Sequoia Capital has issued another worldwide downturn advise, cautioning its portfolio businesses’ founders not to expect a speedy recovery from current market conditions.
The venture capital firm claimed in a 51-page study that lax monetary policies around the world have led to negative interest rates in the previous two years, making financing easier for growing companies and driving up values. With interest rates rising, “money is no longer free,” according to the report, which can have significant ramifications for values and fundraising.
The fund called the downturn a “crucible moment”, one that would present “challenges and opportunities” for many of its portfolio founders.
“We foresaw some of this when we first published our Black Swan memo at the start of the Covid in early 2020. What we got wrong was the monetary and fiscal policy response that followed and the distortion field that created,” Sequoia wrote in a confidential advisory note to the founders of companies where it invested in. “Sustained inflation, and geopolitical conflicts further limit the ability for a quick-fix policy solution. As such, we do not believe that this is going to be another steep correction followed by an equally swift V-shaped recovery, like we saw at the outset of the pandemic,” the note reportedly added.
Sequoia cautions about Valuation Swings
US tech publication ‘The Information’ first reported about the Sequoia advisory on May 24.
Sequoia said the valuation swings currently seen were a reflection of uncertainty about demand, changing labour market conditions, supply chain uncertainties and war. These are factors that ultimately affect business, it said.
“We expect the market downturn to impact consumer behaviour, labour markets, supply chains and more. It will be a 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,” Sequoia added.
In 2020, the global monetary policy shifted towards increasing liquidity in the market and keeping businesses ticking during a tough time, but now in 2022, the monetary policy of the Federal Reserve in the US and the Reserve Bank Of India has shifted towards increasing interest rates.
The VC firm added that founders need to prepare themselves, their teams and their business individually to be ready to take on the challenge of growing in a lean manner.