Adapting to Endure – Sequoia Capital [pdf] | Hacker News Reader

Adapting to Endure – Sequoia Capital [pdf]

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123 pointsdclaysmith74 comments

I really struggle to believe all this thing. We have some inflation because of covid stimulus and Ukraine war, sure. So the fed is going to increase the rate, sure. And everyone is panicking at the same time so markets are falling. Poor people have less money because they need to pay for more expensive food but all the others still have money to invest, so I don't understand what it changes for vc ( except for the money they lost investing in crypto)

The market has cycles where is goes from loving startups that burn cash with the aim of “growing big” and then figuring out the business to absolutely despising these models and flushing them out of the system. We’re at that pivot point now in the cycle.

Startups with cash on hand and generating cash from operations will have some bumps in the road and probably take a big hit to their valuation, but with make it through. Startups still trying to figure out how they’re going to “make money” and without a ton of cash on hand to give them a long runway likely won’t make it through the next 18 months.

On the outside, VC should theoretically be about value investing in the best startups that have sound fundamentals and can grow. Practically, when the market is optimistic and everyone wants to invest in high growth startups, the game can become about "passing the bag". Invest in a company at a low valuation in their seed or series A and wait for a later stage investor to come in and be the one left holding the bag. Ideally, the startup generates enough hype to IPO and then all the investors have a successful exit. You can see this trajectory with startups like WeWork.

When the market is not that optimistic anymore and people are in conservation mode, there's no one to pass the bag to anymore so VCs have to appropriately adjust which businesses they are going to invest in and the valuation.

This is why hype, signaling and FOMO plays such an important role in fundraising. It is about whether the startup can generate enough promise to convince others that they're a high growth investment vehicle and not as much about whether they are profitable in the short term.

Is there significant inflation due to the Ukraine war?

Inflation started to take off about April last year, and was 7.9% at the end of February this year when Russia invaded Ukraine. Since then it rose about a half percent and then started to drop, as sanctions have been implemented.

Inflation in America has more to do with the COVID lock downs in China. Ukraine is having more of an effect on Europe which is highly dependent on gas from Russia.

What's the data or reasoning behind your claim? Inflation in Europe also started an upward trajectory early last year and became unusually high well before the war in Ukraine.

There were also very few COVID lockdowns in China in 2021, most were in early 2020 and then some major ones occurred in 2022 but those, like Ukraine, were well after inflation started to rise in USA and Europe. Not to say the early 2020 China lockdowns could not have caused later inflation, but is that what you are claiming?

China didn't start it's Covid lockdown until after inflation started.

A lot of the "inflation" is straight up corporate profiteering at this point. How else do you explain the record profits many companies experienced during and after the pandemic before the threat of rate hikes?

The answer to the why of all of this is super easy: greed.

I don't find that answer very satisfactory at all. Did they suddenly become greedy in 2020 where previously they were foregoing profit out of the goodness of their hearts?

Corporations are a tool, like a hammer. They're not good or evil. They exist and operate as they are permitted to. And human nature hasn't changed either, everyone is "greedy" to a first order approximation. So what has changed? What conditions have changed between now and then?

An inflation narrative gives cover for price hikes driven by greed.

It could do. And a greed narrative gives (poor) cover for price hikes driven by any number of other things. Just stating these things does not help us get an understanding though. I want to know what changed.

I'd be more inclined to believe the disruption from production to supply chains to storage and demand, migration, etc due to covid regulations (not just the Chinese lockdowns) to have had the major impact. But it could also be for example energy costs due to expensive green regulations, or cartel behavior from energy producers because energy prices have been a major leader in price increases and those affect virtually everything else. Just saying "greed" doesn't help understand anything. People are greedy, we already knew that. Aristotle knew that.

I'm not saying none of those things are factors. I am saying that you can find quotes of executives talking about how great it is to raise prices right now. And plenty of evidence of profit increases substantially above inflation.

Sorry, "greed" simply doesn't explain anything. It's intellectually lazy. So is "you can find quotes...". Unless you actually have some evidence or reasoning that "greed" has increased somehow.

This has nothing to do with profit increasing faster than inflation which I'm not saying is false, mind you. Again, if you had a shred of evidence or logic to say prior to 2021 that corporations did not and would choose not to increase profit faster than inflation then that would be interesting.

We're talking economics, there is very little evidence in general. The entire field is essentially observations and storytelling.

