Silicon Valley Investors Offer Advice for Startups Surviving the Economic Downturn
In recent online slide presentations, blog posts and social media threads, venture capital workers including Lightspeed Venture Partners, Craft Ventures, Sequoia Capital and Y Combinator tell the founders they need to take emergency action for what could It’s the biggest shift in over a decade. Their advice includes cutting costs, conserving cash, and letting go of hopes that hedge funds or other investors will cash in with big checks.
Lightspeed, which has supported companies including social network Snap Inc., wrote. And Crypto Exchange FTX, in a message to startup executives posted on the medium publishing platform, this month: “The boom times of the past decade have unequivocally come to an end.”
Investor warnings are a departure from the growth above all else catchphrase for startups in recent years, and come as the venture capital market is showing signs of sputtering.
Global startup funding — with about $58 billion in commitments in the middle of the second quarter — is on pace to decline by about a fifth in the period from the previous quarter, according to analytics firm CB Insights. The heavy Nasdaq Composite is down nearly 25% from its all-time high in November, and SoftBank Group Corp., which pumped more than $100 billion in investments, this month posted a $26.2 billion loss in the first quarter in valuations. It slipped into its portfolio of technology companies.
Investors in startups sounded alarm bells in earlier moments of financial and economic turmoil, including the onset of the Covid-19 pandemic. But the mutual fund partners say the current situation is different. In previous recessions, the Federal Reserve lowered interest rates and pumped money into the markets to support the economy, providing liquidity and cheap capital. This time, the central bank raised interest rates and pulled money out of the system in an effort to tame inflation.
The Fed’s moves are making capital more expensive, and increasing pressure on companies to keep their cash. Fred Wilson, co-founder of Union Square Ventures, first supporter 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 well-known companies, warned founders and CEOs in a March 2020 memo about the risks to companies from the looming global health crisis, including supply chain issues and travel cancellations.
Sequoia – known for its early investments in Apple Inc. and Airbnb Inc. , among others – the current situation is very similar to the 2008 financial crisis or the 2000 Internet market crash, in a 52-page presentation to nearly 250 founders about two weeks ago.
“We don’t think this will be another sharp correction followed by a rapid V-shaped recovery similar to what we saw at the start of the pandemic,” Sequoia said in the presentation, previously reported by tech news site The Information. The slide presentation, titled “Adapting to Endurance,” described this “critical moment” and advised companies to cut expenses quickly and preserve cash, noting that “the recovery will be longer.”
The latest presentation reflects the message in a 50-slide presentation Sequoia sent to the founders in October 2008, saying the housing and hyper-financial slump – which he explained with a butchered body and a grave – means companies need to control spending, focus on quality, and reduce risk. .
Bill Gurley, a partner at Benchmark Capital known for its successful investments and call-ups in venture capital, has taken to Twitter several times in recent weeks to offer advice. “The cost of capital has materially changed, and if you think things are the way they are, you are about to slide down a slope like Thelma and Louise,” he said this month.
Some big deals are still being done. Space Exploration Technologies Corp., or SpaceX, Elon Musk’s rocket company, has raised up to $1.5 billion in new funding, for example.
Several start-ups stockpiled enough cash from cash flow to raise funds last year to continue working for several more years on existing funds, said Neeraj Agrawal, general partner at Boston-based Battery Ventures. However, Battery Partners are still advising their portfolio companies to maintain cash, he said.
“Before you can thrive, you have to survive,” Michael Seibel, managing director at Y Combinator, said in a YouTube startup video 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, reduce ad spend, and raise prices.
Venture investors also try to issue encouraging notes to the entrepreneurs who have supported them.
Focusing on quality over quantity could have some positive aspects, they said, noting that some of the most famous players in technology today – including Uber Technologies Inc. And Airbnb – they were founded amid economic weakness in the United States.
Venture capitalists say the battle for talent could ease, as job cuts spread across the tech sector. They added that startups that are not viable but still create competition – a phrase that Y Combinator co-founder Paul Graham coined as “virtual dead” – are also likely to disappear without access to cheap cash.
Lightspeed launched its latest headline on Medium, “The Positive Side of the Deflation”. Emphasizing that startups need to slow hiring and cut non-essential activities, among other measures, to survive, she also urged founders to remain optimistic.
“History has taught us that CEOs who make the critical decisions now and make critical changes to their businesses will emerge in a stronger position when markets return to normal again,” Lightspeed said.
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