Are We Headed Toward A VC Bubble Or Bust? Nobody (Not Even Sequoia Capital) Knows Anything!

“Nobody knows anything.”
~ screenwriter William Goldman, on the film industry

Sequoia Capital is widely (and, in my opinion, correctly) considered to be the best venture capital firm on the planet. Their list of hits include Apple, Oracle, Cisco, Atari, EA, Google, Yahoo, and PayPal (and that’s just counting the investments of two of their partners — Don Valentine and Mike Moritz).

In October 2008, Sequoia released their now famous “Slideshow of Doom.“While acknowledging that the economy always goes in boom-bust cycles (to which VC investments are especially susceptible): 

Slideshow of Doom 2

Photo: Sequoia Capital


Sequoia said this downturn would be different:


Slideshow of Doom 3

Photo: Sequoia Capital


They didn’t include numbers on the X-axis, but since average recessions take about two years from which to recover, the implication was this recovery would take much longer:

Slideshow of Doom 4

Photo: Sequoia Capital


And that the tech sector in particular would suffer:

Slideshow of Doom 5

Photo: Sequoia Capital

Their advice for VC-backed firms was to cut spending quickly and assume that VC markets will be effectively closed for a long time:

Slideshow of Doom 6

Photo: Sequoia Capital

Flash forward to 2010, Sequioa just led a rumoured $25M-$30M funding round in Tumblr at a valuation of approximately $150M. Tumblr has great user growth but reportedly little or no revenues. Very smart people like Fred Wilson seem to think a VC bubble is looming. The good times appear to be back.

I say this not to criticise Sequoia — they are the smartest investors around — but just to point out that even the smartest investors have no idea what lies ahead. The only way I know to function in a world of so much uncertainty is to focus on fundamentals — great people and long term trends.

This post originally appeared at Chris Dixon’s Posterous and is republished here with permission.

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