
Sequoia Capital on startups and the economic downturn (2008) - coloneltcb
https://www.slideshare.net/eldon/sequoia-capital-on-startups-and-the-economic-downturn-presentation
======
gdubs
I recall conversations with some uber-rich individuals in those dark, early
days of the financial crisis, and I was struck by their pessimism. These
people didn't have their money in Lehman, and yea they took a huge haircut in
the stock market – but they were still insanely wealthy. And yet, the news of
the day put a rain cloud over their heads and they started making emotionally-
fueled decisions about tightening up on this investment, or that investment...

And then, on the other hand, there were a few folks who saw it as a massive
opportunity, who fully expected things to recover even if it took a while, and
– this is key – didn't radically change their approach to things.

Guess who did better?

The piece of advice that really stands out in this article is "have a safety
net, ideally one year's worth of expenses." Advice that's good for any of us.

I have friends in the music industry, and there's been a few instances of
people getting these really big advances. Then come the big, expensive sushi
dinners, flashy parties, etc. It _looks_ like the record company is picking up
the check... but not really. The artist is on the hook.

I think there's a lesson there for startup founders too. If the fundamentals
aren't there, it can be hidden by a lot of frothy cash floating around. That
cash can be addictive, and people get used to a certain quality of life.
Retaining control means knowing when to say no to taking on more than you
actually need. If you let money people inflate your balloon further than it
should go because _they_ need a huge balloon to pass along to someone else,
ask yourself whether it's really good for your company.

~~~
ummonk
_> Retaining control means knowing when to say no to taking on more than you
actually need._

Isn't the lesson the opposite though? When easy funding is available, take on
more funding than you need and then don't spend it, so that you have plenty of
reserve when things get tight.

~~~
pdevine
There’s a timing problem with this approach, when you get the money vs when
the investor expects a return. The investor usually wants clear indications of
what you’re doing with the cash to increase their investment. Holding it
generally doesn’t sit well with investors as they could have given it to
someone who would be doing things with it.

------
apo
One of the first YC Startup Schools (the first?) was held in April 2008. I was
there and distinctly remember one of the presenters, an editor from one of the
financial monthlies IIRC.

He claimed that subprime defaults (no mention of housing bubble among the mass
media at that point) were no big deal and wouldn't be much trouble to the
economy. The real metric to watch was the direction of worker productivity.

Having witnessed the collective madness of the bubble that inflated
relentlessly for well over ten years (zero-down mortgages almost by default,
flip-o-mania, price appreciations far in excess of inflation, non-stop chatter
about real estate the double-digit gains made in the last year), I was
stunned. This guy didn't have a clue about what was right in front of his
nose.

He wasn't alone.

A similar effect operates in the early phases of a bull market.

Take the years following 2001. Interest faded fast in building riches through
day trading nasdaq shares. Silicon Valley looked more ridiculous by the day.
Sock puppet commercials and online grocery delivery services became the butt
of jokes. An entire business model (making money online) lay in ruins.

As the nasdaq clawed its way back, very few noticed.

Two points:

1\. You'll know it's a bubble when only cranks are calling bubble.

2\. You'll know its a new bull market when each advance is greeted with yawns,
laughs, or eye-rolls.

~~~
confiscate
i have no idea what your last 2 points mean. Can you clarify, instead of
sugar-coating it

~~~
foobiekr
At least what the first is saying is that when even bearish investors
capitulate that the rise is justified the crash is around the corner.

------
csomar
I have a different take: We were in a recession in the last 10 years. We are
just turning around for the real bull-run. Interest rates just started to go
up. If we were in a heated run, they should reach the double digits. We are
probably 4-6 years away from that.

It is a good time to invest but probably a bad time to leverage as interest is
going higher. The right time to leverage was a few years ago. Interest was
cheap back then. Remember buy low sell high? Looks like everyone was freaking
out back then and waiting for the "recession".

We are being far from a heated global economy and given how globalized and
inter-connected the world did get in the last 10 years, the world wide economy
might affect the US more than its own.

