218 Comments

Summary:

Silicon Valley’s smartest investor, Sequoia Capital, is telling its companies to tighten their belts. Super-angel Ron Conway is telling his portfolio of startups to batten down the hatches, cut jobs, and get ready for the worst. The credit crunch is hitting tech land like the proverbial Category 5 hurricane. Continue Reading

Updated: Sequoia Capital, arguably the smartest venture capital investor in business, is sounding the alarm and asking its portfolio companies to buckle down for what could be the worst economic downturn of their relatively short lives.

The fund organized a meeting yesterday where it invited entreprenuers/CEOs from its portfolio companies. The attendees were greeted by a cute image of a Grave Stone, with a message: R.I.P.: Good Times, my sources tell me.

I was able to confirm this with at least two sources. I am currently trying to nail down more details. Sequoia Capital declined to comment on the news. 

The gathering was addressed by at least four speakers, including a brief introduction by Mike Moritiz. Doug Leone was another speaker. I am still trying to nail down more details of the two other speakers. A person who handles Sequoia’s public market investments is said to have talked to the startups. The message delivered to those in attendance was that things could get a lot worse than people think, and it will be a more protracted downturn. To give a historical perspective, Sequoia had a similar meeting back before the last bubble unraveled burst. We know how that turned out.

They want the companies to cut costs, to figure out way to survive and emerge at the other end of this downturn, which could last years. The speakers went through each functional area of the business and told the companies how to cut costs. By holding this special meeting, Sequoia is telling its companies to put survival strategies in place and figure out ways to outlast the broader market troubles. 

Uber-investor Mike Moritiz told The Financial Times earlier this week: “It’s pretty clear that demand is going to soften across the board for every company – it doesn’t matter if you’re selling to consumers or companies.” Moritiz isn’t one to mince words, and is one of those few people who likes to get ahead of the fire and not fight it from behind. 

Sequoia isn’t the only one advising its startups to tighten their fiscal belts and prepare for a gut-wrenching ride. Ron Conway, a well-known angel investor in the Valley who has invested in companies like Google, offered very sobering advice to his companies via an email earlier today.

Raising capital will be much more difficult now. You should lower your “burn rate” to raise at least 3-6 months or more of funding via cost reductions, even if it means staff reductions and reduced marketing and G&A expenses. This is the equivalent to “raising an internal round” through cost reductions to buy you more time until you need to raise money again; hopefully when fund raising is more feasible.

Letting go of staff is hard and often gut-wrenching.  A re-evaluation of timelines and re-focus on milestones with an eye to doing more with less will allow you to live many more days, and the name of the game in this environment in some respects is survival — survival until conditions change. If you are in a funding cycle, you should raise your funding as soon as possible and raise as much as possible but face the fact that if you can’t raise money now you must cut costs.

Folks this is bad news for Silicon Valley, which has been living in a bubble, assuming that it is going to weather the global economic storm without being impacted. We have been following this story since last year, pointing out that the tech is not an island.

By Om Malik

You're subscribed! If you like, you can update your settings

Related stories

  1. [...] Leading Silicon Valley venture firm Sequoia held an emergency meeting yesterday to tell its portfolio companies to get ready for the worst, GigaOm is reporting. [...]

    Share
  2. I’m not going to lie, that is daunting & scary to hear it from Sequoia who clearly know what they’re talking about. I think however, there was always going to come a time when this playground we called Web 2.0 came to an end and businesses with serious business models shone through. The ones without them – knuckle down and make some money…or clearly die.

    Share
  3. I’m not surprised, but I think that startups should run very learn and be doing all of this anyway regardless of market forecast/conditions – especially if they’re funded.

    Share
  4. oops – i mean “run very LEAN”

    Share
  5. Om, insightful post. People have been wondering about how VC’s will react, and I think you’re right that this is a good indicator.

    Share
  6. In a forest fire lots of trees burn, but not all trees. Scary times indeed.

    Share
  7. I sat in meetings with several prominent VC’s and angels, showed a 1000+ user survey with 99.9% favorable responses in favor of paying subscription fees for a mobile service vertical market venture. One question was: “Are you making a Facebook Application?”Another was: “Why would start a venture with towing and automotive services as the target?”

    Now you know why we are in trouble.

    Share
  8. i think the metaphor is more like lions chasing zebra. the herd will be thinned, devil take the hindmost (= those with no business model / revenue).

    Share
  9. VC-backed businesses are going to be under serious pressure that’s for sure. I guess this is the end of the Web 2.0 boom. On to the next big wave!

    Share
  10. “bubble unraveled”? tsk tsk mixed metaphor.

    Share

Comments have been disabled for this post