Sequoia Capital's Doom and Gloom Prophecies and the Economic Road Ahead

The comments made by the partners of Sequoia Capital at their recently held "CEO Summit" have been widely covered by leaks to numerous bloggers. These bloggers have disseminated the details and spread the contagion of the sentiments to the public at large, unfortunately running the risk that the words become a self-fulfilling prophesy. Without challenging the comments, which expressed a heightened degree of doom and gloom for the economic prospects of young start-up companies particularly, I do think it calls for a somewhat more restrained response on the outlook and required action before throwing the baby out with the bath water. Certainly, we are going through a period of enormous economic and political uncertainty. The loss of confidence, primarily in our financial system, as a result of the excess of the past five to ten years (if not longer -- we may never know how long some of the flawed practices have been going on) is one of the leading contributors. We are also at the moment looking for leadership on the political front and both because of very low public support for the president and because we are in the midst of a heated election for his successor, we have no real voice of authority to provide some guidance, reassurance, and inspirational confidence that the bus has a driver who knows where he is going.

Nevertheless, aside from an over inflated housing boom that had to collapse sooner or later and a complicated financial system that arose in part to fuel this engine, the basic economy was in reasonable shape with GNP growth and productivity gains supporting a solid, if not vibrant outlook. (I know the automotive industry is also going through bad times but it no longer pervades the economy as once conveyed in the expression "As GM goes, so goes the nation.")

Advances in technology are allowing companies to make goods and provide services faster and cheaper. The wireless revolution and the Internet have made the dissemination of information easier and more pervasive for the entire world and brought significant benefits to every phase of our economy. That is not going to stop although it may temporarily slow down. In these difficult times, there will be winners as well as losers (and the former may be fewer in number for a while).

The point is, the financial problems are being addressed, if not a bit belatedly, and some international mechanism will be found in short order for some coordinated policy that will restore order and confidence to the system.

Most young companies, with which we are specifically concerned, are financed with equity capital. That has its positives and negatives; on the one hand, debt is a very small factor in the capital structure of most small companies so loan foreclosures and the interest rate burden are not of prime concern. On the other hand, equity capital, which is provided by private investors, requires confidence in future prospects for reaching profitability and creating a strong market value. Certainly under current conditions it is hard to engender such confidence although history has demonstrated that it is in times like these that great opportunities are created. I have always said, "The best time to invest is when the drums are beating, not when the trumpets are blaring!"

This is surely a time for companies to pay meticulous attention to detail, particularly their cost structure. It is a time to be realistic in their near term assumptions for revenue growth and take nothing for granted. Raising additional capital to support operations is of course critical, as it is at any time, but this is particularly a time for young companies to be extra cautious in developing pragmatic assumptions of their needs and in focusing on the amount and not necessarily the cost of that capital.

This is not a time to panic, cut off all investment in the future, and burrow into a dark hole. Take a page from the packaged goods industry that the time to gain market share is during tough times when your competitors are weaker in responding. And while this may feel more directly related to portfolio companies, we as a venture industry should not retreat either. It is our strong belief that we can and will continue to make sound investments in excellent opportunities. It is as good a time as ever to start a company with sound fundamentals.

So my point is to heed the caution of the Sequoia comments but to use them only as a strong message to reexamine all cost elements and growth plans and use this opportunity to assure that you are a survivor. Find a way to use this moment to gain your greater share of the market by providing a solution that is needed by others to improve their prospects in the difficult environment ahead. Tighten your belt and live within your means. Although the timing makes this message seem more prescient, it is a philosophy that works for successful companies at all times and at all stages; it is simply put, good business. This is not a time for heroes!

Comments

[Ironquill]

Having been there, the new venture world uses the term "burn rate" as a badge of honor. Burn rate defines how fast you are bleeding cash before cash inflow equals cash outflow.
If Sequoia Partners is instructing their new venture folks to end the burn rate because there might not be any more cash, a tectonic shift is occuring in that industry.
Tom Wolfe, the writer, looking at the masters of the universe in Silicon Valley, has been trying to get at the roonts of the perviersity of, e.g., seeing a high burn rate as prestigious. I think it is perverse and that this perversity has invaded our financial system on a broad scale. Could there be anything more perverse than the Board of Directors allowing Fuld to leverage the firm beyond the point of redemption, and then rewarding him?
I don't think the stock market will collapse and I bought some stocks on Thursday, but the old order is tumbling. The head of Chesapeak Energy had to sell all of his holdings in the company he founded in order to meet margin calls on his investments. Great company, bright future, What the heck is going on?
I thinbk we just ended the chapter in our society which rewarded picking all the low hanging fruit, eating the seed corn, and having as high a burn rate as possible.
You say that we have no one in authority right now, I agree and ask the question....why is that?

