8 ms·

Sequoia Capital on startups and the economic downturn (2008)

77 points by coloneltcb 8y ago

mooreds 8y ago
"Winter is coming". For a more recent warning, see https://medium.com/@jason/this-is-your-captain-speaking-im-turning-on-the-fasten-seat-belt-sign-a901eaa39f12 https://medium.com/@jason/this-is-your-captain-speaking-im-t...
- nostromo 8y ago
  > I’m not calling a top to the market, or a crash
  - mooreds 8y ago
    > 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 8y ago
      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.
fallingfrog 8y ago
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 8y ago
  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.
- mooreds 8y ago
  > the bull market can't continue indefinitely The question is, is GDP growth always going to trend upward, or will it trend downward at some point in the future. If the former, the bull market (with some crashes) can continue. If the latter, then nope. The stock market isn't the economy, but it certainly is a distorted reflection of the economy. Look at the factors of production: * land: not building any more of it (except the Chinese in the South China Sea :) ). Unless space travel becomes economical, then there's a ton of "land" available in terms of satellite habitats, the moon, etc. * labor: human population looking to peak in 2050 last I checked. Not sure how climate change will affect this (could be a strong negative in 100 years). * capital: lots and lots of capital and more efficient ways for it to move around the world. * energy: fracking + renewables have changed the game and the west is far more able to control their energy supply than in the past (see "The Absent Superpower") * intangibles (ideas, patents, etc). Lots of room to run here. The internet + youtube + google has made the cost of distribution close to zero. This means that new ideas (both inane, like dance fads, and useful, like new ways to organize teams) can spread far more quickly than in the past. (see "Capitalism without Capital") I'm voting yes, the bull market will continue indefinitely. I'm long the human race :) .
csomar 8y ago
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 8y ago
  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 8y ago
    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 8y ago
      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?
gdubs 8y ago
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.
- paganel 8y ago
  > 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... I remember having read that at one moment in late September 2008 the US Secretary of Treasury Hank Paulson had kneeled in front of a room of big-bank CEOs begging them to do I don’t remember exactly what (I’m on mobile, too lazy to look for the exact reference). Also, the money market rates had dropped bellow 0% for the first time in recorded modern capitalist memory, an event that lots of economists had said that it wouldn’t ever happen. These are the two main apocalyptic-like events that I remember back from those days, there were many others, and I’d say that we were pretty damn close to a very deep and ugly financial black hole. As such I don’t blame those people who took the safe way out back in those days, I mean, I’m sure there were also people who hang on to their investments back in 1930 or 1931 thinking that the worse was over but we don’t read any happy stories about them because most probably there were none.
apo 8y ago
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 8y ago
  i have no idea what your last 2 points mean. Can you clarify, instead of sugar-coating it
  - foobiekr 8y ago
    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.
  - curuinor 8y ago
    "Be contrarian."
purplezooey 8y ago
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.
rossdavidh 8y ago
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 8y ago
  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).
  - charlesdm 8y ago
    The problem of 2008 has basically been swept under the rug. My gut feeling is telling me the next recession will be worse, because the only thing that can be done is print more money, which repeats the cycle (but since wages never go up, but asset prices do -- so worsens the problem of more inequality) Easy debt means easy profits, which in turns means that it's better to play a financial game over building something sustainable. It's much easier to turn $10m into $20m in a reasonable amount of time, than it is to build a proper business and sell that for $10m.
whendecadesbook 8y ago
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-ebook/dp/B07GCV4356/ https://www.amazon.com/When-Decades-Became-Days-Princeton-eb...
- drharby 8y ago
  "Buy my book, buy my book, by my book" -cardboard cutout of Jay Sherman
- refurb 8y ago
  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 8y ago
    not just any dorm room.. a PRINCETON dorm room
nishantvyas 8y ago
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!

77 points by coloneltcb 8y ago

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

nostromo 8y ago
> I’m not calling a top to the market, or a crash
- mooreds 8y ago
  > 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 8y ago
    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.

fallingfrog 8y ago

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 8y ago
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.
mooreds 8y ago
> the bull market can't continue indefinitely The question is, is GDP growth always going to trend upward, or will it trend downward at some point in the future. If the former, the bull market (with some crashes) can continue. If the latter, then nope. The stock market isn't the economy, but it certainly is a distorted reflection of the economy. Look at the factors of production: * land: not building any more of it (except the Chinese in the South China Sea :) ). Unless space travel becomes economical, then there's a ton of "land" available in terms of satellite habitats, the moon, etc. * labor: human population looking to peak in 2050 last I checked. Not sure how climate change will affect this (could be a strong negative in 100 years). * capital: lots and lots of capital and more efficient ways for it to move around the world. * energy: fracking + renewables have changed the game and the west is far more able to control their energy supply than in the past (see "The Absent Superpower") * intangibles (ideas, patents, etc). Lots of room to run here. The internet + youtube + google has made the cost of distribution close to zero. This means that new ideas (both inane, like dance fads, and useful, like new ways to organize teams) can spread far more quickly than in the past. (see "Capitalism without Capital") I'm voting yes, the bull market will continue indefinitely. I'm long the human race :) .

csomar 8y ago

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 8y ago
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 8y ago
  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 8y ago
    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?

gdubs 8y ago

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.

paganel 8y ago
> 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... I remember having read that at one moment in late September 2008 the US Secretary of Treasury Hank Paulson had kneeled in front of a room of big-bank CEOs begging them to do I don’t remember exactly what (I’m on mobile, too lazy to look for the exact reference). Also, the money market rates had dropped bellow 0% for the first time in recorded modern capitalist memory, an event that lots of economists had said that it wouldn’t ever happen. These are the two main apocalyptic-like events that I remember back from those days, there were many others, and I’d say that we were pretty damn close to a very deep and ugly financial black hole. As such I don’t blame those people who took the safe way out back in those days, I mean, I’m sure there were also people who hang on to their investments back in 1930 or 1931 thinking that the worse was over but we don’t read any happy stories about them because most probably there were none.

apo 8y ago

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 8y ago
i have no idea what your last 2 points mean. Can you clarify, instead of sugar-coating it
- foobiekr 8y ago
  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.
- curuinor 8y ago
  "Be contrarian."

purplezooey 8y ago

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.

rossdavidh 8y ago

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 8y ago
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).
- charlesdm 8y ago
  The problem of 2008 has basically been swept under the rug. My gut feeling is telling me the next recession will be worse, because the only thing that can be done is print more money, which repeats the cycle (but since wages never go up, but asset prices do -- so worsens the problem of more inequality) Easy debt means easy profits, which in turns means that it's better to play a financial game over building something sustainable. It's much easier to turn $10m into $20m in a reasonable amount of time, than it is to build a proper business and sell that for $10m.

whendecadesbook 8y ago

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

drharby 8y ago
"Buy my book, buy my book, by my book" -cardboard cutout of Jay Sherman
refurb 8y ago
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 8y ago
  not just any dorm room.. a PRINCETON dorm room

nishantvyas 8y ago

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!