Source: Business News
Recently, major media outlets in China and the United States have been discussing topics such as the US recession. A previous Bloomberg survey showed that most investors expect the US economy to fall into recession before the end of 2024. When a crisis occurs, how do we respond?
Share the "Adapting to Endure" report jointly released by several partners of Sequoia Capital in May last year, in an environment full of uncertainty and spreading panic, which warned and provided suggestions on the current highly-watched global economic situation.
The following is the main text:
Last May, Sequoia Capital America warned at an internal sharing session that a critical moment had arrived:
The biggest change over the past period of time is that “capital” has gone from being free to being expensive. The best performing asset has become the worst performing asset.
Simply put, the world is re-evaluating what kind of business model is valuable when capital becomes expensive.
When severe tests come, learning to pause and think is the most important thing. Only those who are best at responding to changes will survive.
Growth at any cost will no longer be recognized, and the era of being rewarded for growth at any cost is over. This recovery will not be a V-shaped reversal, but a long-term repair process.
The following is a summary of the key points of the sharing session:
Sequoia Capital, the venture capital firm behind Google, Apple and Airbnb, has earned a reputation as the tech industry’s “Cassandra” for the presentations and memos it shared with its portfolio companies during the economic crisis.
In a 52-slide deck titled “Adapting to Endure,” Sequoia listed current volatile financial markets, inflation and geopolitical conflicts as key factors of uncertainty and change. Sequoia told founders not to expect the economy to rebound as quickly as it did after the pandemic began because “monetary and fiscal tools to drive economic recovery have been exhausted.”
At the same time, Sequoia also advises founders to take quick action to extend the runway and comprehensively check whether the business has excess costs. "Don't view 'cutting valuations' as a negative factor. It's a way to save cash and grow quickly, which can help you run further."
There will be no “V-shaped recovery” this time
Although the U.S. economy declined in March 2020 due to the epidemic, it rebounded quickly afterwards, which economists called a V-shaped recovery. Sequoia believes that this will not happen again. The report pointed out that monetary and fiscal policies have been exhausted, and persistent inflation and geopolitical conflicts have further limited the ability to solve problems at the macro level.
In response to the pandemic, governments around the world have responded with fiscal and monetary stimulus to fill the huge gap created by the pandemic. This has helped prevent an extremely severe recession, but it has also had serious consequences. This "flooding" is reflected in asset prices, especially in stocks of remote working and e-commerce companies that fit the pandemic theme.
Federal Reserve balance sheet, Figure: Sequoia
The market downturn will have an impact on consumer behavior, the labor market, supply chains, etc. This crisis will be a longer cycle, and although the duration cannot be predicted, we still need to be prepared. The two core tasks of the Federal Reserve are to maximize employment and control price stability, but it seems that they have not done a good job. Not only Sequoia has a premonition of the crisis, but the well-known venture capital Light Speed also mentioned in a blog post that "the prosperity of the past decade is undoubtedly over."
Who will survive?
1. So who can survive in this situation?
The answer is survival of the fittest:
In the end it is not the strongest species that survives, nor the most intelligent, but the one that is best at responding to change.
Just like companies A and B in the figure above, company B, which responded the fastest, has more cash flow and is more likely to avoid a death spiral.
So we recommend that you calculate various ways to save costs, such as shutting down some projects, stopping R&D, reducing marketing expenses, or other things. This doesn’t mean you have to act immediately, but you have to know that if you need it within the next 30 days, you are prepared.
We saw in 2008 that all the companies that cut costs ended up doing better.
Rather than viewing cutting back on spending as a negative, view it as a way to save cash and run faster.
Additionally, think about the relationship between the decision you plan to make and the decision you wish you had made.
When you only have six months of cash flow left, it's going to be very difficult to focus and make decisions, so start thinking now, regardless of how much money you have left.
Rainy days are more suitable for overtaking
Crisis = danger + opportunity. F1 driver Alton Senna once said: You can't exceed 15 cars on a good day, but you can on a rainy day. For startups, recruiting becomes easier during a recession and there will be fewer competitors.
Therefore, crisis is also an opportunity. You can also regard the present as a once-in-a-lifetime opportunity. If you survive, you will become stronger.
So what kind of person can not only survive but also win?
It’s the founders who face reality, respond quickly, have discipline and principles, and not regret.
Moreover, recruiting will become easier in the future, and there will be fewer large companies competing with you.
So, treat this moment as a once-in-a-lifetime opportunity, play the cards you are dealt, and you will emerge stronger in the end.
