Source: Shangwen

Recently, major media outlets in China and the U.S. have been heatedly discussing topics such as the U.S. recession. A previous survey by Bloomberg showed that most investors expect the U.S. economy to fall into recession by the end of 2024. When a crisis arises, how do we respond?

In May of last year, amidst an environment filled with uncertainty and panic, several partners from Sequoia Capital jointly released the report "Adapting to Endure," which sounded the alarm on the current global economic situation that has garnered much attention and provided recommendations.

Here is the main text:

In May of last year, during an internal sharing session, Sequoia Capital warned that a severe moment has arrived:

The biggest change in recent times is that "capital" has shifted from being free to becoming expensive. The assets that once performed the best have now become the worst performers.

In simple terms, the world is reassessing what types of business models are valuable when capital becomes expensive.

As we face this severe test, learning to pause and reflect is the most important thing; those who are best at responding to change will survive.

Unconditional growth will no longer be recognized; the era of achieving returns through reckless growth is over. This recovery will not be a V-shaped reversal but rather a long-term repair process.

Here are the key takeaways from the sharing session:

As the venture capital firm behind Google, Apple, and Airbnb, Sequoia Capital has earned the reputation of "Cassandra" in the tech industry (Cassandra, the Trojan princess in Greek mythology, who could foresee the future) through the presentations and memos shared with its portfolio companies during economic crises.

In a 52-page slide deck titled "Adapting to Endure," Sequoia listed the current turbulent financial markets, inflation, and geopolitical conflicts as key factors of uncertainty and change. Sequoia advised founders not to expect the economy to rebound as quickly as it did after the pandemic began, as "the monetary and fiscal tools that drive economic recovery have been exhausted."

At the same time, Sequoia suggested that founders take swift action to extend their runway and thoroughly check for any excess costs in their businesses. "Do not view 'valuation cuts' as a negative factor; it is a way to save cash and grow quickly, helping you go further."

This time there will be no "V-shaped recovery"

Although the U.S. economy experienced a downturn in March 2020 due to the pandemic, it quickly rebounded afterward, which economists referred to as a V-shaped recovery. Sequoia believes this will not happen again. The report pointed out that monetary and fiscal policies have been exhausted, and persistent inflation and geopolitical conflicts further limit the ability to address issues at the macro level.

To respond to the pandemic, governments around the world implemented fiscal and monetary stimulus measures to fill the massive gap caused by the pandemic. This helped prevent an extremely severe recession but also brought serious consequences. This "flooding" is reflected in asset prices, especially in the stocks of remote work and e-commerce companies that align with pandemic themes.

Federal Reserve balance sheet, Image: Sequoia

The market downturn will impact consumer behavior, the labor market, supply chains, and more. This crisis will be a longer cycle; while its duration cannot be predicted, preparations must be made. The two core tasks of the Federal Reserve are to maximize employment and control price stability, but it seems they are not doing well. Not only does Sequoia sense the crisis, but the well-known venture capital firm Light Speed also mentioned in a blog post that "the prosperous era of the past decade has undoubtedly come to an end."

Who can survive?

1. So in this situation, who can survive?

The answer is survival of the fittest:

Ultimately, it is not the strongest species that survive, nor the smartest, but those who are best at responding to change will survive.

As shown in the image above, Company B, which responds the fastest, has more cash flow and is more likely to avoid a death spiral.

Therefore, we suggest you calculate various cost-saving methods, such as shutting down some projects, halting R&D, reducing marketing expenses, or others. This does not mean you need to act immediately, but you should be prepared if you need to use it within the next 30 days.

We saw that companies that cut expenses in 2008 ultimately fared better.

Do not view cost-cutting as a negative thing; instead, see it as a way to save cash and run faster.

In addition, think about the decisions you plan to make and their relationship with the decisions you wish you had made earlier.

When you have only six months of cash flow left, focus and decision-making become very difficult. So no matter how much you have left, start thinking from now.

Rainy days are better for overtaking

Crisis = Danger + Opportunity. F1 driver Ayrton Senna once said: You cannot overtake 15 cars when the weather is good, but you can in rainy weather. For startups, hiring becomes easier during economic downturns, and there will be fewer competitors.

Thus, a crisis is also an opportunity. You can view the current situation as a once-in-a-lifetime opportunity; surviving will make you stronger.

So what kind of people can not only survive but also thrive?

It is those founders who face reality, respond quickly, and have discipline and principles, rather than regret.

