THE ERA OF FREE MONEY IS OVER

5 Key Takeaways from Sequoia's 'Adopting to Endure' presentation...

Over the last couple of years, companies have been on a fundraising binge, raking in historically high levels of venture capital. However, the good times may soon be coming to an end. Recently, Sequoia Capital, one of the most prestigious VC firms in the world, published a presentation entitled “Adapting to Endure”, in which they stressed that the days of free money are over, and companies need to prepare for a more difficult economic environment.

At Déjà Partners, we were particularly interested in the “Adapting to Endure” presentation. While it was certainly a gloomy picture that was painted, we feel that there are some important takeaways that businesses should heed. Firstly, it is evident that the changes in the macro-economic environment are already having an impact on businesses, and this is only going to become more pronounced in the near future. Secondly, businesses need to start assessing their situation now if they want to survive and thrive in the future. And thirdly, there is no time to waste – the sooner businesses start taking action, the better.

But it’s not all doom and gloom. As well as outlining the challenges ahead, the presentation also gives some practical advice on how businesses can adapt.

Déjà Partners has written this article to outline its key takeaways from the “Adapting to Endure” presentation and has also developed its own “Call to Action” plan that we are happy to share.

When Sequoia Capital shared some tips for surviving the 2008 economic downturn with their portfolio companies, they named their slide presentation “R.I.P. Good Times” to foretell the coming economic crises.

Fast forward to 2022 and a gloomy 52-slide Sequoia presentation entitled “Adapting to Endure” which began leaking online in late May and outlines a collection of risks that founders could face in the months ahead due to the current market upset and ongoing macroeconomic pressures. With the recent news on business slowdowns, layoffs and a cooling IPO market, Sequoia felt that it would be valuable to bring their community of founders together to “share insight into what is happening and why, and more importantly, what it means for you about the road ahead”.

While Sequoia stresses that “This is not a time for panic. It is a time to pause and reassess”, here are some of the key insights that will enable companies to shift their mindset to “respond with intention” rather than “regret”: 

Inflation trends have accelerated since early 2022

To prevent a deep recession arising from COVID-19, central banks around the world embarked on a massive fiscal stimulus programme to maintain economic demand. While economies were awash with capital, company valuations experienced strong growth especially those that were beneficiaries of lockdowns such as remote working cloud services, connected fitness and e-commerce.

As the world economy reopened, there were major supply chain challenges resulting in an uplift of prices for a whole range of products and services. The war in Ukraine has added severe headwinds to an already challenging macro environment with food, energy and commodity prices rising sharply.

According to Sequoia, the US Federal Reserve has responded to these conditions with a new mandate: “control inflation, tighten liquidity conditions”. With inflation running high and a tight labour market with low unemployment, the Fed has now moved to dampen down an overheating economy by increasing the cost of money and reducing liquidity through shrinking its balance sheet.

The Nasdaq is down 28% since last November

Sequoia is particularly bearish on what’s happening in the public tech market and notes that “We are experiencing the 3rd largest Nasdaq drawdown over the last 20 years”. Alarmingly, 61% of all software, internet and fintech companies are trading below pre-pandemic 2020 valuations. And that’s despite many of these companies more than doubling both revenue and profitability!

“The market is clearly indicating that the valuation framework over the last two years is no longer relevant with the removal of free money,” Sequoia says. Furthermore, “The valuation swings we all see are a reflection of uncertainty about demand, changing labor market conditions, supply chain uncertainties, and war”. “These are all factors that will ultimately affect your businesses.”

Sequoia also suggests that the market is shifting its focus to companies with profitability versus growth at all costs. “With the cost of capital (both debt and equity) rising, the market is signalling a strong preference for companies who can generate cash today”.

Capital was free, now it’s expensive

“Over the past two years, monetary policy loosened to avert an economic disaster in the midst of the pandemic. Negative real interest rates led to effortless fundraising for growth companies and record valuation levels. Given the circumstances, that was perfectly rational. But now rates are rising, money is no longer free, and that has massive implications for valuations and fundraising”.

