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Sequoia Warns Founders of ‘Crucible Moment,’ Advises How to ‘Avoid the Death Spiral’. Sand Hill Road’s doomsayer-in-chief—Sequoia Capital—is back with a warning to its startup founders: Don’t expect a recovery from the current market downturn to happen quickly.

Over the years, Sequoia, the venture firm behind Google, Apple and Airbnb, has developed a reputation as the tech industry’s Cassandra, through memos and presentations that it shared with the leaders of its portfolio companies during past macroeconomic crises. In 2008, that took the form of a 56-slide survival guide to the Great Recession, entitled “R.I.P. Good Times.” In early 2020, as the pandemic began upending the economy, Sequoia sent its founders a grim memo entitled, “Coronavirus: The Black Swan of 2020.”

Its latest warning to its portfolio companies takes the form of a 52-slide presentation, a copy of which was viewed by The Information. Sequoia described the current combination of turbulent financial markets, inflation and geopolitical conflict as a “crucible moment” of uncertainty and change. Sequoia told founders not to expect a speedy economic bounceback akin to what followed the start of the pandemic because, it warned, the monetary and fiscal policy tools that propelled that recovery “have been exhausted.”

Today we explore.


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Today in health, it, what do market drops mean for investors in IPO's? My name is Bill Russell. I'm a former CIO for a 16 hospital system and creator of this week health. I said, have channels dedicated to keeping health it staff current and engaged. We want to thank our show sponsors who are investing in developing the next generation of health leaders.

Gordian dynamics, Quill health tau site nuance, Canaan, medical, and current health. Check them out at this week.

Alright. I have two stories here this morning. I have one from your I've expanded my feeds that are coming in that I'm reading. This one's interesting. Scoria capital Warren's founders have longer economic downturn market is in a crucible moment. And this story was interesting because it gives us an idea of the markets and where they're going. And the next one we'll talk about specifically IPOs and investments. Venture capital firms equate capital has sent out a 52 slide presentation to 250 founders.

Warning them that the current market situation presents a crucible moment for the world. They believe the geopolitical crisis in Europe, turbulent financial markets. And rising inflation are going to create a prolonged economic downturn in the presentation reviewed by the information Sequoia. Has warned founders that.

The coming recession will not see a speedy V-shaped return as quickly as the onset of the pandemic in 2020. We expect the market downturn to impact consumer behavior, labor market, supply chains, and more, it will be the longer recovery. And while we can't predict how long

we can advise you on ways to prepare and get through to the other side, the VC firm partially attributed to the slower recovery to the fact that the governments all over the world used. They're emergency fiscal and monetary policy shocks to recover from the black Swan event of COVID 19 two years ago.

Like others such as Lightspeed venture partners in Y Combinator. Who have warned startups about the upcoming difficulty Sequoia suggests immediately cutting burn rates to stock up on cash reserves. For the coming months when funding may be harder to come by. Don't view cuts as negative, but as a way to conserve cash and run faster, said the presentation companies.

Who moved the quickest have the most runway. And most likely to avoid the death spiral. However, Sequoia also suggested that there might be some silver linings, particularly when it comes to tech hiring competition. That has engulfed the startup world recently with large it firms are freezing hiring for the foreseeable future. Sequoia's presentation said recruiting is about to get easier.

All right. So we have a lot going on in the markets. How's this going to affect the health tech startups that you're either bringing in or investing in or looking at? And for that, I actually ended up at his doc.

Venture Valkyrie. Lisa Suning who's been on this week. Health with me applies. , her experience for bus and 2008 stock market correction to predict how recent market drops might affect investors and startups. And I really liked this list. She, a lot of times we'll publish these lists that I think are extremely helpful. ,

and there's there are seven of these items on the list. So let's go ahead and run through them. A venture capital downturn lags, a stock market declined by three to six months. All right. So if the stock market decline started, I let's just say about three months ago. Then in the next three months, we're going to have a venture capital downturn.

That is going to follow the stock market. Number two, the lack of healthy IPO market means private companies. Can't go public and can exit only by selling out VCs. Take advantage of this situation by making low ball offers. All right. So this is a treacherous time for IPO's for startups. , as we enter this turbulent market.

Publicly traded potential acquirers pass on deals involving companies that will dilute their earnings per share, which includes most startups. Next cash. Heavy venture funds will hoard the best deals and lead down rounds. And investing at lower valuations damaging smaller capital poor funds that can't afford to meet term sheet requirements.

Of making ongoing investments. Next companies with less funding or less resource investors have to keep the company going to avoid downward spiral of lower valuations trading growth at all costs for cost reducing survival mode, where company fundamentals suddenly matter. , last two capital rich funds get to buy later. Stage companies had lower evaluations and finally angel investors head for the exits. When the drain is working faster than the tap.

All right. So that's what we're looking at in terms of markets. This seems to be a pretty common theme. That's coming. We have a shock to the system with COVID 19. We have inflation hitting us. Supply chain issues and other things. And those are taking its toll and now it's going to hit the health. It.

And the health tech investment. Markets. And so actions are going to look very different than they have over the last decade. , to us, if we're investors or if we're just buyers of the technology. So what's my, so what on this. I, so what is, you've been warned? The, , market gets kind of crazy during these times. If you live through, as I have, if you live through bust.

If you lived through the 2008. A recession. , things start to look very different companies start to make decisions that may not make sense that are driven by cash as opposed to growth. , which is what we have experienced over the last decade or so. ,

we've lived in a pretty healthy market for probably the last 20 years. My gosh, it's been a, it's been a long time, 2008. So 14 years we've lived in a pretty healthy market and we have seen nothing but up in the health tech sector. I think if I were buying today, I would very much want to look at how they're funding the organization, how much they have in cash reserves.

, what their growth plan is, how they plan to weather, a difficult financial market that could potentially last couple of years. And I'd really, I'd really stress the financial health of the company much more so than I would in , Previous years as I was evaluating these companies, I'd also look at the companies I've invested in and over the last five or six years.

That may be in this category. And just touch base with them on what is their plans to weather this downmarket? How they intend to fund their growth. , keep in mind that most of these companies fund through raising capital. These are going to be difficult times for raising capital and if they have to raise money at lower evaluations that begins the death spiral that everybody's talking about, that, , that leads these companies, , into the ground.

So I keep an eye on the things you invested in, in the last couple of years, keep an eye on the things that you are planning to invest in. Either invest as an investor or invest. As a company you're bringing their technology in both are critical to understand the financial health. Of the organizations that you're choosing to partner with.

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Gordian dynamics, Quill health house site nuance, Canon medical, and current health. Check them out at this week. Thanks for listening. That's all for now

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