The evidence is profits increasing faster than inflation and examples of C-suites saying straight up that this environment is letting them raise prices.

The story is that when inflation is low, consumers are more intolerant of price hikes. They'll shop around and try out your competitors. Evidence to support this sentiment analysis is the myriad ways companies sneakily "hike" prices. Shrinkflation for example. When prices seem like they are going up on everything, what's the point of shopping around?

There is good evidence that it's not greed though, because people didn't suddenly start to become greedy, and nobody _needs_ any "cover" to raise prices, prices get raised all the time based on profit maximization.

Of course people are always greedy. The "cover" provided by an inflationary environment just boils down to people are less price elastic when the environment primes them to expect price hikes so those that want to raise prices for greed (profit maximization) can do so to a greater degree than they could in other market conditions. I don't know why you're being so dense, it's really straightforward psychology and there's a fair bit of data to support this.

You realize that inflation hit corporate profits too?

If a company has a profit of $10M and inflation is 10%, then the following year a profit of $11M is a "real profit" of $0.

For any company making things -- well, to be fair, I can only speak for one of them -- the costs of goods sold has gone to the stratosphere.

This is not a joke, or an excuse, or an apology, just a statement of indisputable fact. Inflation hasn't really gotten started yet. And it's not (just) greed. An FPGA that cost us $40 at DigiKey two years ago is now $700 at $SKETCHY_CHINESE_BROKER. Somebody^WEverybody is going to pay for this.

>So the fed is going to increase the rate, sure.

I believe fed is on a pause.

When the Fed raises rates, they do so by reducing the quantity of money in the economy until rates hit their target. There's just less money sloshing around to be invested, and the banks and financial firms who are closest to money issuance and the Fed are more quickly and severely impacted by that.

> I don't understand what it changes for vc

Their portfolio companies can go bankrupt. It is a Darwinian (survival of the fittest) moment for all the companies at this time.

We’re experiencing a (likely) shrinking economy, with fewer customers who are spending more conservatively. VCs want their companies to succeed and preserve wealth.

What you're missing is the larger picture.

Anyone paying attention in the industry knew in 2019, pre-pandemic, that something wasn't quite right. Companies were hiring way more people than they needed, growing way too fast, building products that didn't make sense, pivoting to increasingly user hostile products, etc. But it kept going because VC and other investor money just kept flowing in.

Then pandemic hit. Everyone who thought things weren't right in 2019 expected the reality check to finally be cashed and for a major industry correction to happen. It should have happened. But it didn't.

Instead the Fed poured incredible amounts of money into the market. We saw stocks instantly u-turn and companies that in 2019 you were suspicious of were all of a sudden getting even more ridiculous valuations.

This happened for what is in retrospect and obvious reason: Big name investors and VCs needed time to cash out. And they got it. We saw two years of record numbers of IPOs. Myself and many others pointed out over a year ago that something wasn't right, that this looked like investors rushing to cash in their chips and get out before everything came crashing down.

Inflation started to rise, and indeed the game came to an end. Now we're going to see a crash that will be much harder than we though we would have seen in 2020 because policy has allowed already unhealthy companies to explode and grow even larger. And they're all interconnected so it's going to be ugly.

How many of your company's customers are other start ups or other tech companies? We have a generation of companies led by people who have never really seen a recession, forget one that impacts tech, completely clueless about what's coming. First we saw consumer spending absolutely wreck big name companies bottom lines. But this is very likely to start spreading as more startups that depend on other startups revenue streams start to miss their targets.

This current generation of founders might be clueless about recession and major downturns, but the people in charge at places like Sequoia sure as hell aren't.

Me thinks you're overstating it because you don't understand how VC's function. Venture Capitalists borrow money from Investment Bankers based on percentages. The market has lost all of its gains during the pandemic, that trend is still bearish. The risk percentages were adjusted, and now there's less money to go around. It's seriously basic math.

"Venture Capitalists borrow money from Investment Bankers based on percentages.'

Me thinks you don't know how venture capital works?

>The market has lost all of its gains during the pandemic

No it hasn't. Not even close.

Have you taken inflation into account? Though also have to consider that growth stocks value also declined due to increasing interest rates.

I'm assuming you don't really follow the news or the market due to your response.

Here:

- https://www.cnbc.com/2022/05/10/amazon-stock-has-lost-nearly...

- https://www.marketwatch.com/investing/index/ndxt?countrycode...

