Venture capital firms such as Sequoia Capital and Y Combinator are sounding the alarm for startup companies that the days of raising capital easily are over.
The well-known VC sent 250 founders a 52-slide presentation via Zoom on May 16, alerting them to a “crucible moment” as higher rates of inflation, volatility in the stock market and several geopolitical issues led to less certainty in the venture capital market. The presentation was seen by The Information.
Sequoia told the startup founders that there likely will not be a “swift V-shaped recovery like we saw at the outset of the pandemic,” and instead recommended that they evaluate their companies for costs that could be slashed.
“Don’t view (cuts) as a negative, but as a way to conserve cash and run faster,” Sequoia wrote.
A behemoth in the venture capital world, Sequoia, founded in 1972, has invested successfully in tech giants such as Google ( (GOOGL) - Get Alphabet Inc. Report), Apple ( (APPL) ) and Uber ( (UBER) - Get Uber Technologies Inc. Report) and other well-known companies that are used often by consumers such as AirBnb (ABNB) - Get Airbnb Inc. Report, Stripe, Block (SQ) - Get Block Inc. Class A Report (formerly Square), Instagram ( (FB) - Get Meta Platforms Inc. Report) and WhatsApp.
Sequoia, the Menlo Park, California-based VC firm who is not shy about alerting its portfolio companies that cutting back on costs is now a priority, gave a similar warning in 2020 called “Coronavirus: The Black Swan of 2020” and also gave a slide presentation in 2008 warning about the Great Recession and financial crisis that started with the housing market's meltdown entitled R.I.P. Good Times.
Another Grim Warning
The VC firm has made 76 investments so far this year, compared to a slower pace in the first half last year when it sunk money into 85 startups, according to Crunchbase data.
As of November 2021, the VC held $45 billion in public positions and during the past 15 years it has distributed $29 billion to its limited partners while investing $12.5 billion.
Y Combinator, a startup accelerator, also gave a grim warning to its companies last week
“No one can predict how bad the economy will get, but things don’t look good, ” the accelerator wrote in a letter that portfolio founders received called “Economic Downturn.” “The safe move is to plan for the worst.”
Softbank (SFTBF) said in May that it will change its criteria in choosing investments after reporting a loss of $27.7 billion on investments in its Vision Fund.
Large losses in the public market can lead to less capital in the venture capital world as limited partnership investors pullback.