Updated: Sequoia Capital, arguably the smartest venture capital investor in business, is sounding the alarm and asking its portfolio companies to buckle down for what could be the worst economic downturn of their relatively short lives.
The fund organized a meeting yesterday where it invited entreprenuers/CEOs from its portfolio companies. The attendees were greeted by a cute image of a Grave Stone, with a message: R.I.P.: Good Times, my sources tell me.
I was able to confirm this with at least two sources. I am currently trying to nail down more details. Sequoia Capital declined to comment on the news.
The gathering was addressed by at least four speakers, including a brief introduction by Mike Moritiz. Doug Leone was another speaker. I am still trying to nail down more details of the two other speakers. A person who handles Sequoia’s public market investments is said to have talked to the startups. The message delivered to those in attendance was that things could get a lot worse than people think, and it will be a more protracted downturn. To give a historical perspective, Sequoia had a similar meeting back before the last bubble
unraveled burst. We know how that turned out.
They want the companies to cut costs, to figure out way to survive and emerge at the other end of this downturn, which could last years. The speakers went through each functional area of the business and told the companies how to cut costs. By holding this special meeting, Sequoia is telling its companies to put survival strategies in place and figure out ways to outlast the broader market troubles.
Uber-investor Mike Moritiz told The Financial Times earlier this week: “It’s pretty clear that demand is going to soften across the board for every company – it doesn’t matter if you’re selling to consumers or companies.” Moritiz isn’t one to mince words, and is one of those few people who likes to get ahead of the fire and not fight it from behind.
Sequoia isn’t the only one advising its startups to tighten their fiscal belts and prepare for a gut-wrenching ride. Ron Conway, a well-known angel investor in the Valley who has invested in companies like Google, offered very sobering advice to his companies via an email earlier today.
Raising capital will be much more difficult now. You should lower your “burn rate” to raise at least 3-6 months or more of funding via cost reductions, even if it means staff reductions and reduced marketing and G&A expenses. This is the equivalent to “raising an internal round” through cost reductions to buy you more time until you need to raise money again; hopefully when fund raising is more feasible.
Letting go of staff is hard and often gut-wrenching. A re-evaluation of timelines and re-focus on milestones with an eye to doing more with less will allow you to live many more days, and the name of the game in this environment in some respects is survival — survival until conditions change. If you are in a funding cycle, you should raise your funding as soon as possible and raise as much as possible but face the fact that if you can’t raise money now you must cut costs.
Folks this is bad news for Silicon Valley, which has been living in a bubble, assuming that it is going to weather the global economic storm without being impacted. We have been following this story since last year, pointing out that the tech is not an island.
218 thoughts on “Sequoia Rings the Alarm Bell: Silicon Valley Is in Trouble”
I’m not going to lie, that is daunting & scary to hear it from Sequoia who clearly know what they’re talking about. I think however, there was always going to come a time when this playground we called Web 2.0 came to an end and businesses with serious business models shone through. The ones without them – knuckle down and make some money…or clearly die.
I’m not surprised, but I think that startups should run very learn and be doing all of this anyway regardless of market forecast/conditions – especially if they’re funded.
oops – i mean “run very LEAN”
Om, insightful post. People have been wondering about how VC’s will react, and I think you’re right that this is a good indicator.
In a forest fire lots of trees burn, but not all trees. Scary times indeed.
I sat in meetings with several prominent VC’s and angels, showed a 1000+ user survey with 99.9% favorable responses in favor of paying subscription fees for a mobile service vertical market venture. One question was: “Are you making a Facebook Application?”Another was: “Why would start a venture with towing and automotive services as the target?”
Now you know why we are in trouble.
i think the metaphor is more like lions chasing zebra. the herd will be thinned, devil take the hindmost (= those with no business model / revenue).
VC-backed businesses are going to be under serious pressure that’s for sure. I guess this is the end of the Web 2.0 boom. On to the next big wave!
“bubble unraveled”? tsk tsk mixed metaphor.
Dave, I have to agree with Scoble — if only because the firm is named Sequoia and not Savannah
Dave, I think it’s more like a hundred lions chasing zebra. The herd will be decimated.
