One of Silicon Valley’s most successful venture capital firms isn’t seeing the economy recover anytime soon and portfolio firms are warning not to tighten their belts in the meantime.
In a 52-page presentation watched by CNBC, Sequoia lays out a series of risks that make it difficult for founders to raise money and operate. The note, which was first mentioned before Informationwas presented last Monday by Sequoia Partners, Alfred Lane, Roelof Botha, Doug Lyon, Carl Eschenbach, and others.
“We believe this is a defining moment,” the presentation read. “First of all, we must be aware of the changing environment and turn our thinking to respond with intention rather than regret.”
Sequoia, known for early investments in appleAnd The Google And Airbnb, sound the alarm before other crises occur. The company published a note entitledRIP the good times“With the economic meltdown in 2008, it is widely read”black SwanA note on the early days of the coronavirus pandemic.
In the most recent of them, Sequoia refers to persistent inflation and geopolitical conflicts that limit the ability to “quick fix policy” such as lower interest rates or quantitative easing.
Sequoia partners said they missed one factor in the latest note: the downplaying of the monetary and fiscal policy response following the Covid crisis, and the “distortion field it created” in markets.
“This time around, many of these tools have been exhausted,” the show said. “We don’t think this will be another sharp correction followed by a rapid V-shaped recovery as we saw at the start of the pandemic.”
Sequoia has joined a group of venture capital firms and investors on Twitter to warn founders about the current macroeconomic environment.
As Lightspeed put it last week at a Blog post“The boom times of the last decade are unmistakably over.”
Tech companies that have seen explosive growth during the pandemic are already taking steps to cut costs with either one cut jobs or freeze employment. Klarna She said This week it plans to lay off about 10% of its global workforce, following similar announcements from Robinhood And Netflix. Facebook Parent deadAnd UberAnd nvidia Among the companies that are slowing down is hiring, too.
Sequoia points to this as a potential space aspect of recruiting as “every FANG has a hiring freeze.” The company urged its founders to consider projects, research and development, marketing and other expenditures to be prepared to cut costs and avoid a “death spiral”.
“Companies that move as fast as they can have the largest runway and are more likely to avoid the death spiral,” the note says. “Look at this as a time of incredible opportunity. You play your cards right and you come out as a strong entity.”
Forget ‘grow at all costs’
Stock markets have been turbulent in recent months due to inflation concerns, the war in Ukraine, supply chain issues and the Fed’s move to raise interest rates. Sequoia notes that the Nasdaq is experiencing its third biggest drop in twenty years, and many high-growth stocks are losing two-year highs. For example, 61% of all software, internet, and fintech companies are trading below pre-pandemic prices.
“The era of rewarding hyper-growth at any cost is rapidly coming to an end,” says Sequoia’s note, noting revenue multiples across programs that have been halved in the past six months and trading below the 10-year average. “This may not translate into your valuation overnight, but in the medium and long term, disciplined and lasting growth is always rewarded and translates into a meaningful appreciation of value.”
Above all, they warn that “cheap capital” will not come to the rescue. The company says cross-border hedge funds, which have been dabbling in private markets and investing in projects in recent years, are “healing their wounds in hard-hit public portfolios.”
However, Sequoia points out that there is opportunity for resilient founders. little partners Cisco After the 1981 accident, Google and PayPal Airbnb survived the financial crisis and DoorDash Navigating the Epidemic. The winners, they said, are those who are willing to take on challenges that “may have been hidden during the glut and distortions of free capital over the past two years”.
Michelle Baylehy, partner on the Sequoia growth team, told CNBC that the right amount of cost-cutting for each company depends on business and cash-burning, and not all of them will lead to a hiring freeze. In some cases, she says, it’s best to “keep your foot on the gas at your core work because you can come out stronger.”
“The message we wanted to get across to the founders is that for the best companies, this should be your time to shine, because when it’s so easy for everyone to raise money and get in demand, you don’t see as much power as some of the top companies and teams,” Bailhe told Network CNBC Crypto World Wednesday. “The playing field is becoming more and more difficult, which will benefit the kinds of people who are taking advantage of this opportunity enormously.”