No this it is not different this time. But probably the baseline of your
"recession" and "bubble" got re-adjusted for the new realities.

~~~
shimon
What's your rationale for this? Beyond interest rates, which are clearly the
result of more aggressive, far larger-scale easing by central banks than we've
ever seen before.

~~~
csomar
P/E ratios in the USA are more favorable than many emerging countries. Given
how expensive some of these countries got; and how shitty they are still are
they'll need to correct. They still make very decent money even though they
are well below the US or the western world on a per capita basis.

The rich of these countries will need to flock somewhere. While you might
think that the prices of the USA stock market is high, these guys will find
the deal favorable to what they have in their own countries.

It is not only Turkey that seeing the correction. Many countries in North
Africa, South America, SEA, Russia, South Africa are getting squeezed. You'll
be surprised at how much money is looking to leave these countries and settle
shop somewhere safe.

You just need a passport and a tourist visa to open a bank account in the US.
Moving your business there is pretty straightforward if you have enough
turnover and will to pay some taxes.

~~~
shimon
I strongly agree that capital flight is a huge and under-recognized driver of
high asset values in the US (particularly equities and real estate).

But how do you even begin to estimate the rate of this effect, or how much
further it might go, or what asset classes it might affect? For example: this
was likely a major force in the surge in Bitcoin value almost a year ago, but
that asset has since collapsed; will a similar effect take place in other
assets?

------
rossdavidh
Thank goodness we have fixed all the things wrong with our economy's approach
to housing and debt, so that all that won't just happen again.

~~~
zackmorris
You may get downvoted so I just want to say that I agree with you. The dot
bomb and housing bubble were political events, not financial. We have
fundamental problems in our economy that aren't being addressed:

* Tax brackets haven't been adjusted in decades, so when people begin making modest amounts of money, say $50-100,000 per year, their taxes increase too fast and they don't feel wealthier. I would suggest keeping the bracket shapes but shifting them to the right by at least 2x to account for inflation. This amounts to a tax cut for the poor and keeping taxes roughly the same for the rich (the opposite of what's been done since 1980). Then we should (obviously) gradually raise taxes over 5-10 years to match the deficit.

* Interest rates are too low because politicians don't want to put the brakes on the economy. The flip side is that they have no way to press the accelerator when the economy tanks. The end result being exaggerated booms and busts, exactly as we have seen in 2000/2001 and 2008 (which means that we're overdue for a bust with current Fed interest rate policy).

* Corporations can be based in the US but act as foreign multinationals by hiding their taxes. Fixing this is trivial but depends on getting money out of politics. See: Citizens United, campaign finance reform and publicly funded elections.

The above are econ 101. My personal thoughts on this are that rents, houses
and cars cost an order of magnitude too much for what they provide. We spend
an order of magnitude too much on the military. We don't build enough or
reward makers enough because the financial sector of the economy is twice as
big as it used to be and we're obsessed with 40 hour weeks instead of progress
or quality of life. I'm 41 and have never seen any of these things change in
my lifetime, so am expecting a major downturn in the economy sometime in the
next 2-5 years, followed by a series of knee-jerk populist reactions that
ensure a repeat 10 years later (downturns are where the wealthy make more
money, as they have the capital to buy up assets).

~~~
hyperpape
1\. I think tax brackets are adjusted for inflation:
[https://taxfoundation.org/us-federal-individual-income-
tax-r...](https://taxfoundation.org/us-federal-individual-income-tax-rates-
history-1913-2013-nominal-and-inflation-adjusted-brackets)

2\. The fed funds rate is low, but has been rising:
[https://tradingeconomics.com/united-states/interest-
rate](https://tradingeconomics.com/united-states/interest-rate).

~~~
zackmorris
Hey cool thanks. I think the tax bracket page may only work in Edge, which I
don't have on my computer, but I found this image associated with it:

[https://commons.wikimedia.org/wiki/File:Historical_Marginal_...](https://commons.wikimedia.org/wiki/File:Historical_Marginal_Tax_Rate_for_Highest_and_Lowest_Income_Earners.jpg)

I'm having trouble understanding what it's saying though. All I see is that
the top bracket was highest during WWI and WWII, approaching 90% on the
wealthy, but is effectively zero since Reagan. The low rate's pretty flat and
the high rate has gone down. And there are fewer brackets today (that might be
why I perceived them as not having been updated).