It follows. If you see the loss of wealth, imagine an equal magnitude impact to national income from a recession, and think of people’s lives scaled down in that proportion, a lot of the current value propositions will be obsolete.
It won’t be enough to deliver real value, it will have to be value relatively more essential to the core of people’s lives. And those lives might be quite a bit simpler.
On the other hand it could be a great time to do deep R&D if you have the funding and can wait long term for an ROI. It should be easier than usual to recruit the brightest minds…
Uh-oh. Start-ups will have to start developing legitimate business plans and actually execute upon their strategy to monetize. How horrible. This is good for tech, not bad.
It seems like startups still haven’t learned to run lean, contain costs and chase money.
shouldn’t be a surprise. ripple effects from the current mess are bound to touch the tech sector.
This is a PR stunt. When companies like Facebook go out and raise $300 million, or RockYou and Slide raise $50 million a piece, you know they were bulking up for hard times ahead. Sequoia knew about this, and told their companies about this, a long time ago. They couldn’t make that public though because they were saying the opposite to the Series A and B venture funds that gave their companies those war chests.
Now Sequoia will leverage this crisis towards more equity in companies that are looking for new rounds of investment right now.
This is all a God damn game for people who are going to be fine no matter what.
We saw this playout 8 yrs ago
Gloomy days ahead for web20
This guy was WAY ahead of the curve. The fact that the VCs are finally catching up to the boards is, um, typical.
The next shoe to drop: VC’s will start withdrawing their money from startups where there is a bunch of cash left. Remember Kibu? I thought not.
That some trees survive is, yes, always the case.
And who is better insulated than the oligarchs? (Well, ok, the mafiosi … anybody been watching Russian markets?)
It comes down to fundamentals. (Karma, baby.) “Bubble” is almost too slight as statement of actuality … more like #matrix.
Is your VC firm doing anything different?
while this is news, and important to talk about, we have to make sure that the positive of the situation also stays in focus: companies today are *so* much stronger than the web 1.0 bomb companies that blew up back in the day.
here is a good article on mashable about the need to stay positive in tech:
Let’s try to get real here. What is before us is not like anything you or I have ever experienced or anticipated. People in the coming months and yes years are going to need shelter, and food, and heat to keep them warm, and more than that, to learn about how the financial systems have been and are still continuing be gamed. Web 2.0 apps for the most part are not essential to survival. Some are and will be critical to communicate for sure, but not this zealous obsession with social chatter. Even if someone is giving you money to pursue this stuff, it better damn well be focused on the essential to survival, not just social chit chat. Good luck.
My guess is only the me 2 companies and mangers will feel the brunt.
As somebody else said maybe R&D will be back. I definitive will do my best, I’m tired of people telling me it can’t be done. When they mean they can’t do it.
Makes me wonder how many people like me left the valley to do some hard work. Maybe we’ll be back after the fluff is gone.
This is bad news for Silicon Valley? Why? Who cares what Sequoia thinks?
It may be bad news for their portfolio companies, however. In the last downturn, after the bubble, they completely cut off funding to many existing investments.
I guess they had the foresight to know which would succeed. Oh wait, they invested in the others also.
typo, his name is Mike Moritz not Mortiz > http://www.sequoiacap.com/people/michael-moritz/
@ Ralph Pina … thank you dear sir for helping me see the light here. I corrected the spellings.
@Dave and @Eric Eldon thanks for the banter. some light relief was in order i guess.
@gw …. this is pretty big sign and yes we in the valley are still not facing up to it. Regardless your comment is pretty spot on.
@Ben Tremblay above: As a Russian I would like to point out that our economy is not all about mafia these days any more. Besides, the fact that we were way too willing to enter the international economics has made Russia much less insulated that we would not want to be so our market is far from healthy either (remember, they call it a global crisis already).
Run Forest Run!!!!!
It will be good to learn some lessons’ from history. Some that I can highlight are 1) In 1932 the DJIA came down from 334 to 42 pts in less than a year but went back up to 172 within the following year or so. 2) Analyze the economic KPI’s and you will see productivity increasing year to year. Hence the basis for economic growth is still intact. 3) Political blunders and run away greed on Wall Street really got out of control this time, but the free market system put in a correction, though a little late. 4) Finally invention and innovation has massive capital support in the US and now world wide, so look out for opportunities like you have never seen before. Conclusion, this will be a period of pain stretching about 18 months, there after you will see the DJIA roar towards 20,000 by 2012-13! Just extrapolate from the history and don’t listen to Sequoia.
