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Summary:

And while Sequoia and other left-coast VC firms are asking their firms to tighten up, and strategically leaking their own advice about survi…

imageAnd while Sequoia and other left-coast VC firms are asking their firms to tighten up, and strategically leaking their own advice about surviving the economic downturn (nevermind their investments into some ridiculous companies that don’t need to survive this anyway), our own former investor Alan Patricof, founder and managing director of Greycroft Partners, is asking for some restraint in the doom and gloom. His main advice: “This is not a time to panic, cut off all investment in the future, and burrow into a dark hole.” The full statement from Patricof, below:

“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

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  1. Thanks for shooting the messenger, guys. But I'm standing by VentureBeat's coverage of the Sequoia presentation.

    Sequoia thinks there's a long term slow down in the works; many economists also agree. The cost of capital has been dropping for decades, for example, but it's not going any lower from now on. This almost certainly means we'll all have to work more and save more for a long time to come. Patricoff apparently disagrees with Sequoia's long-term assessment but he doesn't directly rebut the presentation's points.

    In fact, aside from some rhetoric, I'm not sure exactly where Patricoff and Sequoia disagree. Except where he misconstrues what Sequoia's message was (example: "cut off all investment in the future" — Sequoia didn't actually say that).

    As a journalist, I felt the presentation needed to be out there. I didn't choose to adopt Patricoff's particular line of spin because, well, the evidence for it is at least as murky the evidence for a long-term slowdown.

    However, we also don't necessarily endorse Sequoia's opinion as fact. We are also publishing more positive interpretations of the present startup environment, such as this:

    http://venturebeat.com/2008/10/10/remaining-objective-when-fear-is-in-the-air/

    Finally, I don't have evidence that the presentation was "strategically leaked" to me or others, as you suggest. Perhaps you have more information on that?

  2. "In fact, aside from some rhetoric, I’m not sure exactly where Patricoff and Sequoia disagree."

    @Eric Eldon – Agree.

  3. What would be more interesting is a fact based commentary on the Sequoia vs. Patricof outcomes? Why not create a baseline of all the companies in their portfolios and monitor exits/closures in the near past & near future to see which prognosticator is right.

    Patricof is smart to be optimistic — we all should be optimistic but also shrewd in our investments & spending given the underlying uncertainty that no sector will be immune from until the banking system is secure.

  4. Respectfully disagree with the comments above.

    What Patricoff seems to disagree with is the very first slide in the presentation: RIP Good Times. His point is that while the markets are unstable and the economy slowing down, start-ups should not close up shop and bury their heads in the sand – the world is not coming to an end. Which is absolutely the message of the Sequoia presentation.

    In terms of the specific advice Sequoia gives, what I thought reading it was "this is called good business; they should all be doing this every day." And that was Patricoff's other point. Watch expenses, cut what you don't need, get profitable fast, don't count on absurd valuations or big exits, etc. This would have been sound advice two years ago, it is sound advice today, and it will be sound advice two years from now.

  5. Michael Grove Monday, October 13, 2008

    Having failed at a startup that got to $46M in revenue there is a lot of wisdom in both messages from Sequoia and Patricof. Our startup encountered a severe downward shift in market demand and lost momentum. In hindsight, had I cut back the throttle just 30 days earlier we would have been a huge IPO instead of an asset sale. My suggestion is to use this time to get much more focused and justify the real value of each resource with the goal of making your cash last. What ever budget you create, cut and save an extra 10%.

    On the other hand, now if not the time to crawl in a hole. How is the time to add more value to your core customers. They are also your investors. Use this time to understand them better and to be perceived as essential as opposed to risk. The trick is to contract fast and get the momentum back fast. This is also where the VC's play a critical role. Now is not a time for them to be conservative and crawl into their own hole. Many customers have regretted buying from startups who are backed by VC's. VC's need to work with their companies to reset performance goals and provide concrete sources of cash based on execution performance. This kind of confidence building support ripples all the way back to customer confidence.

    What we need now is leadership from all of us. We need determination and mutual support. From this process, we will set up a huge opportunity for prosperity.

  6. Dorian Benkoil Tuesday, October 14, 2008

    Wondering why the de-emphasis on cost of capital? Isn't that always wise to watch?

  7. is off-shoring going to be silver bullet for this problem ? It might not be, but it will definitely help reduce operational costs for technology startups.

    http://www.confiz.com
    your offshore development partner

  8. Sequoia showed some long term cycles in their presentation. So why didn't they sound the alarm bells earlier?? In fact, Warren Buffet showed similar statistics in 1999 at the Allen conference in Sun Valley (this is covered in detail in his new biography – Snowball). Imagine presenting at that conference, where so many of the star studded audience made fortunes during the bubble, that the good times were going to be over. He said that for the next 17 years returns for the overall market could be (not "would be" since he doesn't make market predictions) zero for 17 years. We are about half way through that cycle now.

    Sequoia made some recommendations that are just business basics. Ever heard of cash is king? They should have been advising their companies to do this earlier. I recently put together a ppt which provides a different viewpoint (just google "rip good times? a different perspective"). Our firm will be more aggressive in making investments in the coming years, not less. You can criticize Alan all you want…but he's seen this movie before….many cycles over decades. As Buffet likes to say, try to be fearful when others are greedy…and greedy when others are fearful.

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