't necessarily want to hold nearly as many US Treasury securities…Foreign reserves can be held in something other than dollars. As that happens, you undermine the United States as a safe haven. So this has the possibility of significantly disrupting historical relationships in terms of macroeconomics. Trump could decide to pull back, but…there's still damage to credibility.”
“If you're a less developed country dependent on getting dollars, and all of a sudden you have a very high tariff, the likelihood of not being able to get sufficient dollars goes up dramatically. Which means that financial instability problems from less developed countries probably goes up.”
Takeaways:
This crisis is fundamentally different from previous financial shocks because it is driven by a supply shock as opposed to a lack of demand. The ability of the Fed to ameliorate the impact is limited, so the “Fed Put” may not exist. And the credibility of the United States to lead a coordinated international effort is also unlikely given the American tariff policies created the crisis. This is an unprecedented situation, with a wide range of potential outcomes; your company needs to be prepared.
There may also be further dislocations from the impact on the dollar. The reduction of US imports, paid for with dollars, will obviously reduce the dollars flowing to foreign businesses and governments. Businesses, individuals, banks, and SWFs and central banks also own and hold dollars in reserves and investment accounts based upon nearly a century of the dollar being the world’s reserve currency, and the dominant mechanism for international money movement. These holdings include $30T in corporate securities, and $8.8T in Treasury securities, and Eurodollar debt exceeds $10T. Given the size of these holdings, even a relatively small decrease in foreign willingness to hold dollars could have a very material impact on US dollar rates and liquidity, and the global payment system.
Step #2: How do you build product and manage sales through market uncertainty?
Stephanie DiMarco, founder and former CEO of Advent Software: “In 2008, it was hard to gain new logos and hard to get new business, but customers actually had a lot of needs during that period. So, we were able to sell into the customer base. We were able to think about new product offerings that kind of met the moment of where they were and what they were dealing with.”
Peter Fisher, former Under Secretary of the US Treasury and former Chairman, BlackRock Asia: “So you'll have to think about who are you [selling] to. Are you [selling] to someone under a [protective] price umbrella? Or are you talking to someone who's still subject to global competition? The people still subject to global competition, they're going to be crazed, finding productivity advances so they don't have to hire more people.”
Yawar Shah, former Chairman, SWIFT and former MD, Citi: “If you're a vendor, showing the client the risk parameters as well as the payback parameters, is very important. So for example, if you are trying to sell a bank on changing its general ledger or DDA system, and they are not going to get a payback on that for seven years -- there's basically little chance that a bank will sign up for that in a moment of significant economic uncertainty. On the other hand, if you are trying to sell the bank on adding a modular, narrowly-construed, plug-and-play additional solution, like a fraud monitoring module, that could still be very compelling.”
Takeaways:
A central rule in enterprise selling is to meet customers where they are and solve the problems they need; those needs might change very quickly. Financial companies might cut back on budgeted technology spend, or postpone implementation of new technology. But they might also have emerging needs relating to the crisis, where you can provide critical, easy to implement solutions. What are these, for both new and existing customers?
A compelling ROI is also a central rule for enterprise selling, and during market disruptions, businesses will postpone any changes in their tech stack of existing software. Think about how to refine your offering to minimize change, reduce risk, and enhance immediate ROI to the customer.
If you’re building a horizontal platform that sells to many industries, be thoughtful about how tariffs shift incentives across your various customers. The customers that are most protected will shift away from investing in productivity while the ones that have to compete globally will be more focused on productivity than even before.
Step #3: How should leaders communicate both internally and externally?
Stephanie DiMarco: “I think in times like this, it's really important for CEOs to over-communicate to all stakeholders…just so that people feel like they know what's going on and that they don't have uncertainty. They still have the external uncertainty, but at least they understand what their leaders are thinking.”
“There is the old adage, ‘Never waste a crisis.’ Times of crisis can be opportunities because the world is freaked out, and there's chaos. And if you're in a position of strength, you want to be playing offense to the extent that it's prudent, to be doing so and to be reinvesting in the business.”
Yawar Shah: “Don't let them get distracted. Don't let them get uncertain and gun shy. At the same time, you as CEO, have to lead a core team with a process that's very transparent, on risk, regulation, geopolitics, environment, with outside folks, inside folks, and then on a regular basis, communicate back to your constituents and your management team what's going on.”
Takeaways:
A critical part of your job as the CEO is communicate internally and externally but in moments like this, it’s easy to get distracted and reducing your level of communication at precisely the moment you should be increasing communication. You need to step up and make things crystal clear to their workforce when they are concerned. If you have bad news, break it to them early instead of allowing for speculation that distracts the team from the task at hand. For the employees that stay, share the roadmap with them and the clear guidelines to success. Focus is the main priority for the workforce and leadership.
If you are in a position of strength, play offense. Don’t let the public market’s concerns become your concerns if you’re well prepared for the turmoil. If you have the right product, now could be the time to further invest in S&M and double down on customer acquisition and growth.
Step #4: How should founders build financial resiliency and mitigate enterprise risk in times of uncertainty?
Eric Rosengren: “So in terms of advice for an entrepreneur: One, I'd be bracing my balance sheet for a recession. Two, I'd be very careful where I put my money. I would only put it in… trustworthy short-term money market funds and banks large enough that their [solvency and liquidity] are not going to be threatened in a crisis.”
“The banks are not really an alternative for private credit because most of the businesses that private credit funds are not bankable debt. So the availability of financing, particularly for small and mid sized firms, may be disproportionately affected by the tariffs.”
“Companies need to think very robustly about managing supply chain risk; if certain parts are not available from my normal supplier, is there an alternative? Is the best alternative to use scarce cash for inventories? Is there enough substitutability that I don't have to worry about that? And I can find it from another source?… This logic extends to software businesses too, which might not need to worry about physical imports, but still might have crucial vendor or partner dependencies.”
Takeaways:
Take minimal balance sheet risk, keep burn flexible, and reassess vendor risks. Things can get a lot worse. Reduce your risk profile now.
Plan out your financing pathways and account for changes in what capital may be available to your business. Especially for capital-intensive businesses (e.g., credit, insurance, and counter-party risks) seek balance sheet alternatives that are reliable.
Many companies are now treating their supply chains as entirely uncertain and are looking for help in managing that. Fintech companies should be thinking about how they can help manage payment risk, FX risk, and other supply chain-adjacent problems.
We’ve spoken to all of you about Financial Design, Enterprise Risk Management, and how to manage the complexities of enterprise sales; now is the time to ensure they are in practice! As always, feel free to reach out if we can be helpful in thinking through each of these plans as it relates to your business or anything else that may come your way as a result of a very uncertain environment.