I know of non-dilutive grants from the government supporting engineering headcount to encourage startups to establish engineering centers in Singapore. Does this sound interesting in such times?
You basically plonk a team in Singapore, pay their payroll out of Singapore, and every 3 or 6 months, get reimbursed up to 50% of their base salary. This might be a good way to stretch startups’ existing venture-backed dollars in such tough times.
Does it makes sense? Thoughts guys?
Here in Israel, VCs tell me they are waiting for opportunities to make aggressive investments as some funds with a lot of reserves get great deals at low valuations.
Also – some will shift their investment models to fit the times – seed funds will make later stage investments in distressed B/C round firms that are close to profitability. They think they can make a killing..
Others are more interested in putting together bay area real estate deals..
Only thing to “fear is fear itself”. Even if 20% of 5 Trillion mortgages made from 2003- 2008 are bad, Fed has enough money to revive the credit flow.
Media is spreading both fear and greed to the extremes. Certainly there is bubble in the blogosphere, what is your differentiation with other popular blogs (I dont need to name) OM ?
How pessimistic to be introduced to a meeting with a grave stone. I guess they want to get the point across, but I would have done it differently.
All of this is good advice from Sequoia, and I think most serious businesspeople are thinking this way anyway.
Since we all know that the current situation is a combination of fundamentals and confidence, let’s not forget to focus on confidence. We survived 2000, we can survive this.
Disciplined companies with good leadership will still be around in 24 months, just like last time. If not, we have a larger problem, that probably no amount of money or wisdom can easily address.
A recession is when the real entrepreneurs emerge. Those who think it would be “neat to start a company” generally prefer the safety of a stable job during a recession. Google emerged during the last recession. While the stock has suffered recently, it remains one of the most successful tech companies ever. Here are some good tips to help startups survive the economic downturn http://tinyurl.com/4bkvle .
Sequoia is an investor in my company http://www.fon.com and what they did is what everyone in the financial community is telling companies large and small. To tell them to lay off 5% to 20% of their workforces and do more with less cause demand will shrink almost as fast as investor patience.
A MUST read for any startup looking to not only service, but prosper during the upcoming downturn;
For small, self-funded startups looking for capital right now, this financial crisis is a real kick in the nuts. Bad timing aside, as it is what it is and no level of pouting will change that for anyone, it will be interesting who can weather the storm and come out the other side. In fact I think that lean companies that are driven on passion and don’t have the responsibility of large investment hanging over their heads, may in fact do better. Innovation will continue as it has. One or two people (with possibly more time on their hands) making new stuff. I guess it depends on how long that passion can last. You can’t eat passion and it rarely pays the rent by itself.
It will separate the true business people willing to do what’s necessary to survive and prosper from the entrepreneurs with great ideas and no business plan. In fact, people will be going out less and probably on the internet more, so there are some interesting possibilities out there.
Looks like Ron Conway gave Om an exclusive preview of his email few weeks before general release. Om had good timing in raising money for his own venture. Congrats! And hope you are managing your stress better this time.
Food, Fear and Sleep
The more you increase it the more they increase
— small east Indian Proverb
I say Chill Out!
The key is to make good decisions in a state of (real or imaginary) panic and chaos. One foot in, one foot out.
Prepare for 3-6 months without additional financing? That’s no time at all. Obviously Conway is talking to companies that are incredibly tight with the VC community. They basically run their businesses on venture money.
If you are not plugged into the VC lifeline, the advice would be: structure your company to survive for 24 months without additional financing. That demands a hard look at your baseline cash flow, cash reserves, and costs.
IF the liquidity fear based crunch can be eased by the Fed PRIOR to business demand destruction, THEN this will not destroy the base that the future apps will need to suceed.
The Fed/Central Banks fail in un-assing the credit liquidity, and job/business demand destruction occurs, then infra-structure rebuilding and consumer markets have to be regenerated. That is the LONG WINTER that sequoia is looking at.
What happens to open source in this downtownturn?
