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Doug Leone is the managing partner of Sequoia Capital.
- Entrepreneurs who are looking for advice on how to safeguard their companies against the coronavirus and its effects on market conditions may look to the past for wisdom and practical tips.
- In 2000, as the stock market tumbled during the dot-com bust, Sequoia Capital partner Doug Leone wrote an email to portfolio company founders on what they could do prepare.
- His advice then boiled down to two measures: Companies needed to raise new funding "as soon as possible." And if a business had less than 12 months of runway, it should look for a buyer.
- A screenshot of Leone's email was included in a presentation titled "R.I.P. Good Times" that Sequoia gave its entrepreneurs in 2008. We've shared the deck with Sequoia's permission.
- Visit Business Insider's homepage for more stories.
In 2000, at the top of the dot-com bubble, a partner at Sequoia Capital wrote an email to portfolio company founders and chief executives, telling them the stock market's bull run was over after five years of "irrational exuberance," as then-Federal Reserve chief Alan Greenspan famously put it.
They had to prepare their companies for a severe reversal of market conditions.
In 2020, the situation feels familiar.
Entrepreneurs are taking measure to steel their companies against a new threat - the coronavirus and its effects on market conditions. And while the first priority for tech companies has been keeping employees healthy, the next step is ensuring the health of their businesses.
The email written by Sequoia's managing partner Doug Leone, who alongside Michael Moritz took control of the venture firm in 1996, offers relevant advice for how a company can survive an economic downturn in any period.
A screenshot of the email was included in a presentation titled "R.I.P. Good Times" that Sequoia gave its entrepreneurs during the financial crisis. We've shared the full deck with Sequoia's permission.
He predicted that startups would have more difficulty raising funds
Leone's email told portfolio companies that capital would start to dry up, as the stock market fell from its record highs.
Sequoia Capital
A screenshot of the email that Doug Leone sent to Sequoia's portfolio companies on April 17, 2000.
In the week before he wrote the note, a sell-off of mostly internet stocks caused the Nasdaq to crater more than 25%. Investors were responding to fears of inflation after many of those dot-com companies failed to make money, laid off thousands of workers, or shut down shortly after they started trading on the public markets.
The entrepreneurs that needed to raise outside funds would do so under different circumstances - and at much lower prices - in the aftermath, Leone told them. They needed to close on new financing "as soon as possible," and lower their expectations on how much they could raise and at what valuation.
"While it's safe to say entrepreneurs have had negotiating leverage," Leone said, "with the 'down draft' in the market, the VC community will start exercising their leverage."
Leone: Look for other exit doors
The worsening market conditions also made going public a less favorable outcome for venture-backed startups.
Leone encouraged the firm's portfolio companies to "aggressively examine and pursue" opportunities for a merger or an acquisition, which creates liquidity for investors. He added that this advice did not apply to companies that had enough cash in the bank to operate for 12 months.
An acquisition by a competitor affords a startup the funding to keep going, new customers, and an increase in market share, Leone wrote to entrepreneurs.
Here's the email:
To: Portfolio CEOs
Date: 04/17/2000 5:24 p.m.
Re: Market Conditions Effect on Portfolio Companies
The down draft in the stock market sends us some obvious 'signals' and we can't help but mention them.
1. If you are in a funding cycle, you should raise your funding as soon as possible and raise as much as possible.
2. You must aggressively examine and pursue M&A opportunities (unless you have over 12 months of cash reserves!) to insure you have critical mass (including funding, customers, rolodex power, market share, cash, synergy, etc.).
3. Be realistic on valuations - they will fall so be ready and willing to co-operate.
4. While it's safe to say entrepreneurs have had negotiating leverage with the 'down draft' in the market, the VC community will start exercising their leverage.