In recent online slide presentations, blog posts and social media threads, venture capital deans including Lightspeed Venture Partners, Craft Ventures, Sequoia Capital and Y Combinator told founders that they had to take emergency action for what could be the sharpest turning point in more than a decade. Their advice includes cutting costs, preserving cash, and abandoning hopes that hedge funds or other investors will rush in with big checks.
“The boom times of the past decade are unambiguously over,” wrote Lightspeed, which has backed companies such as social network Snap Inc. and crypto exchange FTX, in a dispatch for startup executives posted on Medium, a publishing platform, this month.
Investors’ warnings stray from the growth-first mantra for startups in recent years, and come as the venture capital market shows signs of sputtering.
Funding for global startups – about $58 billion in commitments as of the middle of the second quarter – is expected to decline by about a fifth in the period from the prior 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 more than $100 billion in investments, announced this month- ci a loss of $ 26.2 billion in the first quarter as valuations fell in its portfolio of technology companies.
Startup investors have sounded the alarm during previous moments of financial and economic turmoil, including the onset of the Covid-19 pandemic. But venture capital 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 cheap liquidity and capital. This time, the central bank raised rates and took money out of the system in an effort to control inflation.
The Fed’s decisions make capital more expensive and increase pressure on companies to preserve cash. “I plan to ride this thing for at least 18 months or more,” said Fred Wilson, co-founder of Union Square Ventures, an early backer of Twitter Inc. and the fintech startup. Stripe, in a blog post last weekend titled “How It Ends.”
Sequoia, one of Silicon Valley’s most reputable companies, warned founders and CEOs in a March 2020 memo of business risks from the looming global health crisis, including supply chain issues. supplies and canceled trips.
The current situation is more like the financial crisis of 2008 or the dot-com market crash of 2000, Sequoia — known for its early investments in Apple Inc. and Airbnb Inc., among others — said in a slide presentation from 52 pages for about 250 founders. about two weeks ago.
“We don’t believe this will be another steep correction followed by an equally rapid V-shaped recovery as we saw early in the pandemic,” Sequoia said in the presentation, which was reported earlier by tech news site The Information. The slide presentation, titled “Adapting to Endure,” called it a “Crucible Moment” and advised businesses to cut spending quickly and preserve cash, noting, “It will be a longer recovery.”
The latest presentation mirrors the message of a 50-slide presentation Sequoia sent to founders in October 2008, claiming that a housing-related recession and overleveraged finances—which it illustrated with a demolished carcass and a headstone—meant that companies needed to control their expenses, focus on quality and lower risk.
Bill Gurley, a partner at Benchmark Capital known both for his successful investments and for speaking out against excess venture capital, has repeatedly taken to Twitter in recent weeks to offer advice. “The cost of capital has changed dramatically, and if you think things are the way they were, then you’re headed for a cliff like Thelma and Louise,” he said this month.
Some big cases are still going on. Space Exploration Technologies Corp., or SpaceX, Elon Musk’s rocket company, just raised a new funding round of more than $1.5 billion, for example.
And many startups have accumulated enough cash from last year’s fundraising spurt to continue operating for several years with existing funds, said Neeraj Agrawal, general partner at Boston-based Battery Ventures. Still, Battery partners advised their holding companies to conserve cash, he said.
“Before you thrive, you have to survive,” said Michael Seibel, CEO 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 downsize, cut ad spend and raise prices.
Venture capitalists also try to issue encouragement notes to entrepreneurs they have backed.
A focus on quality over quantity can have benefits, they said, noting that some of the best-known tech players today, including Uber Technologies Inc. and Airbnb, were founded in a context of economic weakness in the United States.
The battle for talent could ease as job cuts spread across the tech sector, according to VCs. Startups that aren’t viable but still create competition — a phrase coined by Y Combinator co-founder Paul Graham as “dead by default” — will likely die out without access to cheap money, they added.
Lightspeed titled their recent Medium post, “The Benefits of Slowing Down.” While emphasizing that startups need to slow down hiring and reduce 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 again,” Lightspeed said.
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