Adapting to Endure: An Arete Coach Review of Sequoia Capital’s May 2022 Presentation
In May of 2022, Sequoia Capital released an important and timely presentation titled, “Adapting to Endure.” This presentation examines the current economic market and reviews strategies that business leaders and executive coaches can benefit from. According to Sequoia, the current market is “a Crucible Moment, one that will present challenges and opportunities” alike. This insight article examines key insights and takeaways from Sequoia Capital’s presentation that leaders and executive coaches can apply to their businesses.
The big picture
One section titled, “The Macro Environment,” covers the COVID-19 fiscal mandates, federal mandates to control inflation, and COVID-19 impacts on capital.
COVID-19 fiscal mandates
During the pandemic, “governments around the world” delivered “extraordinary fiscal and monetary stimulus to fill a massive demand hole created by the pandemic.” In light of the pandemic, treasury securities, mortgage-backed securities, and other funds were greatly inflated. These factors “helped prevent… severe recession”. However, this was not without consequences. According to Sequoia “this liquidity creation manifested itself in bottlenecks and distortions throughout the real economy, leading to supply chain challenges and price pressures as demand overwhelmed supply.” Inflation has continued and “accelerated since early 2022,” aided by the war in Ukraine. Furthermore, Sequoia indicates that “5-year forward inflation expectations are at the highest levels in decades.”
Governmental control of inflation
Since September of 2021, the Forward Rate Expectations have multiplied by 10. Sequoia shares that due to high rates of inflation and a “sub-4% unemployment” rate, the perception of the Federal Reserve was that it was “underperforming.” They share that the current trends of the Federal Reserve imply “an abrupt increase in the cost of money and tightening of economic conditions.” They also state that this implies the Federal Reserve is “planning to shrink its balance sheet—further contracting liquidity in the system.”
Current stance of capital: the warning signs
A key change of significance in the current market is that previously, “when capital was free, the best-performing companies were capital consumptive” and “as capital has gotten expensive, these have become the worst-performing companies.” With the market pivoting dramatically after COVID-19, what was once the “best-performing assets” (e.g. biotechnology) are now “the worst-performing assets.” Sequoia warns that “market indicators, including broader equity prices, high yield spreads, and the yield curve are beginning to flash warning signs of further economic deterioration… so it might not just be a question of valuations resetting.” In the current economy, the effects of increasing money costs are beginning to flow through, impacting the economy as a whole. For example, “public markets are already anticipating a severe slowdown in housing activity with homebuilders down 30% from their highs.”
The public market
Nasdaq drawdowns and reduced training
Sequoia states that “we are experiencing the 3rd largest Nasdaq drawdown in 20 years.” They state that “61% of all software, internet, and fintech companies are trading below pre-pandemic 2020 prices.” Furthermore, a third of companies “are trading below COVID-19 lows.” Many are even trading below the period of fear during March 2020. While Federal assistance allowed the market to bounce back, now that “free money” is being removed, the market is facing extreme changes.
Reevaluating growth, profitability, and cheap capital
According to Sequoia, “growth at all costs is no longer being rewarded.” They explain that with the “macro uncertainty around inflation, interest rates, and war, investors are looking for companies that can produce near-term certainty” and “de-prioritizing and paying up less for growth.” Investors are aware of, and acknowledge, the turning tides in today’s economy. As a result, they are looking for “companies with profitability” today. Instead of “growth at all costs,” Sequoia recommends investing in “durable growth with improving profitability” in the medium to the long-term range. Furthermore, Sequoia states that “unlike prior periods, sources of cheap capital are not coming to save the day.”
Questions to consider
What are the key marketplace indicators for your business?
How often do you examine the current trends in the marketplace? Should you examine these trends more often?
How does your business value growth? Are you growing too fast or too slow?
Surviving today’s marketplace
Sequoia outlines 6 main sources of pain for the current economy: the pandemic, too much stimuli, war, supply chain issues, QE drug, and inflation. In facing these challenges, Sequoia acknowledges that “recovery will be long.” But what business will survive these challenges and fluctuations in the marketplace?
Adaptability, speed, and choices
For businesses to survive the current market conditions, businesses “must be adaptable.” Sequoia points to a quote from Charles Darwin which states, “it is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.” While adaptability is important, it is also important for business leaders to move quickly. According to Sequoia, “companies who move the quickest have the most runway and are most likely to avoid the death spiral.” They recommend doing cut exercises in preparation for when cuts are necessary and state that in “2008 all companies that cut were efficient and better” off. Both adaptability and speed require good decision-making. Decision-making during times of high stress can benefit from previous planning and contemplation.
Seek the opportunities ahead
It is important to keep in mind that marketplace difficulties can be used as an opportunity. Sequoia offers a quote from Ayrton Senna, “You cannot overtake 15 cars in sunny weather… but you can when it’s raining.” So take advantage of the turbulent times and use them intentionally as springboards for new areas of growth in your business.
