The venture capital world is something like the Vatican. It’s secretive, it controls vast wealth, few people on the outside know what really goes on, and there are usually mendicants lined up outside seeking a kind of blessing.
That’s why an internal PowerPoint presentation from the powerhouse VC firm Sequoia Capital—funders of companies like Apple, Oracle and YouTube—created such a stir when it was liberated from their servers and screeched into mailboxes all over the valley. And inevitably found its way to the website Valleywag.com.
The audience for this “deck”—as such a document is called in those precincts—was Sequoia’s portfolio companies. Meaning those in charge of the start-ups and early-stage enterprises they’ve sunk money into. The presentation reveals the firm’s blunt and ominous take on the current financial situation, and what the companies they’ve funded must do to survive.
In my line of work I’ve dealt with both venture capitalists and VC-funded firms. I’ve also dealt with many in Wall Street finance—traders, quants, investment bankers. The difference couldn’t be more stark. It’s not that venture capitalists want to get rich any less than some jerk who packages and pretties up CDOs.
It’s that the best VCs are mad-eyed in love with big concepts. So when they gamble, it’s by putting money to work in the service of ideas. On Wall Street, they gamble by putting ideas—like over-engineered derivatives—to work in the service of money.
VCs have to be optimists. They build, baby, build. They believe in the next generation of clean tech, or pharmacogenomics, or search technology. They could never bet on failure or meaningless market movement, the way Wall hedgies do when they sell short.
That’s what’s scary about the Sequoia presentation. With a mixture of gloom, doom and gallows humor that’s not in their DNA, they lay out the case for an extended period of pain.
The first thing you’ll see is an image of a tombstone with the epitaph “RIP—Good Times.” And to drive the point home, there’s a shot of a pig’s head with a knife stuck through it.
Sequoia gives us a damn good, neutral analysis of the devastation. They lay out the multiple, overlapping, and by now familiar problems—low interest rates, mountains of consumer debt, a housing bubble, a balance of payments deficit, and foreign countries owning our debt.
We’ve heard this before, but not in the context of a seismic seize-up in venture capital. Graph after graph punches us in the face: in the early ‘90s, foreign ownership of US treasuries as a percentage of total market capitalization was around 20 percent. Today it’s around 60 percent.
Gape at the chart that shows the chilling growth in derivatives, just one flavor of “structured product.” In 1995 there were less than $60 trillion in open positions on the OTC; today there are $525 trillion. It’s like looking at a print-out of your blood work after a decade of eating like Morgan Spurlock.
The analysis is clear-eyed and apolitical. The words “Republican” and “Democrat” do not even appear.
Unsurprisingly, Sequoia believes we are at the brink of a serious recession. Earnings are getting slammed, retail and e-commerce sales are “deteriorating,” high-growth mobile is not immune, tech spending is vulnerable.
The last section of the deck asks “Where do we go from here?” To the “soft-landing” crowd, who argue that this is just a cycle like others we’ve seen, Sequoia responds “It’s different this time.” That means a long recovery and living with a series of “new realities.”
Sequoia minces no words in its tough love message for managers. There’s going to be less money flowing into VCs, so hoard what you have.
Some quick history to put this in perspective. During the dot-com bubble, start-ups with no business models went public at crazy valuations. Then, in mid 2000, everything fell back into the earth’s gravitational field.
Eventually, stuff started to stir again, largely because of Google, which rendered web traffic “monetizable” through search advertising.
But Sequoia is now saying that VCs cannot continue to fund companies that don’t have a revenue model, and are distant from profitability. No more NASA-like burn rates. In a chart headlined “survival” there’s a list of business imperatives including “cash is king.”
The deck ends simply: Get Real or Go Home.
This is a profound change from the environment of just a few months ago, when companies like Twitter and Digg could raise tens of millions before earning a penny.
We expect twitchy public companies to pull in, to cut investments at the first sign of trouble. But VC is the the game-changing gang that funds the entrepreneurs who give America its competitive edge no matter how much better the math scores are in China, India and Japan. So a venture capital crash could be a far more pulverizing loss to our economy, in the long-term, than the job losses in finance.
Sequoia’s message, prepared for internal consumption, is now part of the national dialogue. Read it and worried. Be very worried.