[Nomccain]

Obama is the only one trying to instill hope and positive thinking while McSAME rails and accuses others of wrong doing and tries to play the race card in desperation.This is the typical Republican tactic once they've screwed things up. George "Mr. Perfect" has NEVER admitted he did anything wrong in his life despite the fact that the whole world knows what a "screw up" he and his REPUG Party is. Their 1960's-70's ideas are no longer applicable in a 21st century global economy and as a result, we are at a disadvantage and a meltdown. They won't change so let us change America before it's too late.

[Overtone]

Let me provide a counterbalance. See the article entitled: Revolutionary Energy Breakthroughs Can Kick-Start the Economy.

It appears on our website: magneticpo­werinc.com

Also on Renewablee­nergyworld­.com

The need for fuel of every variety can be replaced by technologies that operate 24/7 without it. They are inherently inexpensive and renewable. And can be produced worldwide in the near future.

Future cars, trucks and buses can become power plants when parked, restoring the automotive industry and replacing the need to build coal burning or nuclear plants.

[Ironquill]

Good luck. Maybe the end of GM as we know it is the kind of catharsis we need in order to re-invent our society. It's going to rough in the interim.

[hypnotoad72]

Those who say they are going to die... usually find a way to do it.

Well, I'm going to live a decent life.

[SteveMDFP]

The current situation is no ordinary downturn or recession. It's something we haven't seen since the Great Depression, a deflationary death spiral.

Only this time, it's developing at electronic speed.

Illuminating bar chart of investment vehicle classes:
http://bigpicture.typepad.com/comments/2008/10/worst-week-ever.html?cid=134281977

More discussion:
http://stevemdfp.blogspot.com/index.html

[JScott]

In a way tho DOES ANYONE LOOK HISTORICALLY at this I remember other economic crises in the 60's and up thru the 90's, I remember 2 digit % inflation and unemployment, we've got single digit inflation and single digit unemployment. And what about the 'rest' of the economy, beyond the purview of the MSM (probably over exagerating) and Wall St. and the financial industry? I would worry when Warren Buffet and Bill Gates are pulling their $ outta the US and selling their houses (if they could) and moving overseas. And are we really that stupid that we always need a fast fix, whassa matter Wall St. you aren't making more money even faster?-Perhaps that's what's really wrong.

[hypnotoad72]

Gates ditched the dollar in 2005 and boasted how it would fall.

Need a fast fix? Everyone knows wealth works from the bottom up; and it's those in the middle class that work hard to support society. Stop offshoring living wage jobs, replacing them with lower wage ones, and thinking that will do anybody any good.

[midwesthousewife]

(Warren Buffet could easily sell his house. It is an upper middle class neighborhood in Omaha, with values of maybe $400,000-$800,000. Not like Gates mega-million mansion.)

[GaryfromDenver]

You are right that "words" are creating this depression.

But those "words" are contained in The Federal Reserve Act of 1913.

Those "words" allow superelites (the identity of whom, we dont even know) to privately own our monetary system, in which the President appoints a lame duck Chairman with no voting power.

Those "words" that cause depression are spoken in closed door meetings, which become "self fulfilling" because this currency blow out is on purpose to usher in a New World (or at least continental) currency...if you know what I mean

Do your research.

[hypnotoad72]

Oh, like the one Snopes debunked? ;)

[Rickandanumber]

"This is not a time to panic, cut off all investment in the future, and burrow into a dark hole."

How true. This is a time to calmly look over your investments, and then quietly and with deliberation sell everything on Monday, put any money left after six months expense money in cash in your mattress into gold and silver bullion, bury it a good place, making sure that you can find it again, and reduce your lifestyle to subsistence level...

speaking of which, I picked up this great sportscoat at the thrift shop, like new, brown hand woven Shetland cloth of some kind (naw, not Harris Tweed. I already have a couple of them) with leather elbow protectors. $2. Fits me like it was tailored. And a brand new anorak. And a brand new fleece with nylon shoulder and elbow patches ($1 each).... (and the best thing about these clothes is that if anything happens to them, who cares?) and a fire extinguisher for my mom's house for $3. pressurized, of course.

