Fred - I love your blog and thoughts but I generally have to agree with the cynics here. If you look at the presentation through the lens of an entrepreneur who was talented enough in the first place to receive money from Sequoia or Benchmark (not exactly the dregs), you see a didactic and simplistic overview that anyone who has even the most basic clue about the capital markets already understood (or do I give too much credit to Sequoia's ability to pick talented entrepreneurs?).
Perhaps I'm giving them more "credit" than they are due but with a couple of days of thought, the presentation strikes me as being outwardly focused and meant as a way to drive down valuations and keep would be entrepreneurs and investors out of the game to further the cause of their own portfolio. Further, it has the downside risk of being the equivalent of yelling fire in a crowded theater. The broad, one size fits all, comments about cutting back headcount are, in my opinion, irresponsible coming, as they do, from someone whose reputation is as Sequoia's is. They are creating a self fulfilling prophesy of a slow down in the real economy derivative from the problems in the financial services sector. While its hard to argue that there are real fundamental problems with the American consumers overindulgent behavior over the past few years, there are bright people (see the article by U of C economist Mulligan in the New York Times on Oct 10) who believe that the connection between the the FS sectors problems and the real economy of people making real goods and innovating is not a hard and fast one. FDR had it right that we have nothing to fear but fear itself. If you watch Volcker on Charlie Rose last night, he's got a great story about FDR getting on the radio in 32 or 33 when the banks were closed and reassuring the American people that when the banks opened, it was going to be ok. Sure enough, when the banks opened, Americans went back to them and the crisis started to abate. Reality is largely what we, collectively, believe it will be. A panicked and melodramatic cry of "the sky is falling" is the opposite of leadership and is not an irresponsible use of the prestige that they have built up on the backs of this great country and society that we live in. These people who made 10s or 100s of millions personally have a greater responsibility here...
I'm leaning more and more towards the cynical assessment here and am on the verge of concluding that what Sequoia did is inappropriate, irresponsible, and mass scale fear mongering. Further, they should have the humility to understand that they actually know very little about will and won't happen in the coming quarters in the macro economy. If they actually did, they should immediately call their LPs and repurpose the fund to a global macro hedge fund strategy. They could make a lot more money a lot more rapidly doing that than investing in the long term business building endeavor that venture investing is supposed to be and is something we can as a society be proud of (instead of all of our best and brightest going to wall street to make statistical models to make a quick buck)
fredwilson
· 1 year ago
I don't see it that way.
First of all, this was not mean to be public. Someone leaked it but not sequioa. If they shouted fire, it was in a private room not a theater
And entrepreneurs are smart, probably smarter than vcs as a group. But we vcs have the advantage of being one step removed from the business and can often be more analytical and objective about the realities of the business.
It is exactly your thinking that I've picked up on the net in the past couple days that prompted me to write this post
NYCStartupfiend
· 1 year ago
I hope you are right. I'd be happy to be wrong on this one.
Net net though, market timing is really tough (read Soros's book "The New Paradigm for Financial Markets" published in April of this year for a great example; he predicted problems but certainly not the fall of all the IBs) and good businesses led by talented leaders and managers make a success of things regardless of the twists and turns in the road along the way.
fredwilson
· 1 year ago
No question that this is a great time to be doing a startup, particularly if you have a very low cost operating model. I spoke my piece on that in my capital efficiency post a few days ago.
I agree with most of what you've said in this post, but I have to disagree with this: "If they shouted fire, it was in a private room not a theater." Right. Do you or they honestly believe for one second that it would remain private? Come on.
gbattle
· 1 year ago
A bit of old wisdom states that one should consider anything one puts in a PowerPoint presentation public, no matter how many disclaimers or NDA's one might have. Of course it would go public, especially among the "information yearns to be free" evangelists that are today's internet entrepreneurs.
stone
· 1 year ago
This is a good time to weed out the weak companies. What was missing from the recent chatter is the fact that vc's have a vested interest in keeping good companies with good ideas going. Good companies will continue to get funded. The borderline (or crappy) companies that act in nonsensical ways will get crushed. This is how it should be.
As for valuations, this also cuts both ways. Lower valuations could lead to smaller exits so everyone has to be careful.
Mark
· 1 year ago
Weak companies will get weeded out but they'll just be the first to go. In a downturn like this, even many good companies will fall victim. Investors and entrepreneurs alike shouldn't fool themselves in thinking they're "strong enough." It will get to a point where strength or competitiveness has very little to with staying alive.
dave
· 1 year ago
It may not be a coordinated cynical attempt by VCs but it still might not be good advice.
I only have one time when I got this kind of advice from my board, and I ignored it, and made them all rich. Ultimately you're in an advisory role as a board member and investor, but far too often the advisors grab the steering wheel and try to run the show with terrible results.
You don't know what's coming any more than an individual entrepreneur does.
Personally, I think it's bad advice. Zig when everyone else is zagging. Just like you're buying up cheap shares of stock in the stock market, I'd be thinking how to aggressively go after markets now that the competition is freaking out.
In fact I wouldn't be so sure Sequoia isn't bluffing! Something to think about Fred...
alain94040
· 1 year ago
The key message from Sequoia's presentation is that getting more rounds of funding will be much, much harder.
That has an immediate impact on the strategy of all early-stage startups. You can't plan on a runway of 9 months anymore. Or one year. 18 months? Time to adapt the strategy and conserve cash if you were planning on raising additional rounds of funding.
