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Sequoia Paints Doomsday Scenario, Patricof Tells Not To Panic Yet

11 October, 2008

This may be shocking and a bit unsettling if you are an entrepreneur. The reality has started biting venture funds, and in turn startups they have funded. Sequoia Capital, the world’s bluechip venture capital firm, recently made a presentation at its “CEO Summit” which told startups to pull up their socks, be cashflow positive as fast as possible, and spend their money as if it’s your last penny. It said the recovery may take a longer time (all cycles are long), so it’s important prepare for a longer period of hardship.

So goodbye to all that cash burning. Focus on your costs, build sound business models, and come out as a survivor.

See Seqouia’s presentation here.

Meanwhile, venture capital veteran Alan Patricof (founder of Apax Partners and Greycroft Partners) has issued a statement saying – don’t panic yet. This is the time to come out as a winner, and all is not lost. Patricof is not subscribing to Sequoia’s doomsday scenario, while he suggests to focus on some belt-tightening. “This is not a time to panic, cut off all investment in the future, and burrow into a dark hole,” he says.

Patricof’s full statement

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!


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Sequoia Paints Doomsday Scenario, Patricof Tells Not To Panic Yet

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