One of the most famous documents in venture capital is Sequoia Capital’s 2008 presentation ‘RIP Good Times’. It warned its portfolio companies of the economic devastating coming from the Global Financial Crisis and the steps it suggested they should take to prepare.
Sequoia are back in 2022 with another presentation, this time titled ‘Adapting to Endure’. While they do not suggest that this is a moment to panic, they do say it is a time to pause and reassess. The starting point here is that the cost of capital has increased – both for debt (higher interest rates) and for equity (lower public and private market valuations).
Sequoia expect this to be a long, drawn out process as the stimulus of the past couple of years is unwound. And they believe their portfolio companies need to do everything to lengthen runway (i.e. preserve their cash so they can operate for longer). But at the same time, there is an element of hope to it all. Some of the best companies have emerged out of these moments. PayPal and Amazon were two companies that survived the 2000 tech wreck and came out of the other side stronger. Uber and Airbnb were founded in the depths of the 2008 GFC. There will be companies that take this moment to transform from startups fuelled on easy capital, into real, profitable, sustainable businesses.
One final thought. It is important to note that Sequoia haven’t always got it right. In 2020, they wrote a memo ‘Coronavirus: The Black Swan of 2020’ that warned its portfolio companies “until you have charted a course to financial independence, examine whether your capital spending plans are sensible”. What followed was two years of cheap capital and easy fundraising. So it is important to remember Sequoia don’t have any greater insight than the rest of us – but perhaps a dose of economic reality is important in the startup space after two years that, in hindsight, looked a lot like a bubble.
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