Today’s Pain: Inflation
Gas and oil prices are high, and the supply chain is broken due to wars, geopolitical affairs and a 2-year long pandemic. The USA and most of the nations were printing money for years, and reduced loan interest rates to promote spending & hence the economy. They were delaying current challenges and problems to later by doing this.
Now the only way to stop inflation is to stop purchasing, if we have less money to spend economy will shrink. Fed plays a major role in this, and now they doing the same, other government’s also closing the tap to pull the excess money resulting in a huge recovery in capital markets.
“At a high level, the market isn’t as challenged as it was in during the .com crash of the global financial crisis, but the story underneath the surface is more revealing when you look beyond the mega caps” - sequoia
The Recovery in the Economy
As a cascading effect of all of these, all economies & capital markets are going through a huge recovery. The growth was driven by FOMO and not by fundamentals. Tech stocks are falling, same for crypto. Even if the fundamentals and balance sheets are good they are falling. We are experiencing the 3rd largest Nasdaq drawdown in 20 years (-28%).
61% of all software, internet and fintech companies are trading below pre-pandemic 2020 prices.
How long the recovery will last? Nobody knows but according to sequoia this won’t be so quick, it’ll take longer, how long? Longer than expected.
“It will be a long recovery and while we can’t predict how long, we can advise you on ways to prepare and get through to the other side, This is not a time to panic. It is a time to pause and reassess” — sequoia
Capital WAS Free
Till now capital was free but now it’s expensive meaning Investors and VC Firms were throwing money at startups like crazy. This is also the reason for “Startup” becoming a buzzword in the last few years. They were playing valuation games meaning they funded a startup based on valuation and not giving a shit about how much money (profit) they’ve made. Customer acquisition costs for some Indian start-ups are more than 500₹ which means they are spending a huge amount on marketing, sales, advertisements, referral programs etc.
This was great for startups because they don’t need to think about how much runway they're left with. The reason being they know they’ll get more money in the next series of funding based on valuation.
Note : Runway is the amount of time you can operate at a loss before running out of money. If you’re burning through $10,000 a month and have $60,000 in the bank, you have six months before you’re in serious trouble.
CTA to Companies
“It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.” — CHARLES DARWIN
It’s time to change. Focus is important. Growth at all costs is no longer rewarded. The era of being rewarded for hypergrowth at any cost is quickly coming to an end - sequoia
Companies won’t get capital if they don’t show the results (Profits). This means the only way to survive is they need to start making money by changing priorities and reducing the burn rate. Now every dollar is more precious than it was; you need to start thinking about the runway and navigate accordingly otherwise you’ll need to fire people and eventually die or get acquired at the valuation which you deserve.
Survival of the Quickest,
“First and foremost, we must recognize the changing environment and shift our mindset to respond with intention rather than regret”
Reduce burn rate → Extend the runway → Figure out ways to become a profitable business → Generate cash
This won’t happen so quickly, but steps toward medium to long term disciplined monetary growth will be rewarded and translates into meaningful appreciation.
The Good thing is that smart companies started adapting;
Unacademy founder Gaurav Munjal wrote an email to his employees titled “Winter is Coming!”
“This is a test for all of us. We must learn to work under constraints and focus on profitability at all costs. We must survive the winter,” said Unacademy’s co-founder and CEO Gaurav Munjal in a letter to the employees”
Unacademy is now thinking about the runway left and navigating accordingly. They will decrease the cash burn on their subsidiaries relevel and Graphy because they aren’t profitable yet and still making the distribution. They have given deadlines to employees to be profitable in all tets prep categories on the platform.
What for Talents?
Leave the unprofitable organization if you do not believe in their vision & founders (If you do believe, then it’s a different case)
Salaries of all engineers Especially developers will drop at the rate at which valuation will drop. If there’s not much cash to spend who will give you that much. the worst part is you can’t auction, negotiate or bargain (if that fits here) because everyone is going through the same. The entire economy will show the change and not the particular set of companies.
If you are one of the high cost to the company, then you might be in trouble even if you are the smartest or most talented, this is how the economy works. This doesn’t mean that your value dropped but you were paid more earlier when they had money.
And as I said you’ll figure some ways out if you are smart and adapts quickly, you will always survive in the arena.
What For the Win?
“Chance only favours the prepared mind” — LOUIS PASTEUR
If the one with all the money is the one that wins, how could Zappos go up against Amazon and win the shoe category? How could DoorDash come from behind and emerge as the market leader beating UberEats? — sequoia
The one who is best prepared for the fight will win. Clubhouse wasn’t prepared, Rest you know.
To Prepare, Sequoia talks about the checklist;
- Prepare your mind
Confront the reality and understand the market conditions, don’t live in the hope. (For this they tell the story of Admiral Jim Stockdale ).
Control your fear : Crisis leads to opportunity if you show courage in tough times.
You cannot overtake 15 cars in sunny weather, but you can when it’s raining.” — AYRTON SENNA
2. Prepare your team
There are two types of people in the organization, Missionaries & Mercenaries. Missionaries are those who believe in your mission and Mercenaries are there only to get shit done and they don’t care about your vision & mission. Keep the core team together. Be fully transparent with them about everything, Share how much runway you left with & discuss how we can do best with the resources we have. As a founder, it’s your job to not let missionaries become mercenaries.
3. Prepare your company
Make sure the company have smooth cash flow and cut down on extra spending. Stop experimental campaigns and focus on what is working now. Take debt if needed even if it’s expensive coz paisa to chahiye na yar!
What’s next according to Sequoia?
The intention is not to be a beacon of gloom. Far from it, we believe the best, most ambitious, most determined of you will use this moment to rise to the occasion and build something truly remarkable. That was true for Cisco after the crash in 1987, Google and PayPal in 2000 after the dot-com bust, Airbnb in 2008 in midst of the financial crisis, and DoorDash in 2020 during the health pandemic.
But we also believe that winning in the years ahead is going to depend on making hard, decisive choices — confronting uncomfortable challenges that may have been masked during the exuberance and distortions of free capital over the past two years.
The primary goal of this session is to shift our collective mindset. We are at a moment of uncertainty and change — a Crucible Moment where your decisions will have a major bearing on the outcome for your company.
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