Sequoia Capital has a stark warning for its portfolio companies: Cut costs now.
Earlier this month, the Menlo Park-based venture firm shared a presentation with its founders in which it warned them of a pending economic downturn that will last much longer and be more severe than what happened at the outset of the Covid-19 pandemic, according to The Information. Founders need to find ways to tighten their companies' belts to conserve cash — and the sooner the better, Sequoia advised in the presentation, which The Information published Tuesday.
"Companies who move the quickest have the most runway and are most likely to avoid the death spiral," Sequoia said in its presentation.
The firm advised the 250 founders with whom it shared the presentation to consider cutting projects, marketing and research spending and development efforts. Sequoia also urged founders to focus on the moves they can make within the next six months, to move quickly, and to spot and seize opportunities to overtake competitors.
"It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change," the venture firm said in its presentation, quoting Charles Darwin.
Sequoia partners Roelof Botha, Doug Leone, Alfred Lin and Carl Eschenbach reportedly participated in the presentation, which the firm shared with founders May 16.
In the presentation, the venture firm, which backed companies incuding Apple Inc., Zoom Video Communications Inc. and WhatsApp Inc., discussed how governments around the world enacted stimulus programs in response to the pandemic. Such efforts helped the U.S. economy avoid a deep recession but led to a spike in inflation, it argued.
Now the Federal Reserve is raising interest rates in response. Higher interest rates make it more expensive for people to spend and borrow money, leading to a slowdown in the flow of capital between different markets and entities, Sequoia said.
Companies and individual are likely to respond to that slowdown by reducing their spending. Such cutbacks are likely, in turn, to impact the revenue other companies record, it said.
Already, in response to such changing conditions, companies including Netflix Inc., PayPal Holdings Inc. and MainStreet Work Inc. have cut jobs.
"We are just beginning to see how the increasing cost of money flows through to impact the real economy," Sequoia said in its presentation.
The last few years have been marked by a surge in venture investment. Many companies were able to raise money easily at ever-increasing valuations.
Those days are over, Sequoia said. It will take an unpredictably long time before anything like them comes around again.
"It won't be quick," the firms said.
