How Not to Death Spiral in an Economic Downturn

Recently, Sequoia Capitalthe venture firm with notable early-stage investments in Google, Apple, Airbnb, Cisco, DoorDash, Stripe, and others—issued a dire warning to its startup founders: Don’t expect a recovery to happen quickly. 

And Sequoia isn’t the only one sounding the alarm. Amazon founder Jeff Bezos is warning people to “batten down the hatches” as inflation remains stubborn.

Sequoia’s warning comes in the form of a 52-page slide presentation, which you can read for yourself right here. But to give you the bottom line, Sequoia does not believe that the abrupt shift the startup world is currently experiencing will be followed by an “equally swift V-shaped recovery,” as was the case with the recent pandemic recovery. In fact:

Sequoia is referring to our current situation as a “crucible moment.”  

In essence, the message is to buckle up and create a plan to come out strong. In fact, the slide deck clearly states, “This is not a time to panic. It is a time to pause and reassess.

The entire slide deck is a worthwhile read for any business leader, but here are a few snippets from Sequoia I’d like to call your attention to:

  • …rates are rising, money is no longer free, and that has massive implications for valuations and fundraising.
  • More important than the moment in time inflation is the increasing long-term expectations for inflation as expressed by the bond market – where 5-year forward inflation expectations are at the highest levels in decades.
  • Given every dollar is more precious than it was, how are you going to change your priorities?
  • We are just beginning to see how the increasing cost of money flows through to impact the real economy. To give just one example in the housing sector. In the last 6 months, due to the changing cost of money, a new mortgage is 67% more expensive for the same house – the largest percentage shock in 50 years.
  • The market is now pricing in lower values for many stocks than in March 2020 at a time of peak uncertainty.
  • Medium to long-term: durable growth is always the path.
  • …what works in any market, is consistent growth and disciplined financial management that translates into improving margins.
  • Recovery will be long.
  • As Darwin said, “It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.”
  • Companies that move the quickest and have the most runway are most likely to avoid the death spiral.
  • Do the cut exercise (projects, R&D, marketing, other expenses). It doesn’t mean you have to pull the trigger, but that you are ready to do it in the next 30 days if needed.
  • Don’t view cut as a negative, but as a way to conserve cash and run faster.
  • Recruiting is about to get easier. All the FANG have hiring freezes.
  • Look at this as a time of incredible opportunity. You play your cards right and you will come out as a strong entity. The founders / CEOs who face reality, adapt fast, have discipline rather than regret.
  • Wishful thinking is a waste of time. Don’t sit around talking about ‘the good ole days’ with hope they’ll return.
  • Strategies for Uncertain Times…
    • Simplicity scales, complexity doesn’t.
    • Speed – one of the greatest business strategies.
    • Double down on your top talent.
    • Tighten up value proposition/solve real problems.

Conclusion & My Thoughts

It’s not all bad news. Sequoia ends the presentation by reminding us that any crisis is an opportunity. In fact, they say that they “believe the best, most ambitious, most determined of you will use this moment to rise to the occasion and build something truly remarkable.”  They cited several notable examples:

  • That was true for Cisco after the crash in 1987
  • Google and PayPal in 2000 after the dot-com bust 
  • Airbnb in 2008 in midst of the financial crisis
  • DoorDash in 2020 during the health pandemic

Their concluding advice was they believe that winning in the years ahead is going to depend on making hard, decisive choices – confronting uncomfortable challenges that may have been masked during the exuberance and distortions of free capital over the past two years.

My advice to any CEO, Founder, or business leader is don’t feel like you have to face these difficult decisions alone. Economic downturns impact all of us even though we may be in different industries. By belonging to a private CEO peer group you’ll learn what other high-performing business leaders are doing to position their companies for success, and you’ll get feedback on your own decisions. As a result, you and your peers will come out stronger than ever.

As CEOs, we confront critical choices – growth strategies, succession planning, employee engagement, leadership development…the list seems endless. The weight of these decisions can feel exhilarating, yet also stressful. And lonely.

Even though I started an INC. 500 company, I spent too many years trying to navigate it all solo. I’ve learned every CEO needs a community of peers who understand the unique challenges we face.

Peernacle is a private peer advisory group where leaders in southern Virginia come together and help one another to make better decisions and grow as leaders. If you’re looking for a community where you can gain insight from others who have sat in your seat, explore Peernacle group membership.