If the “open source” in question has a source of cash, things will be ok, otherwise it will be closed source.
Here are notes from the meeting:
Today, Sequoia Capital hosted a mandatory CEO All-Hands Meeting on Sand Hill Road (where else?). There were about 100 CEO’s in attendance and let me tell you, the mood was somber. I’m not one to perpetuate doom and gloom or bad news, but let me underscore this for you: We are in a serious economic downturn and this is just the beginning. Immediate, decisive and swift action is required, along with frugal, day-to-day management of expenses and our business is required.
***Here are my notes from the meeting. Keep this note in your in-box and read it every day. I’m serious folks, this is for our survival.***
· Mike Moritz, General Partner, Sequoia Capital (he moderated the speakers).
· Eric Upin, Partner, Sequoia Capital (Eric ran the $26-Billion Stanford Endowment Fund and knows a few things about Economics and investing.)
· Michael Beckwith, Sequoia Capital (Michael was recruited to start Sequoia’s very first hedge fund, coming from Maverick Capital and Robertson Stephens. I know him from my BEA days.)
· Doug Leone, , General Partner, Sequoia Capital
Slide projected on the huge conference room screen as people assembled inside the conference center to take their seats: a gravestone with the inscription: RIP, Good Times.
· The only time Sequoia’s assembled all CEO’s like this was during the dot.com crash.
· We are in drastic times. Drastic times mean drastic measures must be taken to survive. Forget about getting ahead, we’re talking survive. Get this point into your heads.
· For those of you that are not cash-flow positive, get there now. Raising capital is nearly impossible if you’re too far off of cash flow positive.
· There will be consequences for those who hesitate. Act now.
· It’s always darkest before it’s pitch black.
· Survival of this storm means drastic measures must be taken now, so you will have the opportunity to capitalize on this down turn in the future.
· We are in the beginning of a long cycle, what we call a “Secular Bear Market.” This could be a 15 year problem. [many slides on historical charts of previous recessions, averaging 17 year cycles.]
· The credit market [versus the Equity markets] are the issue and will take time to recover.
· Inflection point: Make changes, slash expenses, cut deep and keep marching. You can’t be a general if you turn back.
· This is a global issue and not a ‘normal’ time.
· There is significant risk to growth and your personal wealth.
o Manage what you can control. You can’t control the economy, but you can control everything else.
§ Cut spending. Cut fat. Preserve Capital.
§ Don’t trust your models and spreadsheets. All assumptions prior to today are wrong.
§ Focus on quality.
§ Reduce risk.
· Note: Michael had a lot of slides that were charts, data points and comparisons.
· A “V” shaped recovery is unlikely [√]
· Cuts in spending will accelerate in Q4/Q1. Look at eBay—this is just the beginning.
· This is a different animal and will take years to recover.
· Getting another round if you’re not profitable will be rough.
· Do everything possible to get to cash flow positive. Now.
· Nail your Sales and Marketing message.
· Pound your competitors shortcomings. They’re hurting and they will be quiet. Take the offensive.
· In a downturn, aggressive PR and Communications strategy is key.
· M&A will decrease dramatically and only lean companies, with proven sales models will be acquired.
· Spectrum discussion:
o Capital Preservation ß———————————-à Grab Market
o Everyone should be far to the left (capital preservation)
· Requirements of our companies:
o You must have a proven product
o You must cut expenses. Now and deep.
o Your product should reduce expenses and drive revenue [NOTE: I want to revisit this with the Management team. Our solution does both, we need to quickly and crisply define the sound bite here.]
o Honestly assess your solution vs. your competitors.
o Cash is king [have you gotten this message yet?]
o You must get to profitability as soon as possible to weather this storm and be self-sustaining.
· Operations review:
o Engineering: Since you already have a product, strongly consider reducing the number of engineers that you have.
o Product: What features are absolutely essential? Choose carefully and focus.
o Marketing: Measure everything and cut what is not working. You don’t need large Product Marketing, Product Management teams.
o Sales & Business Development: What is your return on this investment? The Valley has gotten fat with Sales people: Big bases, big variables. Cut base salaries on sales people, highly leverage them with upside (increase variable) and make people pay for themselves via increased sales productivity. Don’t add sales people until you’ve achieved your goals with sales productivity. Be disciplined.
o Pipeline: Scrub the shit out of it and be honest with yourself.
o Finance: Defer payments, what is essential? Kill cash burn.
