But This Time It’s Different

How many times over the last few years have we heard:

“But This Time It’s Different”?

We have been talking about a recession coming for years and it’s never come. This led to rounds getting done at multiples of 100x+ on revenue (not EBITDA), founders selling large chunks of stock into secondaries even though their company was far from profitable product/market fit, and investors chasing deals at sky-high valuations just to put a logo on their website. Most founders and venture investors grew up only operating in a bull market.

We’re starting to see this come to a head. The NASDAQ was down more than 27%, and public tech company valuations were no exception. Things that looked too good to be true are turning out to be too good to be true. Investors who chased the hot shiny thing as the fastest way to watch their money rise are seeing it completely fall.

I have a hunch many of the people who came throwing (or, rather, burning) money around, will disappear from venture. We are not one of them.

I’ve seen this movie before. I was a part of a high-growth start-up in 2001/02 where we had to make significant headcount reductions. I helped build another company during 2008/09 when Sequoia’s infamous warning to hunker down and cut costs immediately came out. We wound up selling that company to Apple at a great multiple – the team and tech of which became the building blocks for Apple’s search ads business. At the same time, fellow GPs Josh and Glenn were also heads-down in 2008 building the best teams, finding product-market-fit, and obsessed with building effectively and responsibly. And then Facebook became one of the biggest companies in the world. When it comes to the early stage, we have a unique understanding of what pain looks like when markets slow down and valuations reset.

Luckily, we built Oceans to make sure founders are ready for this moment. Over the past two years, we’ve told them to be smart about fundraising. We encouraged them to be prudent on valuation, make sure the investors they choose are investors who will be around during good and bad times, keep burn extremely low until signs of accelerated growth are visible, and make sure to surround themselves with people who can help you navigate the difficult times.

We’ve taken a contrarian approach when others were in founders’ ears telling them to take the highest price.

What I love about the pre-seed/seed stage is that although valuations are still on the higher side and will be the last part of the funding cycle to truly compress, we know that our companies will take 5-7 years to generate $100M+ in revenue. By that time, I will bet that the markets will be back in growth mode.

Founders, history repeats itself so do yourself a favor: make sure you have enough cash in the bank to prove that you have a business, don’t be afraid to cut burn, and have the conviction to make the most difficult of decisions that will help you ruthlessly prioritize and focus on the most critical things to prove out. Don’t just take the highest-priced term sheet – take the one that gives you optionality, support, and sets you up for long-term success. You will never regret a successful exit where you took a little more dilution early – but you will regret working your ass off for years to lose most of your company because you got swept up in the downdraft of a market that freezes.

Most importantly, make sure you are building a product that people desperately need.

Through all the noise, what I know for sure is that this time is not different. History always repeats itself. By approaching this moment with pragmatism, patience, and at times ruthlessness, some of the best companies in the world will rise up on the other side.

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