5 Key Takeaways from the Sequoia Memo — Y Combinator & LightSpeed Chime In

Shifting Perceptions

Sequoia first introduced the Adapting to Endure memo on May 16, 2022, as a presentation to help its founders navigate the current market conditions. It’s no surprise that when Sequoia’s leaders chime in about a specific topic, many people scoot to the edge of their seats. We did, and here’s why.

Rapid Scaling Isn’t What It Used to Be

The theme throughout this memo was that the market isn’t rewarding growth at all costs like it did in years past. From where we stand, the overarching message is more like “worker smarter, not harder.” The hustler idealism isn’t dying; it is changing priorities and strategies.

According to Sequoia, “Companies who move the quickest have the most runway and are most likely to avoid the death spiral.” They’re talking about prioritizing profits over growth. Remember, scaling isn’t what it used to be.

Business Must Prepare Like Never Before

Other venture capital (VC) firms, like LightSpeed and Y Combinator, are onboard with the notion of being prepared. One adage goes, “Hope for the best, but prepare for the worst.” Y Combinator encapsulated this proverb by publishing its 10 Point Survival Strategy for startup founders.

Still, preparing to navigate lean times is a tricky concept, mainly because it seems natural to panic about a looming recession, funding slowdowns, and capital limitations, not to mention cutbacks and layoffs. Companies nowadays, from early-stage to mid-market to late-stage companies with IPO stars in their eyes, face issues we haven’t dealt with in decades, if at all.

5 Key Takeaways from Sequoia, LightSpeed & Y Combinator

The Sequoia memo highlights the idea that the US economy isn’t going to recover as it did directly after the COVID-19 pandemic. Instead, businesses will face a much different recovery approach that doesn’t always involve scaling rapidly or what we consider the “traditional” path to profitability. Here are our takeaways, along with insights from LightSpeed and Y Combinator.

1. Cost Cutting

The need to cut costs will be evident as the lean times unfold. We will likely see businesses struggle to source the capital they need for growth. Another way of looking at this scenario is merely lengthening the runway for takeoff. It will probably take companies longer to “take flight” or grow their workforce numbers. But they’ll likely be profitable in the meantime.

Like the Sequoia memo advises, adequate planning and preparation will pay off in the long haul. Preparing for those scenarios is invaluable, whether it’s layoffs, cutbacks, or something else.  For example, we’ve seen our clients prepare for layoffs. In our eyes, this circumstance means reviewing the employment practices liability (EPL) and directors & officers (D&O) insurance policies.

2. Continued Growth

We understand that not all companies are created equal. One industry can also be vastly different from another. As a result, we expect the Sequoia memo advice to fall more lightly on the ears of later-stage company leaders.

In brief, the most successful businesses, backed by the best venture capital firms for startups, are poised to surge ahead, leaving behind those mired in the conventional scaling approach, which tends to result in slower progress or even a complete standstill. It’s worth noting that established companies in later stages not only have the highest probability of sustained expansion but also an increased chance of going public and securing additional capital for their growth.

3. Freezes to Opportunity

LightSpeed said it well, “The boom times of the last decade are unambiguously over.” They even compared current graphs to past corrections, such as the 2008-2009 financial crisis, the 2000-2002 dot-com bubble burst, and 1987’s Black Monday crash. The similarities were eerie, sure — but the VC firm had an artful way of approaching the changing talent war.

“Today’s downturn not only affords CEOs the ability to hit the reset button on accelerating compensation; it also allows them to reduce the pace of hiring, focus more on quality, and gain access to people who weren’t necessarily ‘recruitable’ before. Where necessary, CEOs can rationalize headcount and refocus their company’s culture around performance.”

4. Momentum

LightSpeed and Y Combinator are married to the idea that cutting non-essential activities is vital, mainly because companies should not expect the opportunity to raise capital in the next 24 months. As a result, staying alive is quickly becoming the new momentum during these capital stalls.

Reimagining momentum as merely keeping your head above water might be a jagged pill to swallow. We all want to move forward in our unique way, after all. Few of us want to tread water — but according to the VC firms, we must reset our mindset to view momentum differently. On that note, LightSpeed passionately highlights the importance of optimism during these tough times.

One way to help ease this particular discomfort is to focus on a more well-defined market fit. It’s time to really sink your teeth in and stay put while we wait out the temporary pause on funding rounds.

5. Adaptability

Lastly, adaptability is critical.

As the Sequoia Adapting to Endure memo highlighted, we must continue focussing on adapting to new norms, times, standards, etc. Without that flexibility, businesses will likely waste their energy and resources on the wrong things. This unique balance is so vital that many companies will be toast without it.

As billionaire and philanthropist Shiv Nadar said, “Adaptability and constant innovation is key to the survival of any company operating in a competitive market.” We would add that adaptability is also key to surviving in tough economic times — but you are not alone.

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