That in itself is important advice. Of course, do the best with the cash you have, that has not changed. But don't count on the "easy way out", more cash through additional rounds.
fredwilson
· 1 year ago
I like what obama said in the 1st debate about not questioning the motives of others
I don't question the motives of anyone in the vc business or the startup business as a whole
I think the best way to zig while others are zagging is to leverage capital efficiency to your advantage. Be 'too small to fail'. The things that betaworks is doing come to mind when I think of that idea
dave
· 1 year ago
I guess we have different values -- I don't think there's anything wrong with bluffing your competitors in business. Happens all the time. I don't condone lying or fraud. But you can signal a zig when you're actually zagging. Nothing wrong with that, imho.
fredwilson
· 1 year ago
Not sure that is different values dave. Just a different approach.
vruz
· 1 year ago
actually what Dave is describing (as I understand it) is perhaps a countercyclic economy policy, or possibly an acyclic one.
that's what we've been doing here after all the bank runs and crashes, and it has worked !
see, I'm alive and kicking ! :-)
dave
· 1 year ago
One thing I'd advise based on past bubble bursts is that now is a good time to bet on R&D with a medium to long term horizon. Look in your gut and ask yourself how people are going to be doing stuff in the future, and invest in ways to get there. In the last bubble burst, three good areas to invest would have been blogging and RSS and podcasting, yet none of the VCs we pitched would go with us. Look for things like that, the material that the next boom is going to be built out of. One thing's for sure, a lot of technology is going to be needed. Think about the Y2K problems and square it or cube it. Basically we're going to be unwinding a lot of civilization in the coming years, how can we do it in a humane, even fun way? That's tech worth investing in now.
dave
· 1 year ago
Also, encourage your investments to throw fat on the fire! Have fun -- do bold things. What exactly do you have to lose? Write the whole investment off, now what would you do? (Applied to Twitter, open the whole fucker up, let your competition swarm in. What have you got to lose exactly?)
temporary_bottom
· 1 year ago
Fred,
I've followed your blog for a long time and consider you one of the more enlightened VCs out there. But I have to call bullshit on you on this one. You are one of the key cheerleaders for the "freemium" model; ie., go create something, give it away for free and try to figure out if there's a pony in there. This model has fuelled thousands of start-ups who received funding without having to go through the rigor of developing a revenue or business plan. It was basically a free pass to start a company with no real risk or responsibility. This model is unsustainable and creates a situation where companies lie Seesmic now realize they have no business model whatsoever so their only choice is to reduce expenses. Making the string longer is a good advice but without a revenue or business model and no additional capital in store for these "feature" based start-ups, these companies will eventually reach the end of the string.
It is on this fanboy freemium model that I call bullshit.
fredwilson
· 1 year ago
Freemium doesn't mean free. It means use a free version to build a user base and then migrate to a paid model for those who need it. Look at wordpress for an example of how it works
Its like the shareware and open source business models
Go back and read my posts on freemium and you'll see what I mean
Kevin Elliott
· 1 year ago
I think the main cynicism people are expressing is why are VCs finally saying this NOW? Why does it take an economic meltdown for VCs to say "spend less." On Twitter, a VC told me that they always tell their portfolio companies to spend less. But how is that possible? Have you seen where most of these startups spend their money?
Frankly, if VCs are willing to hand over $20mil Series A to a startup who spends all their money on Aeron's, party supplies, and a business plan without a sane financial model and profitability plan, then this last minute guidance won't protect them.
Perhaps I'm just not clued in enough to know what's really going on, but this is what much of the world sees.
fredwilson
· 1 year ago
I am sure there are examples out there where a 20mm srs a financing went to aeron chairs, party planning, and a business plan that makes no sense but I've not seen it
Just because a company isn't executing a business model right now doesn't mean it doesn't have one ready to go once it has obtained critical mass
And most of the 20mm rounds are not srs a these days, they are srs b or even more likely srs c
This is not 2000 all over again. Most companies are acting quite responsibly with their spending
Vinicius Vacanti
· 1 year ago
I don't understand why people are saying that they saw this coming a year ago. Really? They saw the S&P falling 18% in one week, major centuries-old investment banks collapsing? What has happened in the last few weeks is significant and much more severe than the recession ReadWriteWeb and others had been expecting for the last few years. I commend VC's for sounding alarm bells to their portfolio companies as quickly as they did.
If ReadWriteWeb's Bernard Lunn and others had been expecting the dramatic events of the last few weeks, then they shouldn't have spent their time writing blog posts but instead investing in S&P shorts.
fredwilson
· 1 year ago
Very few people saw something of this order of magnitude happening.
gbattle
· 1 year ago
I doubt that even the venerable cynic-predictor Nicholas Nassim Taleb thought things would have unwound this badly. As much of a derivatives genius as Taleb is, even he must have been shocked to see the VIX nearly double what it had been right after 9/11 (http://bit.ly/30xZCM). The second, third and now fourth order events of this crisis belie a systemic and behavioral complexity that is of biblic proportions. Anyone in fall 2007 predicting such a 10 sigma event would (and probably should) have been routinely ignored. Show me someone who had the conviction to actually bet this would happen a year ago (the closest I can think of would be Greenlight Capital's David Einhorn, but genius that he is, he only really bet against Lehman).
I do know some people who sold all their liquid assets earlier this year and went to T Bills, fundamentally because of the amount of consumer debt.
Mark
· 1 year ago
A lot more people (i.e., Alternative Investment Funds) than you think saw this and took the same action, especially macro-driven funds. If you look at the stats on who has weathered the best, you'll see more macro funds making it through, because their strategy is to make the appropriate move when the dynamics start changing (e.g., not long after they've been changing for a year). These funds that have made or will make it all went majority into unhedged and undiversified positions in liquidity ... cash (or T-bills). Even the general fixed income solution backfired for many. The next best farers are currency traders, but that's a different story. The point is that a lot of people saw this coming ... it's not a complete black swan, indeed it isn't a black swan at all. Surprising maybe, but not completely unforeseen. The thing is, though, you won't hear about those guys that made it until two or three years from now when they're emerging in the next cycle as the leaders. It's more glamorous to talk about the Simmons and Flowers of the world but their quant strategies will eventually fail b/c the level of uncertainty involved in these markets. It's the Bell Curv-ers that are dominating in this down cycle.
Krassen Dimitrov
· 1 year ago
Roubini called it almost precisely...
fredwilson
· 1 year ago
yes, roubini is one of the "very few people" that saw something of this order coming
Scobleizer
· 1 year ago
I've been getting the same kind of heck over on FriendFeed as I've told people how dark and deep this economic downturn would be. They told me I was wrong to fan the flames of fear. But then the stock market dropped another 2,000 points and generally those people have now been discredited. Now we're talking about how to shake customers out of the trees. I just wrote a post called "Tent Sale" which is trying to get some interesting conversation going about that.