Questions to consider
Are you adaptable? Is your business adaptable?
What does adaptability mean to you?
Do you avoid making decisions? How has this affected your business or life?
What is your decision-making process?
When facing challenges do you see opportunities or failures?
What is your initial response to challenges?
What if business leaders saw turbulent marketplaces as not only a season to survive but a season to thrive, rise victoriously, and win? Sequoia states that companies with founders and CEOs who “face reality, adapt fast, and have discipline rather than regret” are more likely to “emerge stronger” than those businesses without such leaders. Sequoia believes that “the one who wins is the one most prepared” not the one with the most capital.
Prepare to win: mind, team, and company
Sequoia outlines three ways that business leaders can prepare their businesses for economic downturn: “prepare your mind, prepare your team, prepare your company.”
In order to prepare your mind, you must “confront your reality,” “confront your fear” to prevent “spinning into a negative cycle,” hold “courage over fear,” and view the crisis as an opportunity.
To prepare your team, business leaders are encouraged to “start with why, reaffirm your mission/values, showcase your leadership, align your team, and ask for commitment.”
To prepare your company, Sequoia recommends having a “cash & cash flow” report and claims that this report has “helped” Sequoia “through the 2008 downturn.” Secondly, they recommend examining the “financial degrees of freedom.” These degrees of freedom are listed below:
Best: earn more from customers
Good: improve your unit economics
Ok: cut excess
If necessary: raise equity or debt, even if it is expensive
Sequoia also recommends concentrating investments in the future of your business while focusing “on the most important and leveraged investments.” Lastly, they recommend having viewing constraints in light of creativity. This can be done by thinking in terms of “and” instead of “either/or.” They state that “when you recognize your constraints, you can focus more on coming up with a better solution than throwing money at the problem.”
Questions to consider
How have you prepared yourself, your mind, and your thought processes to face challenges ahead?
What is your reality?
What are you most afraid of?
What is your biggest goal in life and in business?
How do you show courage in the face of adversity?
How can you choose positivity over fear?
What is your business's “why”? How do you share that with your employees? Are your employees aware of their “why”?
How have you prepared your company for the marketplace challenges ahead? How can you better prepare them?
Lessons in leadership
There are specific strategies leaders can use to lead during times of economic downturn and challenges. Sequoia has four ideologies and several leadership principles they recommend to business leaders.
“Change is inevitable. Growth is optional.” - John C. Maxwell: Business leaders must choose to grow despite of, and through, the inevitable changes to come.
“Wishful thinking is a waste of time. Don’t sit around talking about ‘the good ole days’ with the hope they’ll return.” Business leaders must face their reality and make strategic decisions instead of wishing for the “good ole days.”
“This is the age of instability where managing change is everyone’s job. Think of it as your personal assignment”
“If the world outside your company is changing faster than the world inside your company, the end is near.” Businesses are subject to the marketplace and macro economies that they are a part of. By acknowledging this, business leaders can make better decisions and stay on pace or ahead of marketplace changes.
Sequoia outlines what they call the four C’s, “communication with conviction with confidence with calmness.” They also recommend that leaders be authentic and human and have a balance of optimism and realism. They also share several strategies that can help business leaders lead more effectively in uncertain times. They advocate for simplicity over complexity, speed, focusing on talent, seeking alignment, and tightening up value propositions or solving real problems. Lastly, they share two methods of leadership that can have an impact on leadership and teams: push and pull leadership. They explain that pulling leadership is “inspirational” and can help teams “get alignment on mission and values.” Then they explain that pushing leadership is primarily “motivational.” Sequoia recommends that business leaders combine “both motivational and inspirational” leadership strategies depending on the current moment.
Questions to consider
When you hear the word “change,” what do you immediately think or feel?
Are you primarily a motivational or inspirational leader? How can you blend these types of leadership?
How are your communication skills? Which of the 4 C’s could use improving?
Sequoia states that while the marketplace is wrought with challenges, they still believe that “the best, most ambitions, most determined” businesses “will use this moment to rise to the occasion and build something truly remarkable.” However, this success will depend on “making hard, decisive choices—confronting uncomfortable challenges.” By encouraging business leaders to examine their “crucible moment,” sequoia hopes to shift the mindset of business leaders to strategic decision making.
For an in-depth economic review of Q2 2022, we recommend tuning into Arete Coach Podcast’s Episode #1069 with Severin Sorensen.
Sequoia Capital. (2022, May). Adapting to Endure. https://content.fortune.com/wp-content/uploads/2022/05/Adapting_to_Endure_May_2022.pdf.
Sraders, A. (2022, May 25). Read Sequoia’s 52-page presentation which cautions founders of a ‘crucible moment’ and a ‘longer recovery’ ahead. Fortune. https://fortune.com/2022/05/25/sequoia-capital-slide-dek-warning-to-founders-downturn/.
Copyright © 2022 by Arete Coach LLC. All rights reserved.