The presentation notes that “When capital was free, the best performing companies were capital consumptive. As capital has gotten expensive, these have become the worst performing companies” including technology, biotechnology, and recent IPOs.

As this pivot was digested by the markets, “the world is reassessing how business models fare in a world where capital has a cost and reconsidering how much credit to give companies for profits many years into the future”.

Who survives?

Planning for cost reduction (projects, R&D, marketing, other expenses) should be an urgent management exercise. It does not mean that you must execute the plan, but you should be ready to act if it becomes necessary. “Companies who move the quickest have the most runway and are most likely to avoid the death spiral”.

Sequoia also outlines some “strategies for uncertain times”:

  1. Simplicity scales, complexity doesn’t.
  2. Speed is one of the greatest business strategies.
  3. Double down on your top talent.
  4. Alignment over agreement.
  5. Avoid ‘fluff’ and focus on activities that drive revenue growth, save money, and reduce risk.

How to emerge stronger

To navigate through this crisis, Sequoia has developed a three-pronged framework:

  1. Prepare your Mind – confront your reality, confront your fear, choose courage over fear and recognise that change points can become opportunities.
  2. Prepare your Team – start with Why, reaffirm your mission and values, showcase your leadership, align your team and ask for commitment.
  3. Prepare your Company – focus on cash & cashflow, create financial degrees of freedom, concentrate on investments for the future and manage your constraints by thinking creatively.

In conclusion, Sequoia believes that the primary goal of its presentation is to “Shift our collective mindset. We are at a moment of uncertainty and change – a Crucible Moment where your decisions will have a major bearing on the outcome for your company”.

Déjà Partners Call to Action

Déjà Partners are urging businesses to take three key steps:

  1. Assess their vulnerability to an economic downturn in the company’s specific market. It’s no secret that the economy has been struggling in recent months. There are several factors to consider when assessing vulnerability to an economic downturn. First, what is the overall health of the company? Are sales strong? Is the company profitable? What is the level of debt? Next, what is the state of the specific market the company operates in? Is it growing or shrinking? Are there any major trends or changes taking place? Finally, how competitive is the market? Are there a lot of other companies vying for market share? Answering these questions will give companies a better understanding of their vulnerability to an economic downturn. From there, they can take steps to improve their chances of weathering any future storms.
  1. Develop a plan to mitigate and adapt to the downturn as well as a more challenging fundraising environment. As any business owner knows, a downturn can be a challenging time. Not only do you have to deal with less revenue, but you also must contend with a more difficult fundraising environment. Fortunately, there are steps you can take to mitigate and adapt to the downturn. First, it’s important to develop a plan. This plan should include measures such as cutting or containing costs, reducing headcount, and raising capital. Also, prioritise investments so that key projects are maintained. Next, you need to implement this plan if it becomes necessary. This may require making some tough decisions, but it’s essential to act quickly and decisively. Finally, you need to monitor the situation closely and adjust your plan as necessary. By taking these steps, businesses can weather the downturn and emerge growth ready.
  1. Urgently engage with employees on the challenges ahead. It is more important than ever for businesses to urgently engage with their employees on the challenges ahead. Employee engagement is essential for businesses to tap into the creativity, knowledge and skills of their workforce. When employees feel engaged, they are more likely to be motivated and invested in the success of the business. Engaged employees are also more likely to be productive and efficient, and to come up with innovative solutions to problems. Urgently engaging with employees on the challenges ahead is therefore essential for businesses that want to survive and ultimately thrive in the current climate.

We believe that by taking these three steps, businesses can ensure that they are prepared for the challenges ahead.

At Déjà Partners, our team has a proven track record of success in both good times and bad, and we are confident that we can help you weather this storm and come out the other side stronger than ever. Contact us today to learn more about how we can help you achieve fundraising success in this increasingly challenging environment.

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