Start-up investors issue warnings as boom times ‘unambiguously over’

Delay hiring! Reduce marketing! Extend the runway!

Venture capital missions are back and they are getting hot.

With high-tech stocks crater In the first five months of 2022, and Nasdaq is accelerating towards the second quarter since the 2008 financial crisis, emerging investors say portfolio companies cannot escape a fallout. The situation can get worse.

“It’s a longer recovery and we can’t predict how long, but we can advise you on how to prepare and reach the other side,” said the legendary venture capital firm known for its early bets. One Sequoia Capital Google, Apple And WhatsApp, wrote on page 52 presentation A copy of the title “Adapting to Endure” obtained by CNBC.

Y Combinator, a startup incubator that helped spawn Airbnb, Drop box Said Stripe, the founder Email Last week, they said they needed to “understand that the poor public market performance of tech companies can have a significant impact on venture capital investment.”

This is in stark contrast to 2021, when investors were rushing to pre-IPO companies with very high praise, trading at an enthusiastic pace, and active software start-ups. 100 times more profitable.. In that era, the Nasdaq Composite has made a profit in 11 of the last 13 years, and last year’s U.S. venture funding reached $ 332.8 billion, seven times more than 10 years ago, reflecting the expanding bull market of technology. I did.according to National Venture Capital Association..

A sudden change in sentiment reminiscent of 2008 when the collapse of the subprime mortgage market infects the entire US banking system and has driven the country into recession. At that time, Sequoia was notorious for the memo “RIP Good Times“” Cash flow needs to be positive “and” reduction is essential “to declare to start-up companies.

However, Sequoia does not always set the timing of warnings. In March 2020, the company called the Covid-19 pandemic the “Black Swan of 2020.” Begged founder To regain marketing, customers are prepared to reduce their spending and assess whether they can do more at less cost.

After all, the demand for technology has only increased, Nasdaq Stimulated by low interest rates and a surge in spending on spending, we had the best year since 2009 Products for remote work..

This time, Sequoia’s words look like the traditional knowledge that emerged in Silicon Valley. The market began to change in November, and companies gradually stopped public to start 2022. Crossover funds, which fueled much of the private market boom, have receded as they are tackling historic losses in their public portfolios. Dina ShakirA partner of Lux Capital with offices in New York City and Silicon Valley.

According to Sequoia’s presentation, the difference this time is that there is no “quick fix policy solution”. According to the company, what it missed in early 2020 was the government’s aggressive response, pouring money into the economy and artificially keeping borrowing rates low. Buying bonds..

“This time, many of those tools have been exhausted,” Sequoia writes. “I don’t think this will be another abrupt fix, as we saw at the beginning of the pandemic, followed by a similarly rapid V-shaped recovery.”

Sequoia has instructed companies to consider projects, R & D, marketing, etc. for opportunities to reduce costs. The company doesn’t have to trigger immediately, but the company added that it should be ready to do so within 30 days if needed.

Employment cuts and job freezes are already a hot topic among major public technology companies. snap, Facebook, Uber When Lyft Everyone says they will delay hiring in the coming months, Robin hood When Peloton Announced personnel reduction.

And in a private company, staff reductions are underway. Klarna When cameoInstacart Reportedly Delay hiring prior to the expected initial public offering. Cloud software vendor Lacework announced a headcount reduction on Friday, six months after the company was founded. Equivalent to $ 8.3 billion By venture investors.

“We can adjust our plans to increase cash runways to increase profitability and significantly strengthen our balance sheets to gain more opportunities for investment opportunities and weather uncertainties in the macro environment. I did it, “says Racework. Blog post..

Tomasz Tunguz, Redpoint Ventures Managing Director told CNBC that many emerging investors are advising their companies to keep enough cash on hand for at least two years of potential distress. .. This is a new conversation, accompanied by a rigorous debate about evaluation and burn rate.

Shakir agreed with the evaluation. “Like many, we at Lux think in the long run, extend the runway to more than two years if possible, scrutinize burn reductions and improve gross margins, and short-term. I’ve advised companies to start setting expectations for future funding, which is unlikely to look like what they expected six or twelve months ago, “she wrote.

and Position On May 16th, under the heading “Recession Reversal,” Lightspeed Venture Partners began stating, “The era of the boom of the last decade is definitely over.” Some of the subheadings are “Reduce non-essential activities.”

“Many CEOs will make painful decisions to make the company emerge in the volatile ocean,” Wrightspeed wrote. “Some people face trade-offs that would have seemed eccentric and unnecessary just a few months ago.”

Lux emphasized one of the painful decisions to be expected. For some companies, the company said, “Sacrificing people will come before sacrificing reputation.”

But venture companies are keen to remind their founders that great companies emerge from the darkest times. Those who prove that they can survive and even prosper when there is a shortage of capital are in a position to prosper when the economy recovers.

According to Sequoia, companies that can add talent today have more talent available because hiring has been frozen by some of the larger companies. And Lightspeed said technology will continue to advance, no matter what’s happening in the market.

“Despite all the stories of fate and darkness, we remain optimistic about the opportunities to build and invest in technology companies that transcend generations,” Shakir said. “We were reassured to see the CEOs exchanging notes and tips with each other and quickly becoming lively and humble with these changing situations.”

Correction: This story has been updated to reflect that cloud software vendor Racework has raised $ 1.3 billion in growth funding at a valuation of $ 8.3 billion.

See: “Startup ratings are still very attractive,” says early Facebook investor Jim Breyer.