As with much “leaked” information, the recently released Sequoia Memo addresses plenty of valuable insights for startups. And others venture capital firms, such as Y Combinator and LightSpeed, have chimed with their opinions and insights.
However, unlike R.I.P Good Times during the 2008 Recession and The Black Swan of 2020 memo during the pandemic, Adapting to Endure has a more proactive tone. Several Founder Shield leaders put their heads together to curate a handful of key takeaways from the memo — but enough about us, let’s talk about confronting reality and the concept of adapting.
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 short, profitable businesses will likely dart ahead, while those stuck in traditional scaling mode will putt-putt along more slowly or stall entirely. Later-stage companies may have the highest likelihood of continued growth, public listing, and the ability to raise additional capital.
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.”
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.
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.
Understanding the details of what coverage your company needs can be confusing. Founder Shield specializes in knowing the risks your industry faces to make sure you have adequate protection. Feel free to reach out to us, and we’ll walk you through the process of finding the right policy for you.