Moreover, hiring will become easier in the near future, with fewer large companies competing with you.

So treat the current situation as a once-in-a-lifetime opportunity, play your cards right, and ultimately, you will become stronger.

In such a crisis, how can one become stronger? Opportunities are only given to those who are prepared.

Founders need to face reality, overcome fear, and make timely adjustments. Just as companies that grow slowly but remain profitable now have financial flexibility, they can pull back from cash-burning companies, and the status change between growth stocks and value stocks, crises often serve as turning points.

Great companies in history have emerged from crises, such as Amazon and Google after the internet bubble burst in 2001; Twitter, Uber, Airbnb, and Okta after the 2008 financial crisis. Sequoia believes that the best and most determined startups will rapidly capture the market against the trend in the coming years.

How to prepare?

We will provide a framework that has been used during some very challenging crisis moments and has been continuously improved over the years.

1. First, you must be mentally prepared.

① Face reality: This first step is the hardest.

Every collapse begins with founders not truly facing the harshest realities; as a founder and CEO, you must face reality; your team or board can only help so much.

② Face fear.

Now that you have faced your reality, you must prevent yourself from falling into a negative cycle.

You must break free from this negative emotional cycle to truly know how to get us out of trouble.

③ Have the courage to overcome fear.

Courage is a choice, so choose to be courageous.

No matter what we face today, it will not be worse than the uncertainty we faced when the COVID-19 pandemic began. We will overcome everything.

④ From crisis to opportunity.

The Chinese word for "crisis" consists of two characters. One represents danger, and the other represents opportunity. This word, when separated, is danger + opportunity for change. President John F. Kennedy previously referred to it as danger + opportunity, making it a very popular term.

In fact, when there is a crisis, the opportunity for change becomes more interesting. With the opportunity for change, the strong can become weak, and the weak can become strong.

The growth stocks that everyone once desired are now being sold off, while value stocks are being coveted. Companies that grow slowly but remain profitable now have financial flexibility and can pull back from cash-burning companies.

If you clearly see the opportunity and are prepared to seize the moment, then this point of change will become a new opportunity.

2. Next, prepare your team.

① Start with "why," reiterate your mission, vision, and values.

This is very important for your loyal followers whom you have hired.

② Demonstrate your leadership.

Understand your audience: customers, employees, investors, etc. They all need to be reminded why they initially joined your vision for the future. They are all looking to you for direction and expect you to take decisive action.

③ Finally, ensure your team remains cohesive, ask them to commit and contribute, or… politely ask them to leave to lighten the lifeboat.

3. Get your company ready.

Capital is tightening its pockets, focusing more on corporate profitability.

When liquidity is abundant, the best-performing companies are capital-consuming, such as tech and some new IPO companies. But now the market is reassessing what types of business models are valuable when wallets tighten. With the tightening of liquidity, these companies have become the worst performers. Among all software, internet, and financial companies, 61% currently have market values lower than their pre-pandemic prices in 2020. This is equivalent to the market completely ignoring the development of these companies over the past two years, even though most of these companies have doubled their revenue and profits during this time.

Sequoia believes that the main ways to help startups survive the winter include:

• Restructuring the team: Reiterating the company's mission, vision, and values, retaining valuable employees.

• Focusing on cash flow: Always keeping an eye on the tank.

• Increasing profitability: Broadening profit channels, improving economic models, layoffs.

• Financing or debt financing: Even if the cost is high.

• Focusing on core business investments: Staying away from market pursuits without discipline and principles, such as Airbnb cutting most of its products but increasing investment in key hosting and long-term rental businesses.

• Innovative thinking: Focusing energy on better solutions to problems rather than throwing money at problems; facing issues, change is the only option.

This is a turbulent time

Cisco after the 1987 financial crisis, Google and PayPal after the 2000 internet bubble burst, Airbnb during the 2008 financial crisis, and Doordash during the COVID-19 pandemic (founded by three Chinese Americans).

But we also believe that victories in the coming years will depend on whether companies can decisively make those tough choices to address the potentially uncomfortable challenges brought about by the free capital expansion and distortion of the past two years.

The primary goal of this sharing is to change our mindset.

We are in a moment filled with uncertainty that requires change, and your decisions during this difficult time will have a significant impact on your company.

This is a turbulent time, and managing change is everyone's job and task.

The purpose of our gathering here today is not to be anxious together. On the contrary, we believe that the best, most ambitious, and most determined individuals will create truly extraordinary businesses against the odds.