NYCStartupfiend
· 1 year ago
Whether or not we have a massive recession/depression here, there is no historic proven causality or even correlation between downturns in the financial indexes and problems in the real economy.
Our assessments here in the heat of the moment are going to look rather melodramatic and certainly wrong with the benefit of just a few quarters of hindsight.
"It’s important to keep in mind, too, that the financial sector has had a long history of fluctuating without any correlated fluctuations in the rest of the economy. The stock market crashed in 1987 — in 1929 proportions — but there was no decade-long Depression that followed. Economic research has repeatedly demonstrated that financial-sector gyrations like these are hardly connected to non-financial sector performance. Studies have shown that economic growth cannot be forecast by the expected rates of return on government bonds, stocks or savings deposits."
Chris Dodge
· 1 year ago
I think the issue here is how companies can keep their operations well capitalized. With low stock prices *and* a fist-tight credit market, companies (which have impact on jobs and - hence - the real economy) will definitely struggle. There are already stories coming out of lines of credit ofotherwise healthy companies completely be shut down. In some business revenues streams are - by design - not steady, e.g. "hit driven" industries like entertainment/publishing. They use debt to bridge operations until the revenue spikes arrive.
There's definitely going to be an impact on the real economy over the next few months. It's going to be a brutal Christmas selling season.
Scobleizer
· 1 year ago
My brother owns a bar in Virginia. Not Silly Valley. His sales have gone from $15,000 to $9,000 a week. He's really hurting. I'm hearing stories like that from across the economy. This is not a "stock market" problem. The market is actually FOLLOWING lots of people's pain as credit has been greatly tightened on the economy.
Joseph Hunkins
· 1 year ago
no historic proven causality or even correlation between downturns in the financial indexes and problems in the real economy.
I think you meant something else. Your statement is preposterous. Of course there is both correlation and causation. Obviously there are other factors at work on the indexes as well - is that what you meant?
Mark
· 1 year ago
This is taken out of context and it is looking at the financial sector in a vaccume. Unfortunately, it doesn't work that way. What we are experiencing is systemic failure, and as such, there is indeed market-wide fallout, which will then spread throughout the entire economy. Systemic events are happening on a daily basis, of which the impact is being felt throughout the markets. There's definitely correlation, regardless of the level of bias or inconsistencies in the data.
fredwilson
· 1 year ago
A post called ³tent sale² is one I have to read. I'll be over there soon Robert
bernardlunn
· 1 year ago
Fred, thanks for posting my comment. This is the best forum for real discussion on these issues and it is great to be part of this conversation. I really do believe that you are the best representative of the VC industry. No, I don't have a venture to pitch to you, so that was a genuine compliment!
I was not saying an alarm call is a bad idea. But if your hotel calls you at 9.15 and your meeting is at 9, you would be pissed. To those who say "nobody saw this coming", nobody (well, almost nobody, I certainly did not) saw the market meltdown. But loads of people saw a serious, deep, long consumer recession based on massive consumer debt and an economy where 75% of GDP was based on consumer. I rang many alarm bells on that - so did many others.
I am not suggesting shooting the messenger, just that the messenger could have got there a bit earlier!
I assume that many VC rang those alarms quietly in one to one exchanges with entrepreneurs. (I am not sure that is true, but I assume it is, love to hear from people who received/did not receive this advice).
This meltdown comes from the financial services industry. As per The Economist, the financial services industry went from 10% of GD in the early 1980s to nearly 40% at the height of this boom. That is too big a toll booth for the economy. Nothing will be the same when the dust settles. I am assuming that nothing will be the same for VC either and that some fundamental new models of financing innovation will arise.
And I am sure the debate on that will happen on this blog and that USV will be ahead of the pack.
Many seem to be ignoring the title of your post. At least you have a free-thinking / free-speaking audience:) You and others are simply trying to provide what you feel is some practical advice about surviving through tough times and you get crap for it? I don't get it. I founded a company that survived the 2000/2001 bubbleburst and it taught me this: if it feels bad, it's probably worse. Many of your readers seem to be optimistic, failure-is-not-an-option type entrepreneurs that have not had the chance to learn these lessons yet. Hopefully they will learn something in spite of all the arrows flying.
Chris Dodge
· 1 year ago
I guess I don't get what the hubbub is all about here. If someone has an idea for a product and/or service, he/she should just go ahead and do that thing. While I know that sounds oversimplistic, but it really is that simple. In my opinion, the Y Combinator/TechStars/etc model of hybrid-VC/Incubator (sorry I know you don't like that word Fred) really is the pathway forward:
1) A little capital (Seed/Angel) 2) Some hand-on-mentoring mentoring from a seasoned team, with resource sharing (office space, internal/external IT, HR/Admin personnel) 3) Get to v.1 or proof-of-concept 4) Attract a little more capital (Series A) 5) Build Sales/Marketing (if need be) 6) Apply spit-and-polish on product to make it release class (please no more endless "beta" monikers!) 7) Try to get traction in marketplace, whatever that metric might be (eyeballs, paid subscriptions, or sales to enterprise) 8) Attract even more capital (Series B) 9) Accelerate sales/marketing
I think there will be still be plent of investors willing to keep the ball rolling around, but I think VC's will have to take a "small-investment/medium sized exit" (say high 7 or low 8 figures). I know that doesn't mesh with the "moving the needle" approach, so people will have to adapt.
All this means is working with smaller numbers, that's all.
I'm still not giving up.
fredwilson
· 1 year ago
you nailed the model. that's what i am increasingly being drawn to myself
But it seems like being a voice in the wilderness when compared to people like Robert Scoble. I know for myself I won't stop trying at least.