· Death Spiral (Nobody moves fast enough in times like these, so get going and research later.)
o The death spiral sucks you in, you’re in it before you know it and then you die.
o Survival of the quickest.
o Cutting deeper is the formula for survival.
o You should have at least one year’s worth of cash on hand.
§ Assess your situation. Drop your assumptions, start with a blank page and start zero-based budgeting.
§ Adapt quickly
§ Make your cuts
§ Review all salaries
§ Change sales comp
§ Bolster your balance sheet—if you can add $5M to your coffers, take it and save it.
§ Spend like it’s your last dollar.
· Get Real or Go Home.
As a Sequoia portfolio company, we actually had a slightly different take on this meeting. Read more here: http://www.appirio.com/blog/2008/10/chris-barbin-theres-lot-of-talk-today.php
The majority of 2006-2007 vintage funds will likely lose money – that’s what makes the VCs nervous. The numbers on 1999-2000 vintage funds were ghastly.
For a look at where the economy is heading check this out:
It’s interestiong also how will some startups get money – and also about google adsense too.. google make it more and more difficult to work with it…
We sent out our reporters to find out more – here are some additional details from those who were at the actual meeting:
Wealth comes from natural assets multiplied by intelligence and labor.
In other words, you can not spend your way to riches, as consumers have been trying to do this past decade, you have to create the wealth yourself.
Now, as we re-balance, we will have to start making things, Manufacturing our own wealth again. We have seen what can be built, we want it, we know what we as a nation did before, and so we will start to do it again. The real entrepreneurs will indeed emerge, defying the nay sayers, and will again make America Great!
We will do it precisely because we, the ones others call crazy, ARE FREE to do so!
And when you have a solid idea, people, be it Venture Capitalists or the guys next door, WILL fund it. They will find it because they KNOW what AMERICA has done, and can do again!
Remember, peasants are people who vote with their feet. They are still voting for America whenever they can.
We all knew this was coming.Now lets think of getting over the troubled times.
is off-shoring going to be silver bullet for this problem ? It might not be, but it will definitely help reduce operational costs for these startups.
your offshore development partner
Here is the entire presentation from that evening http://budurl.com/anem
THE AMERICAN GOVERNMENT CRISIS
We the American people can and will, out of desperation take care of this crisis without any government so called help.
If the government put a 6 month freeze on foreign imports, or if they passed a bill that balanced our trade, such as if a foreign country only allows us to send 2 billion dollars worth of goods to their country, then in turn they are allowed to send only 2 billion dollars worth of goods to our country. You know balance the trade!
You and I know this is not going to happen because the rich want a one-world economy and we have a useless congress with a 15 % approval rating. This means that 85 out of 100 Americans think all of congress should be FIRED! We are powerless here.
However Washington, we the little American people have a surprise for you! What you will not do because you are owned and controlled by the lobbyist, we the little American people will do it for you. We definitely don’t need you!
We will stop buying foreign made products and ( you can not stop us ). Within days Wall Mart and others will be full of CHINA AND OTHER COUNTRIES goods that they can’t sell! Within 6 months, millions of good paying American jobs will be created to fill the void with American goods. Again Washington ( you can’t stop us ) !
American little people! I beg you, If it doesn’t say AMERICAN MADE—–DON’T BUY IT! Within 6 months you will have a good job, a good home, be able to pay your bills, and create secure savings! The best thing about this is ( no one can stop us ) .
AMERICAN MADE—AMERICAN MADE—AMERICAN MADE—AMERICAN MADE. Let’s see if this gets Washington’s attention! To Washington, we don’t count!
JOE BILL JONES—A little AMERICAN.
Prepare for 3-6 months without additional financing? That’s no time at all. Obviously Conway is talking to companies that are incredibly tight with the VC community. They basically run their businesses on venture money.
Manufacturing our own wealth again. We have seen what can be built, we want it, we know what we as a nation did before, and so we will start to do it again.
I am working in Sequoia.
Its really amazing John.
I am also working on it from last 3 years.