Don’t Shoot The Messenger

I’ve detected a bit of irritation, and even cynicism about the motives of Sequoia, Benchmark, Ron Conway, and others (including me perhaps) in the venture capital business who have been publicly and privately advising their portfolio companies and entrepreneurs everywhere to be cautious in light of the market meltdown and the potential for a long recession.

Kara Swisher titled her post last week "Irony Alert: Bubble-Making Venture Capitalists Start Popping Them" and started it off by saying:

Is it just me or does the sudden prospect of venture capitalists–the
very investors who fueled the Web 2.0 valuation insanity with their
typically egregious overfunding of start-ups–lecturing about the bleak economy and the need to tighten belts seem just a tad ironic?

Bernard Lunn from Read Write Web posted this comment on my blog a few days ago:

Fred, this is one of the rare times that I disagree with you. Cannot argue with Sequoia’s track record. Their advice is good. Of course companies should keep their costs as low as possible. That has been the obvious for centuries. So last week the advice was “spend like drunken sailors?”. Seriously, this kind of boom one day, gloom the next reminds me of the crazy behavior that got us into this mess. My beef is with this suddenly flurry of VC advice way late in the game of advising their portfolio companies that the economic cycle has turned bad. That was obvious a year ago. Two years ago it was probable. The VCs that I know knew that. Why the sudden flurry of advice after an obvious meltdown? Better than still being in denial I guess.
I know this is bad form, but we have been giving measured advice on the changes in the economic cycle on ReadWriteWeb for over a year now. Entrepreneurs/managers need time to execute these kind of changes, so a bit of thinking ahead of the curve is what they expect from their financial advisors.
Clever slides, great perspective, good data, good data but a year late IMHO.
Bernard

Even some other VCs are commenting on Sequoia’s presentation. Alan Patricof is quoted in The Deal saying:

The comments made by the partners of Sequoia Capital at their recently
held ‘CEO Summit’ have been widely covered by leaks to numerous
bloggers. These bloggers have disseminated the details and spread the
contagion of the sentiments to the public at large, unfortunately
running the risk that the words become a self-fulfilling prophesy.
Without challenging the comments, which expressed a heightened degree
of doom and gloom for the economic prospects of young start-up
companies particularly, I do think it calls for a somewhat more
restrained response on the outlook and required action before throwing
the baby out with the bath water.

Alan’s comments are actually very good and I agree with almost everything he says. But I think everyone is shooting the messenger (ie Sequoia and to a lesser extent the other Silicon Valley VCs) who are raising the caution flag.

To Kara and others’ assertions that it was Sequoia who fanned the flames of the bubble, I call bullshit. I was on a panel with Mike Moritz in the summer of 2007 and he said then:

Adam [Lashinsky] is asking Moritz about frothiness of venture valuations. Still true?

Moritz: Undoubtedly, he says. Best time to invest is when people are
cowering under their desks. Everyone has the strut back in their walk;
everyone is walking tall. Returns paltry for long time, but money keeps
pouring into the area.

Here’s the deal. Everyone, including Sequoia, Benchmark, Ron Conway, etc, are still planning on investing in startups. They’ve been at it a long time and know that VC is a cyclical business. In fact, Moritz understand that the best time to invest "is when people are cowering under their desks".

But we have a responsibility as investors, board members, fiduciaries, and advisors to our companies to tell them what we’ve seen before, that acting now decisively will make it easier to survive tough times.

This is not some coordinated cynical attempt by VCs to talk down valuations or put entrepreneurs on the defensive. We are not spreading the contagion of gloom and doom. It’s all about acting responsibly and making sure we all survive to fight another day. Because in the end, survival is what darwinian capitalism is all about.