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Venture capital giant Sequoia warns on economic downturn

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Yahoo Finance Live anchors discuss venture capital giant Sequoia’s warning on the economic downturn that recovery tools have been exhausted.

Video Transcript

BRIAN CHEUNG: And VC giant Sequoia Capital saying it expects no quick recovery from the current market downturn. This from a new presentation to investors. That's according to the information. Sequoia saying that the typical tools and measures used to recover from a recovery have been exhausted. It has a dire warning for the tech sector favoring companies able to generate cash today. And Akiko, we were-- I mean, Doug mentioned this just now, some of these young stage VC-funded firms, as the shift goes now to prioritizing free cash flow, it's looking a little rough for them.

AKIKO FUJITA: Yeah, and there's a few markers that were mentioned at this 52-page presentation, which, by the way, was shared with the portfolio companies.

BRIAN CHEUNG: And there's too many slides.

AKIKO FUJITA: There's a lot of slides in there. But looking at what happened in 2000 after the dot com bubble burst, you know, what happened in 2008, what happened in 2020, and then now what's happening now, there's a few things that stood out to me on this one. I mean, number one, they called it a crucible moment. Sure, it's a little dramatic.

But a lot of these startup companies, as we've been saying, these high growth names, are starting to look at the writing on the wall. And it's not just about the public companies, obviously, those that have already announced some layoffs after growing for so quickly. The headline here, rates are rising-- well, we were talking about this earlier. Money is no longer free. I mean, it's--

BRIAN CHEUNG: It's never been free.

AKIKO FUJITA: It's never been free, but obviously, the low rate environment allows for--

BRIAN CHEUNG: It was easier.

AKIKO FUJITA: --funding-- the money to be flowing in. And then the point being here that the recovery is not going to be overnight. This is going to be a longer recovery. And so, essentially, Sequoia telling its companies, look, it's time to strap in and reframe your outlook.

BRIAN CHEUNG: Yeah, which, as a reminder, this is significant because Sequoia is a giant in the world, in the world of venture capital. But an interesting quote that they had in the slides, quote, "don't view cuts they're referring to as a negative, but as a way to conserve cash and run faster."

And again, this is thematic not just, though, to early stage companies, but to any growth company, like Facebook or a Facebook Meta or Netflix or Snapchat, which we were talking about yesterday. The priority for investors is no longer, hey, how many daily active users do you have? Because that's supposed to be a foundation for future growth over the next five or six years. They don't care about the number of users right now.

AKIKO FUJITA: No more growth at all costs.

BRIAN CHEUNG: No more-- exactly. Now, it's all about, how do you monetize the base that you have right now and get the ad dollars coming in if you're a tech company, or if you're a growth company making sure that you can continue to keep the lights on, on a daily basis? That is going to be the focus of the industry for the next, let's say, 18 months or so.

AKIKO FUJITA: Well, and the thing we've been hearing over and over is profitability will be rewarded. We heard that from Uber when they talked about having to frame things differently, because shareholders are looking for profitability. That is the focus. And to your point, it's no longer about those growth numbers. It's, how much cash do you have on hand?

BRIAN CHEUNG: Yeah, I mean, who knew? Apparently, investors want companies to make money. That's what it turns out to--