Well said. 2021 was the perfect year for VCs to unload their trash on the retail investor.

Agree except I had assumed the VCs were being opportunistic in unloading, rather than actually shaping policy. Do you have any evidence that they shaped it? Seems there were other significant reasons for stimulus programmes not just saving VCs.

This is a common mechanism that powers conspiracy theories: when you see an opportunist profiting from a situation, you may be tempted to conclude that they had to do shaping the situation in their favour, especially if these actors are a group of wealthy connected people. The police/justice system also uses "motive" as a strong requisite for bringing suspicion on a person; it's a quite engrained psychological mechanism (and often fits reality quite well, until it doesn't)

> This happened for what is in retrospect and obvious reason: Big name investors and VCs needed time to cash out.

HUGE conspiracy theory here. Also, you are giving VCs too much credit. They're not super smart, with a few exceptions.

To be fair… the top VCs disproportionately have a winner take all outperformance, and it is arguable that those same top 5 institutions are on average “super smart” to maintain said position over the long run

they want to create an event to what things will be in motion. a reset. it helps them clean their investments that will not work. usually there are two ways to do it. make someone else invest after your round or create a scenario in which it doesn't make sense for anyone to invest (except if you are an obvious winner with an amazing product). just as inflation is a buzzword that allows companies to mark up their price way more than they were before (but even when the inflation numbers were low or 1% I can garantee you that those companies products prices were increasing more than that. It is just that thanks to "inflation" they cant mark up to 10-20% now.) It is a scam and the looser as always will be the blue collar and the middle class.

This is a return to business fundamentals; you no longer get to burn money and not deliver value.

Cheap money has been a plague on tech. Even bucket shop crypto shitheads like Parcl were getting 10's of millions of dollars. The party is officially over for charlatans like them.

The party was over in 2008 too, yet here we are.

It comes in cycles. I don't think anyone's saying that valuations are going to be low until the heat death of the universe.

The 2008 recession lasted 18 months. On the other hand, the 2000 dot com bust technically resulted in only an 8 month recession but impacted tech hiring & spending for several years.

Yeah, "here we are" but we may have to get through a very rough patch for a couple of years before getting to the next run up.

In 2008 monetary and fiscal policy was not constrained by high inflation. Not it is. Anything that depends on inflows of cheap new capital will suffer. That concerns unprofitable companies as well as assets that generate no cash flows like anything crypto.

Crypto is a fucking scam and I will die on this hill.

Yes, it's a scam. I don't see a downturn making people more wise about this though. Crypto shills have a plausible reason for a decline in value, and otherwise it's not like anything is happening to get the scammed (often just the greedy) to increase their sophistication so they can understand it's a scam.

This is one of the rare times I'd say it, but I think legislation is needed. Crypto is a so-far-legal outlet for various financial schemes (ponzi, pump-and-dump, securities fraud, etc) that all are covered under existing laws. We just need to extend the law to these new instruments so people can't legally con others just by saying "blockchain"

I'll be there with you. It doesn't add value to the world. If you go mine some gold, silver, coal, he'll, even dirt. It all has an intrinsic value for what it can be used for. Even dirt can be used to grow crops or fill in the sea.

Crypto is worthless because it doesn't DO anything.

Those down voting please list here what practical uses crypto currently has for the average human

Bitcoin provides a “fiat” currency which doesn’t depend on any single actor controlling the supply. That could prevent inflation while being easier to exchange than gold.

Thank you, I appreciate it.

I understand the vision, but argue it hasn't lived up to it.

Anyone can walk into dozens of places in my city to buy, sell, exchange gold. There are many reputable online services for this as well. In reality it's really very easy to exchange. It's also way easier to deal with gold coins, etc Tham the whole crypto exchange/wallet/physical backup thing. People always mention theft, anyone who has any amount of gold should have it insured as part of their home/renter insurance, or can store it professionally with the same insurance guarantees. There isn't really a problem that needs solving here.

It's hard to think about it protecting from inflation while it's so volatile. 5-10% inflation seems small when the market fluctuates +/- 25% regularly.

I think crypto will end up going down in history as one of those Enron, Theranos, Segway, DIA automated baggage system, Lularoe things in 10 years. If it were this amazing world changing idea we'd all already be using it. Think about Facebook, Google, Netflix, these all became daily parts of most of our lives within a year or two. We've had crypto for a while now and I argue that the average person doesn't use it much, interact with it much, other than an investment vehicle.