One takeaway though is that the last time tax brackets were similar to today
was from 1925-1931...

Also if you try clicking MAX on the second link, it seems that we've hit a
floor on the fed funds rate, so maybe if it rises then it could move our
economy back towards production instead of consumption by making capital more
expensive. I might be reading my own gut feelings into that though so take it
with a grain of salt.

~~~
hyperpape
1\. Sorry, I gave you the wrong link. Here's the info in a PDF:
[https://files.taxfoundation.org/legacy/docs/fed_individual_r...](https://files.taxfoundation.org/legacy/docs/fed_individual_rate_history_nominal.pdf).

2\. We certainly have historically low rates. It's not the case that the Fed
has refused to raise them--they've cautiously raised them. One contributing
factor is that wages haven't been increasing, and inflation is very very low.
The early 80s were an outlier in another way: Paul Volker shot interest rates
incredibly high to deal with historically high inflation numbers. So the
relevant comparison is arguably 4-10% (late 80s/90s/2000s) vs. 2.25% today.

------
mooreds
"Winter is coming".

For a more recent warning, see [https://medium.com/@jason/this-is-your-
captain-speaking-im-t...](https://medium.com/@jason/this-is-your-captain-
speaking-im-turning-on-the-fasten-seat-belt-sign-a901eaa39f12)

~~~
nostromo
> I’m not calling a top to the market, or a crash

~~~
mooreds
> In my estimation there is a 20–30% chance we could have “an event” in the
> near term (the next two years), and since there is never a bad time to make
> long-term plans you should read this email twice, and discuss it with your
> senior team.

~~~
hyperpape
That corresponds to a 50-65% chance of an event in 6-8 years. That's about the
average length of the business cycle. I too am willing to bet that are better
than even odds of an "event" in the next 6 years.

I expect my prize will be in the mail.

------
whendecadesbook
I'm releasing my diary from 2008, if anyone is interested. It comes out in
November 1 on paperback and Kindle format. You can pre-order. It's from my
Princeton dorm room, and has interesting stories and stuff from the time. Many
smart people did not see the crisis unfolding.

There's a lot of interesting investment lessons from the book, and it's the
first time a crisis has been covered in real time.

[https://www.amazon.com/When-Decades-Became-Days-Princeton-
eb...](https://www.amazon.com/When-Decades-Became-Days-Princeton-
ebook/dp/B07GCV4356/)

~~~
refurb
Ok, I’ll bite. Why would a person be interested in your views of the crisis as
a college student?

This is an honest question, I’m not tying to be critical.

I couldn’t figure it out from the amazon description.

~~~
rboyd
not just any dorm room.. a PRINCETON dorm room

------
purplezooey
If we could add a slide to this today, it would be about the building rate of
new homes. We need to double it. Else we face a crisis soon.

------
fallingfrog
I have been thinking for the past few days that one thing that is being missed
here is even that the few people who are viewed as "perma-bears" (John Hussman
for example) are in reality bulls in disguise; they are just being a little
more picky about waiting for the right buying opportunity. But they're still
planning to buy. As is everyone, and if you fully expect the market to recover
_no matter what happens_ then you're likely to buy whenever it dips even a
little bit. Faith in the ability of the Fed to rescue whatever has gone wrong
with capitalism has reached such levels that the bull market won't really end
until people start to believe that things are so bad that _even the fed_
cannot rescue them. So my question is, given that the bull market can't
continue indefinitely, what would have to happen to convince people that the
next dip is not just another buying opportunity?

~~~
bilkoo
The stock market is not 'people', but rather composed mostly of institution
money and their managers. And due to the short term and relative performance
goals, if they want to keep their jobs or fund from withdrawal better escape
the stampede before everyone else. As to your question though, people may
think the Fed has little room for stimulus this time around.

------
nishantvyas
timing the time is impossible for any market. It's easy to be contrarian but
hard to be a contrarian that will be right (on time).

Reality is no one really knows, what will break the camel's back!

