In recent online slide presentations, blog posts and social media threads, venture capital veterans including Lightspeed Venture Partners, Craft Ventures, Sequoia Capital and Y Combinator told founders they needed to take urgent action in response to potential emergencies The most dramatic turnaround in more than a decade. Their advice included cutting costs, preserving cash and giving up hope that hedge funds or other investors would buy aggressively.
“The boom of the past decade is clearly over,” Lightspeed, which has backed companies including social network Snap Inc. and cryptocurrency exchange FTX, wrote in a briefing for startup executives posted this month on publishing platform Medium .
Investors’ warnings deviate from the mantra that startups’ growth is above all else in recent years, and the venture capital market is showing signs of a slump.
Funding commitments from startups worldwide were about $58 billion by the middle of the second quarter, compared with the previous quarter, and are expected to fall by about a fifth, according to analytics firm CB Insights. The tech-heavy Nasdaq Composite is down about 25% from its all-time high in November, while SoftBank Group Corp., which has invested more than $100 billion, this month reported a first-quarter loss of 262 percent due to valuation reasons. The $100 million portfolio of its tech companies plummeted.
Startup investors have sounded alarm bells in previous moments of financial and economic turmoil, including the start of the Covid-19 pandemic. But venture fund partners say things are different now. In past downturns, the Federal Reserve cut interest rates and pumped money into the market to support the economy, providing liquidity and cheap capital. This time, the central bank has been raising interest rates and taking money out of the system to keep inflation in check.
The Fed’s move has made capital more expensive and increased pressure on companies to preserve cash. “I plan to do this in at least 18 months or more,” Fred Wilson, co-founder of Twitter Inc. and Union Square Ventures, an early backer of fintech startup Stripe, said in a caption over the weekend. for “how will 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 Trip canceled.
Today’s situation is more akin to the financial crisis of 2008 or the internet market crash of 2000, Sequoia Capital (known for early investments in companies such as Apple and Airbnb) said in a 52-page slideshow for about 250 founders About two weeks ago.
“We don’t think it’s going to be another sharp correction followed by the same quick V-shaped recovery we saw at the beginning of the pandemic,” Sequoia said in the presentation, tech news site The Information reported earlier this presentation. The slide presentation titled “Adapting Tolerance” called this a “moment of truth” and advised companies to cut spending quickly and preserve cash, noting that “this will be a longer recovery.”
The latest presentation mirrors a message from a 50-slide presentation Sequoia sent to founders in October 2008, calling real estate-induced recession and overleveraged finances — illustrated with slaughtered corpses and tombstones Getting to this point – means companies need to rein in spending and focus on quality and risk mitigation.
Benchmark Capital partner Bill Gurley, known for his successful investments and pointing out the excesses of venture capital, has taken to Twitter several times in recent weeks to offer advice. “The cost of capital has changed significantly, and if you think that’s the case, you’re going to fall off a cliff like Thelma and Louise,” he said this month.
Some big deals are still being done. For example, Elon Musk’s rocket company Space Exploration Technologies Corp. or SpaceX just raised a new round of more than $1.5 billion in funding.
Neeraj Agrawal, a general partner at Battery Ventures in Boston, said many startups have amassed enough cash from the fundraisers that poured in last year to stay afloat for several years on top of their existing funds. Still, Battery’s partners have been advising their portfolio companies to save cash, he said.
“Before you can thrive, you have to survive,” Y Combinator managing director Michael Seibel said in a video posted to YouTube this month. The Silicon Valley accelerator aims to help startups thrive and has invested more than Airbnb, including Airbnb 3,000 companies are urging founders to cut jobs, cut ad spend and raise prices.
Venture capitalists are also trying to give a voice of encouragement to the entrepreneurs they support.
Focusing on quality over quantity could have some benefits, they said, noting that some of today’s best-known tech companies — including Uber Technologies Inc. and Airbnb — were founded in the midst of a weak U.S. economy
Venture capitalists say the war for talent could ease as layoffs spill over into the tech industry. They add that startups that aren’t viable but are still creating competition — a phrase “death by default” coined by Y Combinator co-founder Paul Graham — may also disappear without access to cheap cash.
Lightspeed named its recent Medium post “The Benefit of a Downturn.” While underscoring the need for startups to slow hiring and cut back on non-essential activity to survive, it also urged founders to remain optimistic.
“History tells us that CEOs who are decisive now and make significant changes to their businesses will be in a better position when the market normalizes again,” Lightspeed said.
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