I think the crypto industry needs to take a hard look on the value prop they originally made, if they're meeting it, and what value, if any, they're providing instead. Does crypto work without continued investment? Does it add value and hold water on its own or does it rely on a steady stream of new investors putting more money in? Does it create value?

You might well be right - I'm not a Bitcoin investor or advocate. OTOH, while using gold for physical exchange in small amounts is workable, that breaks down when you get to large amounts. A million dollars of gold is about 20 kg. One hundred million dollars requires an armoured truck to transport. That's not a good way to do business. And indeed, we rarely see gold used for exchange. We rarely see bitcoin used either, but it happens - for example, criminals use it for ransom payment.

I'm not sure that FB or Google happened as quickly as you think, but in any case, there are less obvious issues with coordination. One person can start using Google. For BTC to be useful, many people have to start using it, and it might not be surprising that that takes a while, or starts among investors rather than ordinary Joes. It might not even be surprising that it starts with a huge amount of speculation - that doesn't prove the price won't settle down eventually.

Yes and the wood from this new species of tree can be used to build time travelling quadcopters and yet all I see is a throng of people buying and selling planks for more and more money without there being a single chronocopter.

It would be nice if it provided sources for any of these claims (e.g. the recession will be long)

Economics is the biggest “bro science”

It's some kind of internal discussion deck of people giving ideas about what the future might hold based on their experience. It's almost certainly wrong, but in context it's almost certainly framed as advice and not a research project for publication.

Not a finance person, just an adjacent technogist, but from having lived/worked through Black Monday, the 90s recession, the 2000 bust, the lean early oughts, and then the world ending 2008- for whatever reason this one feels like much-ado-about-nothing. If capital is not again issuing- not gushing, just issuing- in solid flows- by fall, I will be very surprised. Sure, some people were swimming in the deep water with no shorts on. But there are too many things to do, too many real opportunities, and too much real powder sitting around. We've all seen this all before, and know what happens next, and know how to get their faster.

This is definitely not investment advice.

I'm not quite old enough to remember Black Monday, but I remember all the rest. I have the exact same feeling. The 20% correction is already done.

When I saw that CryptoLand video last year I immediately through of the E-Trade monkey superbowl commercial.

However, there is still risk that could make this current situation last longer and be more painful than I think we anticipate. If corporations start laying off workers and/or if the general public gets spooked enough to stop spending, that could actually induce a deeper recession than I think you and I are currently expecting.

No doubt there is some short-term negative news coming out this summer. The question is what the sentiment will be like come early fall. I think that's when we will know how bad this is going to be. It might be over by then. Hopefully.

This presentation is a great example of why slides are a horrible format. It's either too much or too little information per slide, context is lost if you're not in the room, and it allows escape hatches for handwaving at the charts without the ability to dive deeper or question the data.

I agree with you re: why slides are a terrible way to convey information, but in this case each slide has a page-long summary with their talking points. If you care to read, it's almost like being in the room with them.

My comment about too much vs. too little information includes the bullet points outlining what the presenter said. For example, here's the entire slide on Adaptability:

"Adaptability"

> 1. Must be adaptable. “It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.”

It's too much information in some cases, that we assume will be verbally given (and then later members of the audience are expected to cross reference to dig deeper on), mixed with filler.

Just when the Nasdaq posts one of its biggest weeks in a long time. This is why I tend to tune this stuff out. The time to have made this presentation was 6+ months ago. Now too late. Still long, have not sold anything. Added more to my position last week.

Bear rallies are fierce. I do not think we've hit bottom yet. Notably this opinion is shared by Michael Burry, Jeremy Grantham, and Ray Dalio, among others.

bear markets tend to be much briefer than bull markets. Odds are if you try to time it you will end up selling too soon, buying back too late. How do you know if a bear market rally is the start of a new bull market? You don't, which is why I err on the side of not selling.

> bear markets tend to be much briefer than bull markets.

Is this because governments are quick to drop rates and add QE but slow to do the opposite?

While this is true, bear markets usually last 12-18 months. We're just getting started.

I think it's fine (but not optimal) not to sell if you're playing the long game.

I'm all in cash and short positions right now. If my investing track record is anything to go by, that's a signal we've hit bottom. I'm betting otherwise, but what do I know.

They're not telling people to sell their Nasdaq positions.

They're telling their portfolio companies to shore up their balance sheets and extend their runways in case raising money at previous peak multiples continues to be difficult.