Joseph Hunkins
· 1 year ago
Fred not all bloggers are on the doom and gloom bandwagon
Steven it's not "doom and gloom" to simply suggest the obvious - the party is over and folks should expect to work harder, spend less, and stop living so large on paper wealth that, like Elvis, has left the building(s).
StevenHodson
· 1 year ago
maybe so but if you subscribe to Robert Scoble's theory this is the worst week ever and is only a harbinger of the hurricane yet to come that will sweep through and totally devastate everything in its path. sorry but I like to think that even as bad as things might be; or get, we are more than capable of picking ourselves up and trying again. I know the reality of the situation and it isn't going to be an easy time ahead but shouldn't be at least a little bit hopeful?
gbattle
· 1 year ago
I think by definition, entrepreneurs are optimistic about their own prospects - the best ones may even be drunk on their own Kool-Aid in that regard. So I don't believe there's necessarily a lack of hope in the startup space. If anything, the competition for capital accelerates a process which is good for everyone - the weak companies will die faster (thus freeing up valuable financial and human resources for existing or new ventures), and the strong will get more disciplined, focused and flexible. This is not a bad thing in my eyes.
Scobleizer
· 1 year ago
Steven: Stop misquoting me. I never said the coming storm would destroy everything. I said a Category 5 Hurricane is moving toward Silicon Valley and that it would destroy a lot, but I made it VERY CLEAR that there would be winners. If you read my blog over the past week you would see that. I really wish you'd stop misquoting me and taking my words out of context. Right now we need accuracy in conversation more than ever. Thanks.
fredwilson
· 1 year ago
thanks for those links
great stuff and please do keep it up
Joseph Hunkins
· 1 year ago
It's just the revenge of the spawn of Darwinian capitalism rearing their ugly two headedness!
Given that average VC returns (Fred excluded) have gone from poor to what may become catastrophic, I hardly think it's fair to say VCs fanned all that many flames. On average the VC startup economy appears to benefit startups far more than investors. Perception is the opposite simply because people do not review the failures - only the giant successes.
People are looking hard for scapegoats and unless you watch FOX (where the scapegoats are the poor crack addled inner city folks who FOX suggests were buying 2 homes each), expect the more successful capitalists to be under fire for some time. Some with justification, others not so much.
Eric Rice
· 1 year ago
Translation: it's harder to get loans from us, too.
terra210
· 1 year ago
Robert Rice @robertrice wrote a couple of interesting tweets on VC investing within the current crisis economy. He advised VC's to invest more in early stage, riskier opportunities.
High net worth investors have traditionally invested in risky investments through Hedge Funds, and now are pulling their funds rapidly in a flight to (perceived) safety. It seems to make a lot of sense to switch that risk adverse investing primarily into new ideas, and start-ups, This will help the economy, the culture, and serve investors. Yes there will be loss. But there is always loss associated with risk.
In a recent David Faber piece on CNBC, he said in 1985 there were 13 billionaires in the US; there are now 1,000. There are 125 thousand households in the US with a net worth of 25-50 million dollars. Many of these people just pulled their funds out of the market. If even a small percentage invested in new ideas, we could do a lot to turn things around.
KP
· 1 year ago
I think the point, is not irony - cynicism moreover. Where was the call for prudence from VC when overpriced homes that were hyper leveraged by traders was an obvious tragedy in tow and awful portfolios of "serial entrepreneurs" were being built. Hind sight is 20/20 as is Sequoia's fiduciary duty.... now is the best time to bet and invest, no doubt.
I know nothing about Twitter's balance sheet, but for the users and tech community screaming at them to "Spend some of that f'ing VC money!" a few months ago, I'm thinking they should be recognized for their apparent prudence. These guys are what 31-ish?
Oh, and I'm looking forward to learning from your discussion [thanks, once again]:
Regardless of a extreme downturn or a shallow one, the advice on cutting costs is always a good one. The economic downturn just provides an excuse to do it quick and fast. Will you possibly miss some opportunity if you "cut too deep" - maybe, but I have yet to see a company that "cut too deep" and never recovered.
Krassen Dimitrov
· 1 year ago
Fred, So who was fanning the flames of the bubble, then? Can you give us names? I can. Here's a little quiz: who said this about the valuation of a multibillion "freemium" company? "The breadth for any acquirer to be able to access that subscriber base is tremendously valuable. And then you also have at play the overall VoIP space, which is a real opportunity to disintermediate the telephone company. If you think about that type of market opportunity as an acquirer, that also plays into what you are willing to pay because of the tremendous upside potential."
Here's, however, the scariest part: The person who fell for this bullshit was "nominated" last week as the next Treasury Secretary. God bless us all if these people are put in control of America's money!
Scott
· 1 year ago
With this, I'd like to pose a rather OT question.
Which candidate will help VCs most: Obama or McCain?
Which candidate will help entrepreneurs most: Obama or McCain?
i'd prefer to ask who will help entrepreneurs most, because they are the raw material of venture capital
Scott
· 1 year ago
You're right. But then, who's better for entrepreneurs? Obama or McCain? And why?
fredwilson
· 1 year ago
I think Obama is better for our country in many many ways and I think what's good for our country is ultimately good for entrepreneurs
fredwilson
· 1 year ago
i think, but don't know for sure, that you are talking about meg whitman
and yes, Skype was a big time overpay
but i don't think YouTube was
Krassen Dimitrov
· 1 year ago
Correct. Meg Whitman was offered as a possible Treasury Secretary at the last debate by the GOP candidate (McCain). The quote is from Jennifer Fonstad, a Managing Director at DFJ (old nemesis of mine), who were investors in Skype. What not many people know is that Fonstad was a fundraiser and vice-chair of "women for Romney". The chairperson of "Women for Romney"? Meg Whitman.
If that does not spell all that is wrong with America, I don't know what does. A CEO overpays ridiculously for a startup backed by a fellow Republican activist, while the latter provides cover in the press. Then shareholders are stuck with billion-dollar write-offs, while the CEO is groomed as the next Treasury Secretary... Cronyism, enmeshment of politics and business, disregard for fiduciary duties...
I guess, as they say, "One's garbage is another's Treasur(y)..."
