In recent online slideshows, blog posts, and social media threads, the doyens of venture capital, including Lightspeed Venture Partners, Craft Ventures, Sequoia Capital, and Y Combinator, tell founders they must take emergency action to what could be the sharpest change in more than a decade. His advice includes cutting costs, preserving cash and ditching hopes that hedge funds or other investors will walk in with big checks.
“The boom times of the last decade are unambiguously over,” Lightspeed, which has backed the likes of social network Snap Inc. and cryptocurrency exchange FTX, wrote in a dispatch to startup executives published on Medium. , a publishing platform, this month.
The investor warnings are a departure from the growth-first-everything mantra for startups in recent years, and come as the venture market shows signs of stalling.
Funding for global startups, with around $58bn in commitments as of the middle of the second quarter, is on track to fall by around a fifth in the period compared to the previous quarter, according to analytics firm CB Insights. The tech-heavy Nasdaq Composite Index is down about 25% from its all-time high in November, and SoftBank Group Corp., which has poured more than $100 billion in investments, reported a $26.2 billion loss this month. dollars in the first quarter as valuations plummeted in its portfolio of tech companies.
Emerging investors have sounded alarm bells in previous times of financial and economic turmoil, including the start of the Covid-19 pandemic. But hedge fund partners say the current situation is different. In past recessions, the Federal Reserve has cut rates and pumped money into the markets to support the economy, providing liquidity and cheap capital. This time, the central bank has been raising rates and taking money out of the system in an attempt to control inflation.
The Fed’s moves are making capital more expensive and increasing pressure on businesses to hold onto cash. “I would be planning on putting up with this for at least 18 months or more,” said Fred Wilson, co-founder of Union Square Ventures, an early backer of Twitter Inc. and fintech startup Stripe, in a blog post last weekend titled “How does this end.”
Sequoia, one of Silicon Valley’s most storied companies, warned founders and CEOs in a March 2020 memo about the risks to businesses from the looming global health crisis, including supply chain issues and cancellation of trips.
The current situation is more similar to the 2008 financial crisis or the 2000 dot-com market crash, Sequoia, known for her early investments in Apple Inc. and Airbnb Inc., among others, said in a 52-page slideshow. pages for approximately 250 founders. about two weeks ago.
“We don’t think this is going to be another sharp correction followed by an equally rapid V-shaped recovery like we saw at the start of the pandemic,” Sequoia said in the filing, which was previously reported by tech news site The Information. . The slideshow, titled “Adapting to Hang On,” called this a “Crucible Moment” and advised businesses to cut expenses quickly and conserve cash, noting “it’s going to be a longer recovery.”
The most recent presentation mirrors the message in a 50-slide presentation Sequoia sent to founders in October 2008, saying that a recession fueled by housing and overleveraged finance, illustrated by a butchered corpse and a tombstone, meant that companies they needed to control spending, focus on quality and lower risk.
Bill Gurley, a partner at Benchmark Capital known both for his successful investments and for exposing venture capital excesses, has taken to Twitter several times in recent weeks to offer advice. “The cost of capital has changed materially, and if you think things are the way they were, you’re going off a cliff like Thelma and Louise,” he said this month.
Some important business is still being done. Space Exploration Technologies Corp., or SpaceX, Elon Musk’s rocket company, just raised a new round of more than $1.5 billion in funding, for example.
And many startups amassed enough cash from fundraising last year to continue operating for several more years with existing funds, said Neeraj Agrawal, general partner at Boston-based Battery Ventures. Still, Battery partners have been advising their portfolio companies to hold onto cash, he said.
“Before you thrive, you have to survive,” said Michael Seibel, managing director of Y Combinator, in a video for startups posted on YouTube this month. The Silicon Valley accelerator, which aims to help startups thrive and has invested in more than 3,000 companies including Airbnb, is urging founders to cut staff, cut advertising spending and raise prices.
Venture investors are also trying to sound notes of encouragement for the entrepreneurs they’ve backed.
The focus on quality over quantity may have some advantages, they said, noting that some of today’s best-known tech players, including Uber Technologies Inc. and Airbnb, were founded amid economic weakness in the US. .
The battle for talent could ease as job cuts spread across the tech sector, venture capitalists say. Startups that aren’t viable but still create competition — a phrase coined by Y Combinator co-founder Paul Graham as “dead by default” — are also likely to disappear without access to cheap money, they added.
Lightspeed titled its recent Medium post, “The Silver Lining of a Recession.” While emphasizing that startups must cut back on hiring and eliminate non-essential activities, among other measures, to survive, he also urged founders to remain optimistic.
“History has taught us that CEOs who are decisive now and make critical changes to their businesses will emerge in a stronger position when markets normalize once again,” Lightspeed said.
This story has been published from a news agency feed with no changes to the text.