In such a critical moment, how can we become stronger? Opportunities only come to those who are prepared.
Founders need to face reality, overcome fear, and make timely adjustments. Just as slow-growing but profitable companies now have financial flexibility to pull back from cash-burning companies and change the status of growth stocks and value stocks, crises are usually the turning point of everything.
Great companies in history were born in crises, such as Amazon and Google after the Internet bubble in 2001, Twitter, Uber, Airbnb and Okta after the financial crisis in 2008. Sequoia believes that the best and most determined startups will quickly capture the market against the trend in the next few years.
How to prepare?
We're going to present a framework that has been used in some of the most difficult crisis moments before and has been refined over the years.
1. First, you must be mentally prepared.
① Face reality: This first step is the most difficult.
Every collapse begins with the founder not really facing the harshest reality; as a founder, as a CEO, you have to face reality; there may only be so much your team or directors can do to help.
② Face your fear.
Now that you have faced your reality, you must prevent yourself from falling into a negative cycle.
You have to break out of this vicious cycle of negative emotions before you can truly know how to get ourselves out of trouble.
③ Have the courage to overcome fear.
Courage is a choice, so choose to have courage.
Whatever we face today will not be worse than the uncertainty we faced at the beginning of the COVID-19 pandemic. We will overcome.
④ From crisis to opportunity.
The word "crisis" written in Chinese consists of two characters. One represents danger and the other represents opportunity. The word is separated into danger + opportunity point of change. President John F. Kennedy used it before to refer to danger + opportunity, making it a very popular word.
In fact, when there is a crisis, the opportunity for change is more interesting. With the opportunity for change, the strong can become weak, and the weak can become strong.
Growth stocks, once the most coveted, are being sold off, while value stocks are being coveted. Slower-growing but still profitable companies now have the financial flexibility to pull back from cash-burning companies.
This turning point will be a new opportunity if you see the opportunity clearly and are prepared to seize the moment.
2. Second, prepare your team.
① Start with “why” and reiterate your mission, vision/values
This is very important for the loyal believers you hire.
② Demonstrate your leadership
Understand your audience: customers, employees, investors, etc. They all need to be reminded why they bought into your vision for the future in the first place. They all look to you for direction and they all expect you to take decisive action.
③ Finally, keep your team aligned and ask for their commitment and contribution, or… politely ask them to leave and lighten the lifeboat.
3. Prepare your company.
Capital is tightening its purse strings and paying more attention to the profitability of enterprises
When liquidity is plentiful, the best-performing companies are capital-consuming, such as technology and some new IPO companies. But now the market is re-evaluating what kind of business model is valuable when wallets are tight. As liquidity tightens, these companies have become the worst-performing companies. Among all software, Internet and financial companies, 61% of the companies are currently valued below their pre-pandemic prices in 2020. This is equivalent to the market completely ignoring the development of these companies in the past two years, even though most of these companies have doubled their revenue and profits in these two years.
Sequoia believes that the main ways to help startups survive the cold winter include:
Reorganize the team: reaffirm the company's mission, vision, and values, and retain valuable employees
Focus on cash flow: Keep an eye on the tank
Increase profits: expand profit channels, improve economic models, and lay off employees.
Financing or debt financing: even if the cost is high
Focus on investing in key businesses: Stay away from undisciplined and unprincipled market pursuits, such as Airbnb cutting off most of its products but increasing investment in key hosting and long-term accommodation businesses.
Innovative thinking: Focus on solving problems with better solutions rather than investing money in problems. Change is the only option when facing problems.
This is a turbulent era
Cisco after the financial crisis in 1987, Google and PayPal (an American online payment service provider) after the bursting of the Internet bubble in 2000, Airbnb (an American vacation home rental company) during the financial crisis in 2008, and Doordash (an American food delivery company founded by three Chinese Americans) during the COVID-19 pandemic in 2020.
But we also believe that victory in the coming years will depend on whether businesses can decisively make those hard choices to meet the potentially uncomfortable challenges brought about by the unfettered capital expansion and distortions of the past two years.
The primary goal of this sharing is to change our mindsets.
We are in a time of uncertainty and change, and the decisions you make during this difficult time will have a significant impact on your company.
These are turbulent times and managing change is everyone's job and mission.
We are not gathered here today to share in the anxiety. Quite the opposite. We are gathered here to believe that the best, most ambitious, and most determined people will create truly extraordinary things against all odds.