Mike Abundo
· 1 year ago
The best startups emerge during downturns. Witness Google.
Scobleizer
· 1 year ago
Mike, I agree, but Google isn't a good example. It was born in 1998, before the downturn of 2000. A better example might be Six Apart. But that got steam along with the rest of the industry.
Dave Winer is right, by the way, the VCs were stupidly on the sidelines in the last downturn.
bernardlunn
· 1 year ago
They were. And despite all the talk of dry powder many of them will be in this downturn. We need VC to be contrarian. It is in their interest to be contrarian. But too many of them are cyclical momentum chasers. They are protected by the fact that the Pension Funds get even more risk averse and won't touch a new fund. Which would be the normal way to get some competition going. The fate of innovation in this downturn will determine the length and depth of the recovery. Innovation should be agenda number one. VC should be at the center of innovation. All too often they are not.
fredwilson
· 1 year ago
There's been a bunch of new firms created in the past four or five years and we coinvest with many of them; spark, first round, OATV, betaworks, etc, etc
And most of this group is doing things a bit differently.
bernardlunn
· 1 year ago
That is great to hear. Some I had heard about and some not. I am thinking that ReadWriteWeb review of early stage funds in the New York area would be a good idea.
fredwilson
· 1 year ago
Not all of these firms are in NYC
There are new firms who are doing it differently all over the country
Krassen Dimitrov
· 1 year ago
Dear Bernard, you seem to know a lot and maybe you can answer this for me: why are the institutional LPs so enamored with old funds, even if they have consistently been awful? This is terrible, I have seen minutes from some of the state pension systems. The fund managers come in and mumble some garbage about "lessons learned" and "new exciting dealflow" and boom! here's another 40-50 mil for your next fund. It's like performance does not matter at all for these people...
bernardlunn
· 1 year ago
Krassen, that is an interesting question. Generally, creative destruction does not work as well in VC land as it does in the companies they invest in. Which makes running a VC fund a great business. There are barriers to entry. Not insurmountable ones, but still tough. Here are the four big barriers I see:
1. Institutional LPs are conservative. They are not paid to take big risks. A big win is great, but they don't share in the upside. A big lose or two and they lose their job. That is a recipe for playing it safe. So new funds have to get cash from entrepreneurs, not institutions.
2. Entrepreneurs flock to the big brand name VCs. Stop it guys! It used to matter a lot more than it does now. In olden days, when the play was getting Fortune 500 to open up their budgets, the Big Brand VC's rolodex and brand were 100% critical. In the days of "click here to try and buy", this is irrelevant.
3. Like soldiers, Great Old VC Funds don't die, they just fade away. It takes years to wind down portfolios. The new GPs want to raise new funds and even if they are a shadow of the guys who built the Fund in its glory days....go back to point # 1.
4. It takes a long, long time for bad results to show up. In a software company you can track results quarterly. In a Fund, accurately seeing progress is tough till the Fund is nearly at end of lifecycle
Krassen Dimitrov
· 1 year ago
Bernard, thanks! I have a somewhat more cynical view and it has to do with human nature. If you are a pension fund manager and have an established relationship with certain people - people who always suck up to you, people who wine you and dine you at their annual meetings, and in some cases people who are friends or close associates - there is a level of discomfort in having to say "no" to them. The sad reality is that the financial management class is too intertwined and incestuous to be productive. I have seen a case in Oregon where the VC had invested in a startup run by one of the board members of the pension fund. The VC fund is a perennial loser, yet when they asked for $40mil they got $50mil... This is not capitalism, where the owners can exercise active control over their assets. You have millions and millions of "owners" who only get a monthly or a quarterly statement that they hardly understand; their interest is supposed to be looked after by these fiduciaries that are members of the same "management class" that has wrecked America.
Once all the dusts settles with this financial shake-up you will see that the biggest losers will be the pension funds and retirement savings of an entire generation of Americans. Of course, it's not only the private equity that is the problem, but the system just does not work.
This has to be a major priority for Obama, since ultimately all these retirees will flock back to the government system, after their pension/retirement assets have been robbed. How do you get capitalism to work in a system with such widely distributed ownership of assets?
bernardlunn
· 1 year ago
I don't share that level of cynicism, but I do think it is a big, big problem if the vast majority of people start to feel that equity markets are not for them because they perceive them as rigged. We may see that as a major fall out of this crisis. That leaves equity back in the province only of the rich and connected.
fredwilson
· 1 year ago
You start by giving all asset managers a compensation system that is based on results
Most of the people who allocate pension funds to private equity, hedge funds, and venture capital are paid a salary and possibly a small bonus
They do not share in the upside of the investments they make
³all of this may come to pass, but it will take a while. venture capital has a very long lag time because the funds we raise are ten year funds and partners have to stick around and manage them. that's why Vinod still carries a KP business card. nothing happens fast in the world of venture capital. that's both good and bad.²
david bailey
· 1 year ago
actually it is all about the VCs having two concerns: first up their shadow banking partners have gone titsup and won't pass them huge piles of cash on demand any more, and secondly there is a real risk of a consumer slow down. BUT I find myself one of a few asking "where will the slow down hit, and why?" and not getting a serious answer. All tech stocks will not be hit equally, and it is not always the time to run for cover. For a few - perhaps a very few - this is the moment to go out and do something really brave in order to corner a market while your competitors run around like Chicken Licken shouting "the sky is falling" http://blog.david.bailey.net/blog/MediaandTechn...
jake
· 1 year ago
i'm missing a post about how to layoff 80% and keep a core technology+product team.
fredwilson
· 1 year ago
I am not sure that can be done. Although we've got a few companies in our portfolio with dev/product teams of less than five people total
Still Though
· 1 year ago
You never really respond to Bernard's point that this advice is a tad late. Seriously, the real estate market hit a turning point July through August 2007. Since that time, there's been consistent news indicating a downward trend in other markets, especially lending and financial. So the way I see it, these powerpoints and tighten-your-belt speeches are all about reiterating the obvious. The super obvious.
