Sequoia Capital, the 50-year-old venture firm, has become known over the years for using sweeping memos to warn founders in its portfolio of market shifts after the shift became somewhat apparent.
However, while it’s tempting to scoff at these messages – 2008’s “RIP Good Times” and its March 2020 “Black Swan” note became legendary – many teams are now wondering how long the current downturn could last, so it’s no surprise that The outfit has set up a new and very comprehensive presentation, telling many founders with ties to the company not to expect a quick recovery.
In fact, the 52-slide presentation, first published by The Information, makes clear that the company does not believe that – as happened at the start of the pandemic, when markets froze, then quickly improved – the sudden turnaround the startup world is currently experiencing will follow a “quick recovery.” Equally V-shaped.
The presentation reads, “We expect the market downturn to affect consumer behavior, labor markets, supply chains, and more. It will be a longer recovery, and while we can’t predict how long we can advise you on ways to prepare and go to the other side.”
In one key slide, the company refers to what has already been said about startups by a wide range of enterprising investors (and the market itself), that the focus of investors is shifting to profitable companies.
The company writes: “With the rising cost of capital (debt and equity), the market is signaling a strong preference for companies that can make money today.”
In another segment, Sequoia takes snapshots at some of the companies that have been investing aggressively in startups in recent years, even when Sequoia itself has significantly grown its assets under management during the same period. (Sequoia Capital China alone was said to have raised four new funds totaling $8 billion in March, according to an earlier report in The Information.)
The slide reads:[U]In contrast to previous periods, sources of cheap capital do not come to the rescue of the situation. Cross hedge funds, which have been a very active private investment over the past few years and have been one of the least expensive sources of capital, are dealing with their wounds in their public portfolios, which have been hit hard.”
Sequoia is not wrong. We reported earlier this month that Tiger Global, the most active investor in the first quarter of this year, is slowing down for a number of reasons, including that it has already exhausted the $12.7 billion it announced in March. The Financial Times separately reported that as of early May, the 21-year-old has seen losses of about $17 billion during this year’s tech stock sell-off.
We’ve reached out to Sequoia for more feedback.
Sequoia’s presentation to the founders follows a series of similar advice from several project companies that have been offering words of wisdom to their portfolio companies about the economic downturn. Their guidance has run the gamut but is largely focused on getting the founders to focus on expanding their runway, looking at rollover rounds and thinking about how to spend in a more disciplined manner.
The popular accelerator Y Combinator made special reference to the current state of the world, telling founders last week to plan for the worst and focus on being “virtually alive.”
“If your plan is to raise money in the next six to twelve months, you may have raised at the height of the downturn,” the company said in the letter, titled Economic Deflation. Remember, as stated, “Your chances of success are very low even if your company is doing well. We recommend that you change your plan.”
Meanwhile, Bill Gurley warned Over the weekend on Twitter, “The cost of capital has materially changed, and if you think things are the way they are, you’re going downhill like Thelma and Louise.”