Start-up investors are warning of dark days ahead as boom times are ‘unambiguously over’

Slow your hiring. Cut back on marketing. You should extend your runway.

The venture capital missives are back.

Start-up investors are telling their portfolio companies they won't be spared in the aftermath of tech stocks cratering through the first five months of 2022.

It will be a longer recovery and we can advise you on how to get through it.

The poor public market performance of tech companies significantly impacts VC investing, and that's why Y Combinator told them in an email last week.

When investors were rushing into pre-IPO companies at sky-high valuations, deal-making was happening at a frenzied pace and buzzy software start-ups were commanding multiples of 100 times revenue, it was a stark contrast to today. In the past 13 years, the tech bull market has continued, with the tech stock market's gains in 11 of the past 13 years and venture funding in the U.S. reaching $332.8 billion last year.

The 2008 collapse of the mortgage market caused the entire U.S. banking system to go into recession. The memo titled, "R.I.P. Good Times" was published by Sequoia.

Sequoia Capital Global Managing Partner Doug Leone speaks onstage during Day 2 of TechCrunch Disrupt SF 2018 at Moscone Center on September 6, 2018 in San Francisco, California.

Sequoia hasn't always nailed the timing of its warnings. In March 2020, the firm called the Covid-19 epidemic the "Black Swan of 2020" and urged founders to pull back on marketing, prepare for customers to cut spending and evaluate whether they can do more with less.

Technology demand increased and the Nasdaq had its best year since 2009, spurred on by low interest rates and a surge in spending on products for remote work.

The emerging conventional wisdom in Silicon Valley looks a lot like the words of Sequoia. The market began to turn in November, with companies going public to stop. The funds that fueled so much of the private market boom have pulled back as they grapple with historic losses in their public portfolios.

Companies that recently raised at high prices may be facing burn rates and near-term challenges that are growing into those valuations.

In its first-quarter letter to limited partners, Lux reminded investors that it had been predicting trouble for months. The fourth-quarter letter told companies to preserve cash and avoid putting money behind unprofitable growth.

Most companies are prepared for winter now that they have been advised.

In the past few years, fuel and food prices have gone up, and now investors are worried about inflation, interest rates and a recession all at the same time.

According to the presentation, there is no quick-fix policy solution this time.

Many of the tools have been used up and we don't believe that this will be another steep correction.

The companies were told to look at projects, research and development, marketing and elsewhere for opportunities to cut costs. The firm said that companies don't have to immediately pull the trigger, but they should be ready to do it in the next 30 days.

Job cuts and hiring freezes have become a big story inside major public tech companies. In the coming months, several companies have said they would slow their hiring.

Staff reductions are underway at some companies that are still private, while hiring is slowing at others. Six months after the company was valued at over a billion dollars, it has announced staff cuts.

We have adjusted our plan to increase our cash runway through to profitability and significantly strengthened our balance sheet so we can be more opportunistic around investment opportunities and weather uncertainty in the macro environment.

Many start-up investors advise their companies to keep enough cash on hand for at least two years of potential pain, according to Tomasz Tunguz, managing director at Redpoint. Tough discussions about valuations and burn rates accompany that new conversation.

Like many, we at Lux have been advising our companies to think long term, extend runway to 2 years if possible, take a very close look at reducing burn and improving gross margins, and start to set expectations that near-term.

Lightspeed Venture Partners said in a post on May 16 that the boom times of the last decade are over.

Many CEOs will make painful decisions in order to keep their companies afloat.

One of the painful decisions it expects to see was highlighted. The firm said that sacrificing people will come before sacrificing valuation.

It is important for venture firms to remind founders that great companies emerge from the worst of times. When capital is in short supply, the thinking goes, those that prove they can survive and thrive are in a good position to flourish.

There is more talent available for companies that can add it today because of hiring freezes at some of the biggest companies. Lightspeed noted that technology will progress regardless of what happens in the market.

Despite all the doom and gloom, we are still optimistic about the opportunities to build and invest in technology companies.

Jim Breyer, an early Facebook investor, says startup valuations are still attractive.