Is it about wanting to be noticed (maybe later on) for sounding the beacon? It just doesn't make sense.
fredwilson
· 1 year ago
I thought I did that in the post itself.
Moritz was saying to be cautious back in the summer of 2007
I could go find numerous posts on this blog over the past 18 months that said the same
The idea that VCs were saying ³step on the gas² last week and then ³hit the brakes² this week is just plain wrong
baeight
· 1 year ago
Great post and references to others. There is a general feeling of panic but I agree the VC and entrepreneurs who seize the opportunity by continuing to drive innovation and new thinking by staying involved will come out the winners over those who clamp down and quit investing.
stillabanker
· 1 year ago
Fred,
You are a good writer, but isn't the term "darwinian capitalism" redundant? Apologies if someone else already aseked the question among the 70+ comments...
fredwilson
· 1 year ago
Well I wanted to remind everyone that capitalism is darwinian
I am not sure everyone realizes that
Damon
· 1 year ago
I don't know about conspiracy, but Sequoia certainly gets the Captain Obvious Award for this. If you didn't see this coming, you deserve what you get.
dantinpa
· 8 months ago
Many seem to be ignoring the title of your post. At least you have a free-thinking / free-speaking audience:) You and others are simply trying to provide what you feel is some practical advice about surviving through tough times and you get crap for it? I don't get it. I founded a company that survived the 2000/2001 bubbleburst and it taught me this: if it feels bad, it's probably worse. Many of your readers seem to be optimistic, failure-is-not-an-option type entrepreneurs that have not had the chance to learn these lessons yet. Hopefully they will learn something in spite of all the arrows flying.
All Comments
Perhaps I'm giving them more "credit" than they are due but with a couple of days of thought, the presentation strikes me as being outwardly focused and meant as a way to drive down valuations and keep would be entrepreneurs and investors out of the game to further the cause of their own portfolio. Further, it has the downside risk of being the equivalent of yelling fire in a crowded theater. The broad, one size fits all, comments about cutting back headcount are, in my opinion, irresponsible coming, as they do, from someone whose reputation is as Sequoia's is. They are creating a self fulfilling prophesy of a slow down in the real economy derivative from the problems in the financial services sector. While its hard to argue that there are real fundamental problems with the American consumers overindulgent behavior over the past few years, there are bright people (see the article by U of C economist Mulligan in the New York Times on Oct 10) who believe that the connection between the the FS sectors problems and the real economy of people making real goods and innovating is not a hard and fast one. FDR had it right that we have nothing to fear but fear itself. If you watch Volcker on Charlie Rose last night, he's got a great story about FDR getting on the radio in 32 or 33 when the banks were closed and reassuring the American people that when the banks opened, it was going to be ok. Sure enough, when the banks opened, Americans went back to them and the crisis started to abate. Reality is largely what we, collectively, believe it will be. A panicked and melodramatic cry of "the sky is falling" is the opposite of leadership and is not an irresponsible use of the prestige that they have built up on the backs of this great country and society that we live in. These people who made 10s or 100s of millions personally have a greater responsibility here...
I'm leaning more and more towards the cynical assessment here and am on the verge of concluding that what Sequoia did is inappropriate, irresponsible, and mass scale fear mongering. Further, they should have the humility to understand that they actually know very little about will and won't happen in the coming quarters in the macro economy. If they actually did, they should immediately call their LPs and repurpose the fund to a global macro hedge fund strategy. They could make a lot more money a lot more rapidly doing that than investing in the long term business building endeavor that venture investing is supposed to be and is something we can as a society be proud of (instead of all of our best and brightest going to wall street to make statistical models to make a quick buck)
First of all, this was not mean to be public. Someone leaked it but not sequioa. If they shouted fire, it was in a private room not a theater
And entrepreneurs are smart, probably smarter than vcs as a group. But we vcs have the advantage of being one step removed from the business and can often be more analytical and objective about the realities of the business.
It is exactly your thinking that I've picked up on the net in the past couple days that prompted me to write this post
Net net though, market timing is really tough (read Soros's book "The New Paradigm for Financial Markets" published in April of this year for a great example; he predicted problems but certainly not the fall of all the IBs) and good businesses led by talented leaders and managers make a success of things regardless of the twists and turns in the road along the way.
you have a very low cost operating model. I spoke my piece on that in my
capital efficiency post a few days ago.
http://www.avc.com/a_vc/2008/10/capital-efficie...
As for valuations, this also cuts both ways. Lower valuations could lead to smaller exits so everyone has to be careful.
I only have one time when I got this kind of advice from my board, and I ignored it, and made them all rich. Ultimately you're in an advisory role as a board member and investor, but far too often the advisors grab the steering wheel and try to run the show with terrible results.
You don't know what's coming any more than an individual entrepreneur does.
Personally, I think it's bad advice. Zig when everyone else is zagging. Just like you're buying up cheap shares of stock in the stock market, I'd be thinking how to aggressively go after markets now that the competition is freaking out.
In fact I wouldn't be so sure Sequoia isn't bluffing! Something to think about Fred...
That has an immediate impact on the strategy of all early-stage startups. You can't plan on a runway of 9 months anymore. Or one year. 18 months? Time to adapt the strategy and conserve cash if you were planning on raising additional rounds of funding.
That in itself is important advice. Of course, do the best with the cash you have, that has not changed. But don't count on the "easy way out", more cash through additional rounds.
I don't question the motives of anyone in the vc business or the startup business as a whole
I think the best way to zig while others are zagging is to leverage capital efficiency to your advantage. Be 'too small to fail'. The things that betaworks is doing come to mind when I think of that idea
that's what we've been doing here after all the bank runs and crashes, and it has worked !
see, I'm alive and kicking ! :-)
I've followed your blog for a long time and consider you one of the more enlightened VCs out there. But I have to call bullshit on you on this one. You are one of the key cheerleaders for the "freemium" model; ie., go create something, give it away for free and try to figure out if there's a pony in there. This model has fuelled thousands of start-ups who received funding without having to go through the rigor of developing a revenue or business plan. It was basically a free pass to start a company with no real risk or responsibility. This model is unsustainable and creates a situation where companies lie Seesmic now realize they have no business model whatsoever so their only choice is to reduce expenses. Making the string longer is a good advice but without a revenue or business model and no additional capital in store for these "feature" based start-ups, these companies will eventually reach the end of the string.
