Sequoia coaches start-ups to cut costs or face a ‘death spiral’ amid stock market slump, bleak economic backdrop

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  • In a 52-page slide presentation, Sequoia lays out the big-picture risks for start-up founders, while urging them to preserve cash to survive.
  • The Silicon Valley firm points to continued inflation and geopolitical conflicts that limit the ability of policymakers to “quick-fix policy solutions”.
  • “We don’t believe this is going to be another sharp correction, followed by an equally rapid V-shaped recovery, as we saw at the start of the pandemic,” say Sequoia’s partners.

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One of Silicon Valley’s most successful venture capital firms doesn’t see the economy bouncing back any time soon and in the meantime is warning portfolio companies to tighten their belts.

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In a 52-page presentation seen by CNBC, Sequoia lays out a slew of risks that make it difficult for founders to raise and operate funds. Memo, first of all. reported by informationPresented Last Monday by Sequoia Partners Alfred Linn, Roelof Botha, Doug Lyons and Karl Eschenbach and others.

“We believe this to be a crucible moment,” the presentation reads. “First and foremost, we must recognize the changing environment and change our mindset to respond with intention rather than remorse.”

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Sequoia, known for its early investments in Apple, Google and Airbnb, has sounded alarm bells before other woes. The firm published a memo titled “RIP Good Times“As the economy declined in 2008, read more widely”black Swan“Memoirs in the Early Days of the Coronavirus Pandemic.

In the most recent one, Sequoia points to continued inflation and geopolitical conflicts that limit the ability of “quick-fix policy solutions” such as slashing interest rates or quantitative easing.

Sequoia partners said they got one factor wrong in a previous memo: underestimating the response to monetary and fiscal policy, following the COVID crisis, “and the distortion zone that created” in markets.

“This time, many of those tools are gone,” the presentation said. “We don’t believe this is going to be another sharp correction, followed by an equally sharp V-shaped recovery as we saw at the start of the pandemic.”

Sequoia joins a group of venture capital firms and investors on Twitter warning founders about the current macroeconomic environment.

As Lightspeed put it last week in a blog post“The boom time of the last decade is clearly over.”

Tech companies seeing tremendous growth during the pandemic are already taking steps to cut costs by cutting jobs or freezing hiring. Following similar announcements from Robinhood and Netflix, Klarna said this week it plans to lay off about 10% of its global workforce. Facebook parent Meta, Uber and Nvidia are also among companies slowing hiring.

Sequoia points to this as a potential silver lining for the recruiter because “all FANGs have a hiring freeze.” The firm urged its founders to be prepared to cover projects, research and development, marketing and other expenses to cut costs and avoid a “death spiral”.

“The companies that run the fastest, have the most runway and are most likely to survive the death spiral,” the memo said. “See this as a time of incredible opportunity. You play your cards right and you will come out as a stronger unit.”

Forget ‘Development at All Cost’

Stock markets have been rocked in recent months by inflation fears, the war in Ukraine, supply chain issues and the Fed’s move to raise interest rates. Sequoia tipped the Nasdaq to its third biggest decline in over twenty years, and many high-growth stocks lost two years of price appreciation. For example, 61% of all software, internet and fintech companies are trading below pre-pandemic prices.

“The era of being rewarded for hypergrowth at any cost is soon coming to an end,” says the Sequoia memo, with revenue multipliers in software being cut in half over the past six months and trading below the 10-year average. Used to be. “It may not translate into your valuation overnight, but in the medium and long term, disciplined, sustainable growth is always rewarded and translates into meaningful value appreciation.”

Above all, they warn that “cheap capital” is not coming to the rescue. Crossover hedge funds, which have been dipping into private markets and venture investing in recent years, “are moving toward their wounds in public portfolios,” the firm says.

Still, Sequoia points to opportunity for resilient founders.
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Partners mentor Cisco after the 1981 crash, Google and PayPal survived the dot-com bust, Airbnb pulled it out of financial trouble, and DoorDash navigated the pandemic. The winners, he said, are those who are willing to face challenges that “may have been masked during the glee and distortions of free capital over the past two years.”

Michelle Belle, a partner on Sequoia’s growth team, told CNBC that the appropriate amount of cost-cutting for each company depends on the business and the cash it burns, and not all will result in a hiring freeze. In some cases, “it’s better to keep your foot on the gas in your core business because you can come out even stronger.”

“The message we wanted to send to the founders was that for the best companies, this should be your time to shine, because when fundraising and getting demand is easy for everyone, you can’t stand the power of something specific. Don’t see much in the form of businesses and teams,” Ballet told CNBC’s Crypto World on Wednesday. “The playing field has become tougher, which will benefit those who make the most of this opportunity.”

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