Don't Buy Sequoia's Gloom and Doom Scenario

Last Updated Oct 31, 2008 6:12 PM EDT

If you happened to check out Sequoia Capital's doomsday presentation to portfolio companies, you were probably horrified. I guess Halloween came early this year.

While Benchmark Capital's email from general partner Bill Gurley had some similar messages, it was also more balanced. The key take-away was: "Financing as we know it just got a whole lot tougher. Basically, the cost of capital is going way up." Can't argue with that.

But I am going to go out on a limb and say I don't agree with the entire gloom and doom scenario.

Of course, as the VCs counsel, businesses should look at lowering their burn rate, preserving capital, raising capital, getting to cash flow positive, and pursuing M&A opportunities. Being flexible about valuation goes without saying.

But any CEO or business leader who finds any of this to be insightful should consider a new career. This sort of advice is pretty generic, garden variety stuff.

In reality, every company is a unique situation. And I'm sure that, in a crisis like this, all good VCs are spending one-on-one time with their portfolio companies. At least you'd think so.

As for me, I've been here before. I was running a startup when the dot-com bubble burst. We couldn't raise our second round of funding and shut our doors a few months after the attacks on September 11, 2001.

What I remember most about that time is the chaos and uncertainty. Rough times, for sure. And since my empathy knows no bounds, here's some equally generic, if not contrarian, advice from the entrepreneur side of things:

  • Flat markets are essentially zero-sum games. Market turmoil can level the playing field, creating competitive opportunity. Don't make decisions in a vacuum. Look at the big market picture, the entire competitive environment, before you cut development resources and your time to market.
  • When it comes to raising capital, the toughest problem isn't getting investors to say yes, but getting them to say no. You heard me right. VCs don't like to say no. Why should they? And your time is precious. Learn how to read the signs and focus on opportunities where you have a realistic shot.
  • Your pitch must clearly answer the following: 1) what big market problem does your product or service solve, 2) how big is the market, 3) what are the competitive barriers, both for you to enter and for others to follow, 4) what's the business plan, including assumptions and time to cash flow positive, and 5) why VCs should bet on your management team.
  • In my experience, companies that should get funded, get funded. I can't point to quantitative data, and I'm not sure why, but it probably has something to do with how American capitalism and entrepreneurialism works. What does that mean to you? Get your ducks in a row and have confidence in your business strategy.
Don't get me wrong, I don't advocate fiddling while Rome burns. The message is simple: be wary of generic advice that may neutralize a competitive advantage. Don't be paralyzed by fear and doomsday scenarios. You're accountable, nobody else. Be prudent, analyze the situation, and trust the instincts and capabilities that got you here.