Of course, they have a vested interest in companies believing that this is going to be both an impactful and severe downturn, given they are capital providers. I'd take this with the appropriate grains of salt.

I'd take your comment with a much larger grain of salt. Be aware that all of Sequoia's existing VC investments are getting marked down drastically as well. Private company valuations don't just magically stay at above market levels when the public markets go down.

Sequoia is the top of the top, I don’t think they think like this

Disagree. They want to maximize the number of portfolio companies that survive in an environment where a significant fraction will not. This is a message that the money faucet has turned off, and that there will be pain - a timely breakdown of the ongoing macro effects. Note how "raise more money" is at the very bottom of suggested actions (pg35).

> Time to get your team's commitment for the path forward or... politely ask them to lighten the lifeboat

That's a gem.

These slides feel surprisingly like a twitter-style blog sequence. . .

Somehow, I feel like I’m being served ads.

By a hedge fund.

Walk away.

Technicality: Sequoia Capital is not a hedge fund. It's a private/venture capital firm.

Anyone have a link to the slides for the 4 breakout sessions mentioned at the end?

Whenever I read these things I think I should have been a CEO, as I would be up against people whose main stakeholder/shareholder thinks they need to be advised to be authentic. I have the impression that the thing people live to regret most is fear, and while surivor bias is indeed probably a factor in that, I still believe this all only gets as bad as we let it.

The economic limit is not on the availability of capital, it is on productive assets to put capital into. e.g. This isn't a water shortage, it's a bucket shortage. The maximalist view of returning the most to shareholders at the cost of becoming completely unmoored from reality is the direct consequence of a board installing a their rep at the helm to pump and dump the asset for them, and said rep writing a self justifying book moralizing their role in the experience afterwards. It's a critical and necessary role, but managers are not builders, they are extractors, and in a deluge, it's not the people with the promises who prevail, it's the ones building the rafts.

Anyone who has thought seriously about what this downturn is and what is causing it also knows that there are technology solutions that can and will turn it around. No company with product market fit will ever go down for lack of capital, it needs you more than you need it. The most volatile and powerful force on earth is human desire, and beautifully, right now it is suppressed by a small cadre of people who think they can subdue, contain, and manage it.

There has been no greater opportunity to disrupt and bring down mammoths since the the holocene era. The FAANGs growth period is behind them, which means they have peaked and they arguably now more defensive of their market share than they are innovative, which leaves a huge gap open. Nobody likes them anymore, to where blowing off their recruiters doesn't even merit a quip on personal slack channels. They're disco. Bets against the dominance and longevity of the platforms has become optimism for the human spirit, and that's a precarious place for them to be. Their whole strategy is to be short customer satisfaction, but without the regualtory monopoly holds that other predatory companies with terrible service have (credit agencies, HMOs, retail banks, cable and wireless operators, etc).

The reason the platforms want moderation and censorship is because in exchange it consolidates their market share via regulatory backing under the pretext of safety, so no new competitor can come to market unless they can meet the moderation requirements. That's how much they know their product sucks, that they are willing to get into bed with government to mandate that nobody can use anything else. That's the opportunity. To invent ice cream in a market full of shit sandwiches.

Pessimism is predicated on a zero sum model where you tell stories about a change in its balance, and given change is constant everywhere, all predictions of change in zero sum models are necessarily solipsisms. They aren't wrong it's just misleading and lame. (I do it myself a lot, optimism is a muscle that needs training.)

Anyway, this is to say my own plan is to listen to people, build tools for them, ship products, and iterate. Our greatest risks come from when we take our eyes off the road to worry about the fuel gauge. That slide deck provoked me anyway. Kind of them to share it, as it's really amazing to see their insights, but also to know for sure that mine really are way better.

This is same deck that they had in 2008. That said, it’s still applicable

Guessing you mean this one: https://www.dropbox.com/s/5db0iwb57zls7k7/RIP%20Good%20times...

Similar "Recovery will be Long", "Survival of the Quickest", etc, themes.

They predicted COVID in 2008?? Why didn't they warn anyone?

(it isn't the same deck)

Just for others seeing this, the content of the deck is in fact new. I could totally see how the advice may be the same as a prior deck though.

What date was this deck presented, and to whom?

It says May 2022 in the slides.

> "Who doesn't just survive but win?"

A finite mindset?

> "I want to take you back to early 2000 ..."

Does the world still look like the early 2000s?

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