Sequoia Capital: The economy's not so grim after all

(I’m live-blogging from Startup School, a daylong program from startup incubator YCombinator held at Berkeley today. You can watch it here live or update as we go….)

Greg McAdoo, a partner at Sequoia Capital, said the firm has been making more investments in the last 12 months than in the preceding two years. The firm, one of the Silicon Valley’s most storied houses with homeruns like Google, was a whole lot less pessimistic than last October, when it released an ominous deck of slides entitled “R.I.P. Good Times,” warning startups to slash costs.

“That deck of slides was so misunderstood. The point there was to run your business cognizant of the times we’re in,” McAdoo said. “We had a lot of startups that fell into really bad habits — things you might have gotten away with in a nice economy, but that wouldn’t fly in these times.”

The company has made about 20 early-stage investments in the last year in companies like Bump Technologies, which lets people share business contacts on the iPhone, and AirBnB, which offers a cheap alternative to staying at hotels.

“The idea is to get very involved in the startup community during this time to help entrepreneurs navigate this environment,” he said. He said the firm is interested in models that have very clear return-on-investment opportunities and focus on monetization early.

He repeated an old Silicon Valley truism — that, in the history of startups, there’s a correlation between downturns and the creation of influential tech companies like Atari, Tandem, Apple and Cisco (though we should add that this correlation has never really been proven out by rigorous study; Google and many others, for example, were started during relative boom times).

Still, his overall point is well taken: “These founders don’t listen to the market prognosticators,” McAdoo said. “All of these companies got started during times of horrible headlines.” There’s a few factors that contribute to that, he said. Potential customers are willing to try new alternatives when necessity calls and entrepreneurs are compelled into starting new companies, because the opportunity cost is smaller during a recession.