In 2008, Sequoia Capital, the legendary Silicon Valley venture fund, gave a presentation to its portfolio companies titled “RIP: Good Times.” The infamous slide deck started with a picture of a headstone. The firm was (rightly) worried about an economic downturn and wanted its companies to prepare themselves.
In its slide deck, Sequoia pointed to a number of factors that were out of a single company or leader’s control:
- Homeownership had risen sharply, leading to home prices growing substantially above their mean. (Remember when flipping houses was a thing?)
- Assets prices were falling, credit markets were frozen, and the United States was (even more so now) in record debt to foreign countries.
- Wage growth was falling while personal savings were being depleted.
- Household debt and household financial obligations were hitting record levels simultaneously.
- Consumer confidence was at multi-decade lows.
- The S&P 500 was down 18 percent from the prior year’s estimates.
There were more headwinds, but you get the idea, and likely remember ’08-’09. It was ugly. Sequoia recommended deep cuts and implored companies to become cash flow positive as quickly as possible. What’s interesting is how obvious all of this should’ve been in retrospect. Take a look at Slide #46 from their presentation:
The first key to survival was that you must have a product. Kind of a no-brainer, right? They didn’t even say you needed to have a good product. Just a product—something to sell to customers. I’m not sure that flies today. In today’s climate, having a product, or even a good product, doesn’t feel like enough. It’d better be great. (Sorry, 99.8% of crypto startups.)
Today’s headwinds are different than they were back then, but many of the same principles that past successful companies implemented still apply. In a recent interview with Traeger Grills CEO Jeremy Andrus, we discussed how prosperous economic times make everyone look good. For example, it was clear from the beginning that Traeger’s newest, late-to-the-space competitors had inferior products. Yet they not only survived, but their market share and revenue grew. That’s over now.
“Those brands have been calling me for six months saying, ‘We're for sale,’” said Andrus. “‘We'd love to partner and merge with Traeger. And by the way, can you do it fast?’ And you know exactly where they're going; they’re not going to survive.”
One of the brands that contacted Traeger actually had a good product but could never make the commercial model work. Four months ago, Andrus spoke with the CEO and ultimately declined any deal. Then, in the same email chain with that CEO, Andrus received another email recently. According to Andrus, this one was from the company’s lender and read, "Hey, it's a different conversation now. We're selling inventory, we're liquidating their inventory."
“These entrepreneurs were made to look pretty good in tailwinds, but number one, they weren't building something that was going to last,” said Andrus. “And number two, being a wartime CEO is a totally different set of capabilities. And the reality is unless you want to hire and fire your CEO according to the economic cycle that you're in, you have to hire wartime CEOs.”
During our conversation, I asked Andrus how we get out of the economic cycle we find ourselves in. His answer made me want to run through a wall for Traeger (a company I have no affiliation with). I’ll let you read it directly from the source:
How do we get out of this? For better or worse, we don't all get out of this. This is part of the culling process of an economy, and it's the invisible hand that fixes it, that takes care of all these things. And it's the intersection between things right-sizing themselves, inflation right-sizing itself. Consumers’ cash, it's still there, but the cash has got to be spent. The consumer has got to go into debt because they always do. They're going to start buying things on credit cards. It's going to get painful. And then interest rates will come back down, businesses will start to reinvest.
These cycles are really interesting in how they take care of themselves. And then, you know what? It's survival of the fittest. And this is where, as a CEO, you have to step back, and there's some reinvention. We are seriously reinventing so many components of our business, and you don't get paid for it for a while because these things take time.
But you also have to acknowledge the cycles you're in and build a strategy against those cycles. So I'm not built to play defense; it’s just not in my DNA. But you know what? This is a moment where we're playing defense, and we're focused on liquidity, cash, and margins. It was all about growth for eight years. And then we said, our focus is going to turn to stability as we reinvent the future. And as the consumer gets stronger. Then you lean into it.
