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Sequoia Rings the Alarm Bell: Silicon Valley Is in Trouble

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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.

218 Responses to “Sequoia Rings the Alarm Bell: Silicon Valley Is in Trouble”

  1. Beeru Raza

    It will be good to learn some lessons’ from history. Some that I can highlight are 1) In 1932 the DJIA came down from 334 to 42 pts in less than a year but went back up to 172 within the following year or so. 2) Analyze the economic KPI’s and you will see productivity increasing year to year. Hence the basis for economic growth is still intact. 3) Political blunders and run away greed on Wall Street really got out of control this time, but the free market system put in a correction, though a little late. 4) Finally invention and innovation has massive capital support in the US and now world wide, so look out for opportunities like you have never seen before. Conclusion, this will be a period of pain stretching about 18 months, there after you will see the DJIA roar towards 20,000 by 2012-13! Just extrapolate from the history and don’t listen to Sequoia.

  2. @Ben Tremblay above: As a Russian I would like to point out that our economy is not all about mafia these days any more. Besides, the fact that we were way too willing to enter the international economics has made Russia much less insulated that we would not want to be so our market is far from healthy either (remember, they call it a global crisis already).

  3. @ Ralph Pina … thank you dear sir for helping me see the light here. I corrected the spellings.

    @Dave and @Eric Eldon thanks for the banter. some light relief was in order i guess.

    @gw …. this is pretty big sign and yes we in the valley are still not facing up to it. Regardless your comment is pretty spot on.

  4. fremsnak

    This is bad news for Silicon Valley? Why? Who cares what Sequoia thinks?

    It may be bad news for their portfolio companies, however. In the last downturn, after the bubble, they completely cut off funding to many existing investments.

    I guess they had the foresight to know which would succeed. Oh wait, they invested in the others also.

  5. My guess is only the me 2 companies and mangers will feel the brunt.
    As somebody else said maybe R&D will be back. I definitive will do my best, I’m tired of people telling me it can’t be done. When they mean they can’t do it.
    Makes me wonder how many people like me left the valley to do some hard work. Maybe we’ll be back after the fluff is gone.

  6. Let’s try to get real here. What is before us is not like anything you or I have ever experienced or anticipated. People in the coming months and yes years are going to need shelter, and food, and heat to keep them warm, and more than that, to learn about how the financial systems have been and are still continuing be gamed. Web 2.0 apps for the most part are not essential to survival. Some are and will be critical to communicate for sure, but not this zealous obsession with social chatter. Even if someone is giving you money to pursue this stuff, it better damn well be focused on the essential to survival, not just social chit chat. Good luck.

  7. That some trees survive is, yes, always the case.

    And who is better insulated than the oligarchs? (Well, ok, the mafiosi … anybody been watching Russian markets?)

    It comes down to fundamentals. (Karma, baby.) “Bubble” is almost too slight as statement of actuality … more like #matrix.

  8. Been There Before

    The next shoe to drop: VC’s will start withdrawing their money from startups where there is a bunch of cash left. Remember Kibu? I thought not.

  9. Anonymous

    This is a PR stunt. When companies like Facebook go out and raise $300 million, or RockYou and Slide raise $50 million a piece, you know they were bulking up for hard times ahead. Sequoia knew about this, and told their companies about this, a long time ago. They couldn’t make that public though because they were saying the opposite to the Series A and B venture funds that gave their companies those war chests.

    Now Sequoia will leverage this crisis towards more equity in companies that are looking for new rounds of investment right now.

    This is all a God damn game for people who are going to be fine no matter what.

  10. Uh-oh. Start-ups will have to start developing legitimate business plans and actually execute upon their strategy to monetize. How horrible. This is good for tech, not bad.

  11. It follows. If you see the loss of wealth, imagine an equal magnitude impact to national income from a recession, and think of people’s lives scaled down in that proportion, a lot of the current value propositions will be obsolete.

    It won’t be enough to deliver real value, it will have to be value relatively more essential to the core of people’s lives. And those lives might be quite a bit simpler.

    On the other hand it could be a great time to do deep R&D if you have the funding and can wait long term for an ROI. It should be easier than usual to recruit the brightest minds…

  12. 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.

  13. 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.