It is on this fanboy freemium model that I call bullshit.
Its like the shareware and open source business models
Go back and read my posts on freemium and you'll see what I mean
Frankly, if VCs are willing to hand over $20mil Series A to a startup who spends all their money on Aeron's, party supplies, and a business plan without a sane financial model and profitability plan, then this last minute guidance won't protect them.
Perhaps I'm just not clued in enough to know what's really going on, but this is what much of the world sees.
Just because a company isn't executing a business model right now doesn't mean it doesn't have one ready to go once it has obtained critical mass
And most of the 20mm rounds are not srs a these days, they are srs b or even more likely srs c
This is not 2000 all over again. Most companies are acting quite responsibly with their spending
If ReadWriteWeb's Bernard Lunn and others had been expecting the dramatic events of the last few weeks, then they shouldn't have spent their time writing blog posts but instead investing in S&P shorts.
http://www.youtube.com/watch?v=FiVvA9YQpiI
"Meltdown Expected"
seriously, that rocks!
http://online.barrons.com/article/SB12236785379...
I do know some people who sold all their liquid assets earlier this year and went to T Bills, fundamentally because of the amount of consumer debt.
Our assessments here in the heat of the moment are going to look rather melodramatic and certainly wrong with the benefit of just a few quarters of hindsight.
For a different take on what may or may not happen, its worth reading this article:
http://www.nytimes.com/2008/10/10/opinion/10mul...
A good quote from the opinion piece:
"It’s important to keep in mind, too, that the financial sector has had a long history of fluctuating without any correlated fluctuations in the rest of the economy. The stock market crashed in 1987 — in 1929 proportions — but there was no decade-long Depression that followed. Economic research has repeatedly demonstrated that financial-sector gyrations like these are hardly connected to non-financial sector performance. Studies have shown that economic growth cannot be forecast by the expected rates of return on government bonds, stocks or savings deposits."
There's definitely going to be an impact on the real economy over the next few months. It's going to be a brutal Christmas selling season.
I think you meant something else. Your statement is preposterous. Of course there is both correlation and causation. Obviously there are other factors at work on the indexes as well - is that what you meant?
Robert
I was not saying an alarm call is a bad idea. But if your hotel calls you at 9.15 and your meeting is at 9, you would be pissed. To those who say "nobody saw this coming", nobody (well, almost nobody, I certainly did not) saw the market meltdown. But loads of people saw a serious, deep, long consumer recession based on massive consumer debt and an economy where 75% of GDP was based on consumer. I rang many alarm bells on that - so did many others.
I am not suggesting shooting the messenger, just that the messenger could have got there a bit earlier!
I assume that many VC rang those alarms quietly in one to one exchanges with entrepreneurs. (I am not sure that is true, but I assume it is, love to hear from people who received/did not receive this advice).
This meltdown comes from the financial services industry. As per The Economist, the financial services industry went from 10% of GD in the early 1980s to nearly 40% at the height of this boom. That is too big a toll booth for the economy. Nothing will be the same when the dust settles. I am assuming that nothing will be the same for VC either and that some fundamental new models of financing innovation will arise.
And I am sure the debate on that will happen on this blog and that USV will be ahead of the pack.
It was you who inspired my post as I said here
http://fredwilson.vc/post/54089247/inspiration-...
c
You and others are simply trying to provide what you feel is some practical advice about surviving through tough times and you get crap for it? I don't get it. I founded a company that survived the 2000/2001 bubbleburst and it taught me this: if it feels bad, it's probably worse.
Many of your readers seem to be optimistic, failure-is-not-an-option type entrepreneurs that have not had the chance to learn these lessons yet. Hopefully they will learn something in spite of all the arrows flying.
1) A little capital (Seed/Angel)
2) Some hand-on-mentoring mentoring from a seasoned team, with resource sharing (office space, internal/external IT, HR/Admin personnel)
3) Get to v.1 or proof-of-concept
4) Attract a little more capital (Series A)
5) Build Sales/Marketing (if need be)
6) Apply spit-and-polish on product to make it release class (please no more endless "beta" monikers!)
7) Try to get traction in marketplace, whatever that metric might be (eyeballs, paid subscriptions, or sales to enterprise)
8) Attract even more capital (Series B)
9) Accelerate sales/marketing
I think there will be still be plent of investors willing to keep the ball rolling around, but I think VC's will have to take a "small-investment/medium sized exit" (say high 7 or low 8 figures). I know that doesn't mesh with the "moving the needle" approach, so people will have to adapt.
All this means is working with smaller numbers, that's all.
I'm still not giving up.
But it seems like being a voice in the wilderness when compared to people like Robert Scoble. I know for myself I won't stop trying at least.
Steven it's not "doom and gloom" to simply suggest the obvious - the party is over and folks should expect to work harder, spend less, and stop living so large on paper wealth that, like Elvis, has left the building(s).
great stuff and please do keep it up
Given that average VC returns (Fred excluded) have gone from poor to what may become catastrophic, I hardly think it's fair to say VCs fanned all that many flames. On average the VC startup economy appears to benefit startups far more than investors. Perception is the opposite simply because people do not review the failures - only the giant successes.
People are looking hard for scapegoats and unless you watch FOX (where the scapegoats are the poor crack addled inner city folks who FOX suggests were buying 2 homes each), expect the more successful capitalists to be under fire for some time. Some with justification, others not so much.
High net worth investors have traditionally invested in risky investments through Hedge Funds, and now are pulling their funds rapidly in a flight to (perceived) safety. It seems to make a lot of sense to switch that risk adverse investing primarily into new ideas, and start-ups, This will help the economy, the culture, and serve investors. Yes there will be loss. But there is always loss associated with risk.