So as we think about the next three years of strategy, it goes from a very defensive posture to building a very aggressive posture. And the best brands will survive. And part of this process of brands going away is healthy because a lot of bad investments chase bad companies in really frothy times. And you know what? No one's investing in outdoor cooking for the next four or five years. No one. You just wouldn't. Investors are often lagging indicators of things that are working.
And so we're going to see attrition in this industry. We may see some cuts, some consolidation. We're not going to see new players come in. And we're going to survive because we have the best team, we have the best strategy, and we're going to execute the best. And when we come out of this, we're going to be a better company, we're going to have less competition, and we're going to figure out a way to speak to our customers with a better voice. And so these things, they really do take care of themselves. And look, you just hope to be the one that survives. I think it's natural.
And by the way, this is another thing that really gives me energy right now: I love that my competitors aren't going to survive. I know some of them are not going to make it. Weber, who's multiple times our size, has a billion and a half dollars of debt, they just raised emergency capital, and they're saying they've got to go private to restructure. I love that. No disrespect. Great business, great product.
But you know what? They'll survive because they're the biggest, but when they survive, they're going to come limping out of this thing, and we're going to come out swinging. I look at some of my other competitors, and we just hear bits and pieces through the grapevine. And if they survive, they're going to be wounded. And our goal is, it's like this cliche, this is where you capture share. And you don't get paid for it in the moment, but it's where you start to position yourself. So I think it's healthy. I hope we're one of the survivors. I think we will be, I feel pretty good about it.
But we have some real structural challenges in the economy. And for decades, we've just become drunk on low-interest rates and borrowing. And that's not sustainable. And so you can't fix decades-old problems quickly. The Fed is committed to breaking the consumer. They have to. And so we think about that in our strategy.
It's going to take time. And it may not be as deep as the Great Recession of '08, '09, et cetera, but I think it could be longer. I think we're going to see interest rates hit really meaningful highs, and I think they're going to stay there for a while. This is going to have to work its way out.
You should watch/listen to my full interview with Jeremy Andrus. It’s well worth your time, especially for leaders who are trying to navigate the current environment.
The good-but-not-great investors will also struggle. Sequoia’s 2008 slide deck quoted a Fortune article by Michael V. Copeland that read, “If you’re a second or third-tier venture firm trying to raise another fund, forget about it.” The modern version of that article was recently written by The Information founder Jessica Lessin that reads, in part:
The game of the last five years—at least—is over. And no one really knows how to play the next one. For years, venture capitalists focused on backing companies they believed would be marked up by late-stage private investors like Tiger Global Management. “Picking winners” meant picking companies that could raise a big growth round at a higher valuation. But those growth investors have retreated and a new strategy is needed. Every venture capitalist I talk to has a different view on what will emerge. Will investors go back to basics and back proven founders? Will they go far afield and look for investments in newer, riskier growth areas? I’m not sure investors at the same firms are even on the same page. This is all getting sorted out now.
Just as many companies won’t make it through this downturn, we’ll see quite a few investors exit stage right if they continue to execute the same strategy. And that’s what might happen to some of the good ones. The great ones know what to do and have been preparing for this for a while. As for the “second or third-tier” investors, using Michael V. Copeland’s verbiage, it’s unclear how they can compete in this environment—let alone survive. I can’t imagine there are a lot of limited partners left who want to take a chance on inexperienced or out-of-their-depth venture firms.
Longtime investor (one of the great ones) Bryce Roberts, recently tweeted, “New game, new rules, new markets, new models. New playbook(s) and entire new startup ecosystems are begging to be built on the back of this bubble.” No question he believes Indie.VC is one of those new models. An update was recently sent on a potential relaunch of Indie. Something to keep your eyes on.
Long before Sequoia Capital, the great Merle Haggard wondered if we’d seen the last of good times. He sang, “Is the best of the free life behind us now? Are the good times really over for good?" It wasn’t over then, and it’s not over now. Some of history’s greatest companies, entrepreneurs, and investors will come of age over the next few years. Like my dad used to say each morning, way too early, “Time to get up. You’ve got work to do.”
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