Sequoia warns its startup founders: cut costs or face a ‘death spiral’ 

Sequoia Capital has warned of tough times ahead for the tech sector. Last week, the US venture capital firm gave a presentation on Zoom to 250 of its entrepreneurs and details have leaked to “The Information” website. Sequoia, one of the largest and oldest venture capital firms had a clear message and immediate measures that it felt its portfolio companies should be taking. Some of the ideas were to cut spending, look at the budget again in a month, and focus on making money instead of growing quickly.

Sequoia has also developed a reputation as an unofficial barometer for the tech industry by producing papers with forecasts and advice for businesses to weather impending economic crises.
In 2008, at the beginning of the subprime crisis, Sequoia offered a presentation titled “R.I.P. Good Times.”
In 2020, it issued a letter titled “Coronavirus: The Black Swan of 2020.” The reports are meant to help the leaders of Sequoia’s portfolio companies face reality without taking shortcuts.

However, the venture capital firm was harshly criticized for its inaccurate prediction at the onset of the COVID pandemic, when tech businesses were bolstered rather than severely impacted. Even so, Sequoia then added that it would take many more quarters to see if the virus could be stopped and even longer to see if the world economy was getting better.

Sequoia admits that it does not comprehend how fiscal and monetary policy (government incentives during the COVID crisis) are distorting the overall picture.  This time, it says, these options have been used up, and rising inflation and geopolitical crises are making it very hard for governments to find quick solutions.

The most recent Sequoia study pushes its companies to “adjust in order to improve their position.”

Among Sequoia Capital’s investments are Whatsapp, FTX, Instagram, and Strip. Its investments in Israel include unicorns such as Gong, Fireblocks, Starkware, Wiz, and Airbnb.

Prediction: a slow and protracted recovery

Sequoia does not anticipate a rapid resolution to the current dilemma. In contrast, the venture capital company warned entrepreneurs that the recovery from the crisis would be lengthy and drawn out, partly because the COVID crisis has depleted the government incentives and monetary policies that pushed cheap money into the software industry.

Sequoia does not see a quick exit to the current problem. In contrast, the venture capital company warned entrepreneurs that the recovery from the crisis will be lengthy and drawn out, in part because the COVID crisis has depleted the government incentives and monetary policies that pushed cheap money into the software industry.

On top of it, Ukraine’s invasion has increased fuel prices; global supply chain problems have also contributed to inflation – and now it appears that the only way to stop it is to simply stop buying, which will essentially result in a recession.

As the stock markets began to decline in September of last year, market expectations for interest rate increases began to circulate. The cost of new mortgages in the United States has risen by 67 percent in the previous six months, the largest increase in over fifty years.

Entrepreneurs have always found it unpleasant to make reductions. Even if they do not entail layoffs, they can result in the abandonment of plans to create new products and enter new markets, as well as the postponement of employing more personnel to support the company’s growth. Sequoia does not offer consolation to business owners and advises them to be prepared to cut expenses quickly. Instead of seeing cutbacks as a negative, embrace them as a way to save money and run more efficiently.

The Stockdale Paradox

Sequoia tells the story of US Navy Vice Admiral James Stockdale, the most senior American officer to survive captivity during the Vietnam War, to encourage entrepreneurs to adopt a realistic approach and not deny reality.

Stockdale was the only senior American officer to survive captivity and torture during the war. Stockdale stated that many who believed they would be released by the next Christmas, Easter, or Thanksgiving did not survive. When this did not happen repeatedly, they died of shattered hearts. Stockdale informed his fellow prisoners that they would not be released soon and advised them to adjust to the concept. The term for this is the Stockdale paradox.

Sequoia said that it is not requesting urgent cuts but rather the building of backup plans so that they are prepared to implement their plan when the time comes.

The VC suggests that entrepreneurs review expenditure on special projects, development, marketing, and other expenses and establish a 30-day implementation plan for cost reductions. During the financial crisis of 2008, companies that made cuts were demonstrably more efficient and superior.

Recommendations: high revenue per user

Sequoia advises its portfolio companies to produce increased short-term income from all consumers based on the experiences of those that have gone through prior crises, such as online footwear retailer Zappos and Airbnb.

Zappos boosted the variety of shoes it sold, encouraging customers to place larger orders. While Airbnb accomplished its plan by decreasing marketing expenditures. This was accomplished by reducing customer payment plans and asking consumers to pay a greater amount in the initial payment. The last piece of advice from Sequoia is to acquire loans.

The opportunity: Shortage leads to creativity

Lack of capital might motivate businesses to develop innovative solutions. Zappos, for instance, utilized client funds to execute unique programs such as gift cards, build financing plans for retailers they collaborated with and extend payback terms to 30 to 90 days. Even though the company cut its marketing budget, it put money into customer service and technology to get customers to buy more.