In a recent David Faber piece on CNBC, he said in 1985 there were 13 billionaires in the US; there are now 1,000. There are 125 thousand households in the US with a net worth of 25-50 million dollars. Many of these people just pulled their funds out of the market. If even a small percentage invested in new ideas, we could do a lot to turn things around.
http://www.santaletterz.com/
These guys are what 31-ish?
Oh, and I'm looking forward to learning from your discussion [thanks, once again]:
http://www.techcrunch.com/2008/10/11/profit-max...
So who was fanning the flames of the bubble, then? Can you give us names?
I can.
Here's a little quiz: who said this about the valuation of a multibillion "freemium" company?
"The breadth for any acquirer to be able to access that subscriber base is tremendously valuable. And then you also have at play the overall VoIP space, which is a real opportunity to disintermediate the telephone company. If you think about that type of market opportunity as an acquirer, that also plays into what you are willing to pay because of the tremendous upside potential."
Here's, however, the scariest part: The person who fell for this bullshit was "nominated" last week as the next Treasury Secretary. God bless us all if these people are put in control of America's money!
Which candidate will help VCs most: Obama or McCain?
Which candidate will help entrepreneurs most: Obama or McCain?
Scott from http://www.VentureDig.com
good for our country is ultimately good for entrepreneurs
and yes, Skype was a big time overpay
but i don't think YouTube was
The quote is from Jennifer Fonstad, a Managing Director at DFJ (old nemesis of mine), who were investors in Skype.
What not many people know is that Fonstad was a fundraiser and vice-chair of "women for Romney". The chairperson of "Women for Romney"? Meg Whitman.
If that does not spell all that is wrong with America, I don't know what does. A CEO overpays ridiculously for a startup backed by a fellow Republican activist, while the latter provides cover in the press. Then shareholders are stuck with billion-dollar write-offs, while the CEO is groomed as the next Treasury Secretary... Cronyism, enmeshment of politics and business, disregard for fiduciary duties...
I guess, as they say, "One's garbage is another's Treasur(y)..."
Dave Winer is right, by the way, the VCs were stupidly on the sidelines in the last downturn.
we coinvest with many of them; spark, first round, OATV, betaworks, etc, etc
And most of this group is doing things a bit differently.
There are new firms who are doing it differently all over the country
you seem to know a lot and maybe you can answer this for me: why are the institutional LPs so enamored with old funds, even if they have consistently been awful? This is terrible, I have seen minutes from some of the state pension systems. The fund managers come in and mumble some garbage about "lessons learned" and "new exciting dealflow" and boom! here's another 40-50 mil for your next fund. It's like performance does not matter at all for these people...
1. Institutional LPs are conservative. They are not paid to take big risks. A big win is great, but they don't share in the upside. A big lose or two and they lose their job. That is a recipe for playing it safe. So new funds have to get cash from entrepreneurs, not institutions.
2. Entrepreneurs flock to the big brand name VCs. Stop it guys! It used to matter a lot more than it does now. In olden days, when the play was getting Fortune 500 to open up their budgets, the Big Brand VC's rolodex and brand were 100% critical. In the days of "click here to try and buy", this is irrelevant.
3. Like soldiers, Great Old VC Funds don't die, they just fade away. It takes years to wind down portfolios. The new GPs want to raise new funds and even if they are a shadow of the guys who built the Fund in its glory days....go back to point # 1.
4. It takes a long, long time for bad results to show up. In a software company you can track results quarterly. In a Fund, accurately seeing progress is tough till the Fund is nearly at end of lifecycle
I have a somewhat more cynical view and it has to do with human nature. If you are a pension fund manager and have an established relationship with certain people - people who always suck up to you, people who wine you and dine you at their annual meetings, and in some cases people who are friends or close associates - there is a level of discomfort in having to say "no" to them. The sad reality is that the financial management class is too intertwined and incestuous to be productive. I have seen a case in Oregon where the VC had invested in a startup run by one of the board members of the pension fund. The VC fund is a perennial loser, yet when they asked for $40mil they got $50mil... This is not capitalism, where the owners can exercise active control over their assets. You have millions and millions of "owners" who only get a monthly or a quarterly statement that they hardly understand; their interest is supposed to be looked after by these fiduciaries that are members of the same "management class" that has wrecked America.
Once all the dusts settles with this financial shake-up you will see that the biggest losers will be the pension funds and retirement savings of an entire generation of Americans. Of course, it's not only the private equity that is the problem, but the system just does not work.
This has to be a major priority for Obama, since ultimately all these retirees will flock back to the government system, after their pension/retirement assets have been robbed. How do you get capitalism to work in a system with such widely distributed ownership of assets?
on results
Most of the people who allocate pension funds to private equity, hedge
funds, and venture capital are paid a salary and possibly a small bonus
They do not share in the upside of the investments they make
That's why stupid stuff happens
http://www.businessweek.com/technology/content/...
] last week
³all of this may come to pass, but it will take a while. venture capital has
a very long lag time because the funds we raise are ten year funds and
partners have to stick around and manage them. that's why Vinod still
carries a KP business card. nothing happens fast in the world of venture
capital. that's both good and bad.²
Is it about wanting to be noticed (maybe later on) for sounding the beacon? It just doesn't make sense.
Moritz was saying to be cautious back in the summer of 2007
I could go find numerous posts on this blog over the past 18 months that
said the same
The idea that VCs were saying ³step on the gas² last week and then ³hit the
brakes² this week is just plain wrong
You are a good writer, but isn't the term "darwinian capitalism" redundant? Apologies if someone else already aseked the question among the 70+ comments...
I am not sure everyone realizes that
You and others are simply trying to provide what you feel is some practical advice about surviving through tough times and you get crap for it? I don't get it. I founded a company that survived the 2000/2001 bubbleburst and it taught me this: if it feels bad, it's probably worse.
Many of your readers seem to be optimistic, failure-is-not-an-option type entrepreneurs that have not had the chance to learn these lessons yet. Hopefully they will learn something in spite of all the arrows flying.