[rich misty]

http://money.cnn.com/2008/09/29/magazines/fortune/varchaver_derivatives.fortune/

This is where we are now ^^^

http://www.marketwatch.com/news/story/derivatives-new-ticking-time-bomb/story.aspx?guid=%7BB9E54A5D-4796-4D0D-AC9E-D9124B59D436%7D

This is where we are heading ^^^

[julianne]

With respect, the continued falling of the U.S. stock market at this time in our history is not just primarily instigated by a lack of confidence in our financial system but a lack of confidence in the intellectual, cultural, and institutional life of the United States. There is a vortex of sadness, despair, and fear that most of the world's citizens never wanted to enter but into which they were impelled by events, events driven primarily by U.S. policies and assumptions usually involving a lot of hubris, theivery, and blood. Because of a litany of historical actions and arrogant assumptions that have now become unforgiving, many people on Earth now see the U.S. as indemically fascistic, theocratic, and corrupt. And it is the American people, themselves, that are now being seen as dangerously self-centered and impelled or mesmerized by sociopathic hubris and an Orwellian media and political-religious culture. Other nation's leaders may welcome an Obama Presidency, but they cannot ever trust us as they once had because they are responsible for the health and progress of their own nations and will now fear that the underbelly of our nation, today so fully on display, may rise again. This is why millions of thoughtful Americans wanted Bush and Cheney impeached years ago.

[dutchman]

Brilliant post - thank you.

[olephart]

"This is why millions of thoughtful Americans wanted Bush and Cheney impeached years ago."

This is why the safety first politics of the Democratic "leadership" has failed so miserably. The recent Wall Street bailout bill is just another example of the "going along to get along" weakness of the "leadership". The War Crimes of the Bush Administration begged to be examined in the light of day. Each lie and fabrication needed to be exposed in detail so that Americans could "pull their heads out" and face reality. Those who still refused to accept the facts could be shown to be the shills and morons that they are. We desperately needed an exorcism and what we got were pandering enablers who swept the dirt under the rug.

Now that the economy has gone the way of Bush's miscreant Foreign Policy everyone is suddenly concerned. Never mind that 4000 Americans were sacrificed or that hundreds of thousands were murdered, Americans only noticed the catastrophic failures when it came to their money. Thus we are exposed to the World as callous, self centered clod hoppers who can't tell $h!t from shinola.

Trust is something that will not soon be associated with America. If McCain "wins" the election we will consigned to the dust bin of History.

[Overd0g]

You should know that there aren't millions of thoughtful Americans.

[oldfart1]

What's so hot about this? Many large corps starting hoarding cash a year or more ago, and the total hoard is now supposed to be around $800 billion.

The only people who really hurting are the banks. Let them hurt.

[Rule Of Law]

Alan, I'd like to be a relaxed about this as you are, but the fact is that the Sequoia guys gave realistic advice to anyone still in the market. The uber-wealthy have been quietly exiting the stock market and moving into metals, safe real estate and off shore accounts for the past year, since he real estate "bubble" became common knowledge and the foreclosures began. This is just what they do. They did it before the last Great Depression. That's why they're rich. Why should we, as individuals do any different.

There may be growth opportunities for a few companies during this coming depression, but that isn't high on the list of the concerns of most of us who read and write here.

[ErnestineBass]

I don't know, ROL. My brother (a recently unemployed architect) and I have been talking about starting a solar panel and wind turbine installation firm. IMO, green, off-the-grid power generation and water recycling systems are the future.

[Rule Of Law]

Oh, I agree with that, totally. But most of us Ernestine still work for someone else, unfortunately, and I think that as a result most folk's concerns are a bit more downstream.

[DavidATolucaLake]

Your assessment is a bit rosy.

You are failing to acknowledge that credit, from low interest home refinancing to credit cards, has fueled the recent economic growth in the USA.

This credit will now be unavailable to many.

The American consumer will how have to spend what he has and not also what he can borrow. This will reduce consumer demand.

And with real wages stagnating for many, for the last 10 years, there will be even less surplus cash for American consumers to spend.

You are overly optimistic about the outlook of the American economy, for the near future.

[hypnotoad72]

Compared to all the overly pessimist people, SOMEBODY has to be a counterbalance.

[LCM1220]

I agree wholeheartedly! Let's face it, most people will not be able to resume their former spending habits, which will in turn affect retail and wholesale performance, which will in turn lead to more layoffs, etc.....yes it is a death sprial....

As for housing prices? They still have to come way down in order to be realistically "affordable" as the exotic mortgages which made it possible for many "middle" class people to buy 1/2 million dollar homes, when they could only really afford 300,000 homes. Anyone who thinks this is going to be a "typical" recession is going to be very unpleasantly surprised. This is going to get very very very UGLY!