Venture capital funds from Silicon Valley are unlikely prophets of doom

“Simply put, the world is rethinking how business models are doing in a world where capital costs something,” the presentation said.

Sequoia, at least according to Charlie Munger, have one of the best investment records in history. The presentation also highlighted several public market benchmarks to warn their companies of the dark clouds ahead.

The Nasdaq drop of 28 percent is the third worst drop in 20 years, but the pain has been most pronounced in nonprofit technology companies, which have doubled.

Nearly two-thirds of software, Internet and fintech stocks were actually below pre-pandemic levels.

Investors no longer reward growth at all costs. The multiples of the technical company’s corporate value – the sum of the company’s debt and equity – to revenues have halved from 12 times to less than 6 times, which is a 10-year average.

Cheap money no longer came to the rescue. One of the venture capitalists was Tiger Global. The fund manager took a spray and praying approach to investing by being the first to issue a check to companies that raise money.

But these hybrid hedge funds are now devalued because massive declines in their public holdings have made them relatively overexposed to private investment, meaning they simply cannot cut more checks.

The overall message from Sequoia was not to deny and to the founders to put on their game faces and be prepared for tough challenges as the bleak period approaches.

“Don’t see the reduction as negative, but as a way to save cash and run faster,” he said.

Streets on the same side

There seems to be some consensus in Silicon Valley on this issue. Another esteemed company, Y Combinator, also sent a letter to its portfolio companies entitled Economic downturn this could be summarized as: taking the position of the orthosis.

“Regardless of your ability to raise funds, it is your responsibility to ensure that your company survives if you are unable to raise money for the next 24 months,” says one point in the report from Tech Crunch.

Justin Kahl and David George of another well-known risk company, Andreessen Horowitz, shared a similar view in a blog post called Market navigation framework.

The aim was to provide advice that goes beyond “clichés” on how to save cash, expand runways and move away from a focus on growth to greater efficiency.

But the examples they give are pretty scary. One of them is a company that raises money worth $ 2 billion, which had an annual revenue of $ 20 million.

It is not good to raise money without an annual “runway”, nor is it great to raise money with a lower value. So what would this company have to do to maintain this award?

Well, public markets now value similar companies at 10 times the ARR (compared to the last increase of 100 times), but if it grows fast, it may be able to reach a multiple of 15 times.

But even so, it would have to raise its ARR almost seven times to $ 133 million while maintaining enough money for the year. Simple!

Then there’s the burning of money. Andreessen Horowitz prefers measuring the cash needed to generate one dollar of sales over the cost of acquiring customers, who tend to measure only sales and marketing effectiveness.

For this fictitious company, historical hedge fund tables suggest that this $ 2 billion company must spend less than $ 1 to make one dollar in sales, otherwise it has trouble.

Cash burning should decline as the company grows and reaches a larger scale. But maintaining access to capital because multiples have collapsed, while keeping costs under control is a difficult balancing act.

While some companies adapt, survive and thrive, gravity will surely catch up with the wave of start-ups that have been forced to feed on cheap money. This is perhaps why hedge funds are preparing for a period of pain.

Think of these fearless founders, whom their supporters have told them to think big in the long run or face extinction, but now they are told that their survival is at stake.

If they have not yet learned, private markets are not very different from their crazy public equivalents.

Those who respond most quickly to his rapidly changing signals will be rewarded, while those who do not adapt will be punished.