Sequoia Announces the New VC Reality









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Matt Marshall of VentureBeat
 posted the Sequoia CEO presentation that is buzzing around VC circles and generating plenty of commentary. Putting aside the colorful graphics and the pointed 'cutting the fat' imagery, the presentation is excellent and right on the money. The new reality for entrepreneurs and venture capitalists alike is that we need to focus on building private companies that are cash flow positive while they remain private. The old 'build it and they will come", "technology first" approaches simply won't work in a liquidity constrained capital markets environment that is in major systemic flux. This does not, however, categorically spell 'Bad News' for the VC industry.

The first positive step is for VC's and entrepreneurs to recognize that Silicon Valley is not insulated from the capital markets– the lag time between traded markets "Cause" and their "Effect" on the less liquid VC markets gives us the chance to make necessary changes to our business models before our portfolio companies go out of business.  At Levensohn Venture Partners we are proactively addressing the challenges as well as seeking out the opportunities created by the leveling of the old Wall Street while we wait for the New Wall Street to emerge (and it will).

Venture capital is all about capital formation, creating new jobs, and embracing innovation– and these are essential elements of the capitalist engine that America must support to restore a new and lasting equilibrium to our economy. It is incumbent on the venture capital community to build companies which embrace fiscal discipline and can achieve positive cash flow organically. I also expect that we will see many more private to private mergers between existing VC-backed companies in growing technology markets in order to achieve scale and profitability.

ADDENDUM:

One of my Silicon Valley CEO friends made the following observation after reading this post:

Yes this is the time to be careful in how companies
spend – but it is also a time that good companies will be killed by
this type of scare tactic.  Many start-ups will see their revenue
impacted significantly by the economic downturn, but if the
fundamentals of the technology and business model are sound – this is
the time they need venture backers that will get them through the
downturn with some support and nurturing.  Arbitrarily deciding the
everyone has to get to profitability will create it's own death spiral
in many companies as they cut too deep to survive.  The venture firms
have the money to provide the cushion to get through bad times – they
shouldn't do it for everyone, now is a good time to weed out
investments that are mediocre – but it is also the time to support
those that have the potential to go on to do something great.
 

I agree completely with this observation– let's not forget that great companies are started during hard times and that we cannot abandon innovation and research in the name of cash flow.  To be clear, at Levensohn Venture Partners we will continue to make early stage investments as we do our part to help build the next generation of great companies.
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