Updated with the Sequoia powerpoint: Last night I reported on a special meeting held by Sequoia Capital for its portfolio companies, warning them about the fiscal hurricane that was going to hit them, and how they’d better figure out ways to survive what could be a big downturn.
There were some gaps in the details about that meeting, but I have since been able to piece together the minutes and what folks there essentially said. Since these are second-sourced details, I cannot say they are a 100 percent accurate, so please view them with a degree of skepticism. Nevertheless, I still feel confident enough to share them.
These were the four speakers:
Mike Moritz, General Partner, Sequoia Capital, who moderated the speakers. The speakers were Eric Upin, Partner, Sequoia Capital, who until recently ran the $26-billion Stanford Endowment Fund, and Michael Partner, Sequoia Capital, who was Sequoia’s very first hedge fund manager and worked at Maverick Capital and Robertson Stephens. The last speaker was, as I mentioned before, Doug Leone, General Partner, Sequoia Capital.
Moritz Musings
Mike Mortiz kicked off the proceedings by saying that these are drastic times and that means drastic measures must be taken to survive. His message to companies was don’t worry about getting ahead, instead, “We’re talking survive. Get this point into your heads.” He warned that companies need to be cash-flow positive, and if they are not, then they need to get there now, because raising capital without being cash-flow positive is going to be tough. He was warning that there will be a price to pay for those who hesitate to act.
Upin Says
Upin, who knows a thing or two about money and markets, told the room that we are in the beginning of a long cycle, what he called a “secular bear market.” This could be a 15-year problem, he said. This comment was accompanied by many slides that showed historical charts of previous recessions averaging 17-year cycles. He pointed out that the issue here is not the equity markets but the credit market, and that will take a long time to recover. He was ominous in warning the startups that this is a global issue, it is not a normal time, and is a significant risk not just to growth but to personal wealth.
He advised startups to make drastic changes, to cut expenses and to cut deep, but to still keep marching. “You can’t be a general if you turn back,” he apparently said. The point he hammered on was that since you can’t manage the economy, manage everything else, including your business. He had some interesting advice for startups.
- Cut spending. Cut fat. Preserve capital.
- Throw out the models and spreadsheets, because all assumptions will be wrong.
- Focus on quality.
- Reduce risk.
Michael Beckwith
Michael Beckwith’s presentation had lots of charts and data and he pointed out that the V-shaped recovery is unlikely. He also said that the cuts in spending will accelerate in the fourth quarter and the first quarter of 2009, and pointed to eBay as an example.
Leone’s lessons
Doug Leone told the group that this downturn was a different animal and one from which it would take “years to recover.” He was clear in pointing out that:
- Unprofitable companies would have a tough time raising cash, so get cash-flow positive as soon as possible.
- Go on the offensive and pound on your competitors’ shortcomings.
- Be aggressive with your messaging and be out there. In a downturn, aggressive PR and communications strategy is key.
- Decline in M&A will mean that only lean companies with sales models that work will get bought.
- When it comes to deciding between capital preservation and grabbing market share, he advised that everyone should be preserving capital.
Leone’s other tips for companies, especially the Sequoia portfolio companies, were something like this:
- Start with zero-based budgeting.
- Cutting deeper is the formula to survive, and this is an era of survival of the quickest.
- Make sure you have one year’s worth of cash.
- If you have a product, reduce expenses around it and boost sales. If the product is ready, cut the number of engineers.
- Focus on building the absolutely essential features in your product.
- Be brutal when it comes to marketing — anything that isn’t working, cut it.
- Don’t burn through your cash, for cash is king.
- Cut base salaries on sales people and leverage them with upside.
- Most importantly, be true to yourself.
So Om ,
you recently got 5 million right? Is that enough for you to sustain. Are you casflow +ve.
I would hate to see this blog die.
http://www.gandalf-lab.com/blog/2008/10/let-real-test-of-open-source-business.html
I really agree with Doug Leone’s comment about the need to get the word out there. In particular, I really like this statement: “Be aggressive with your messaging and be out there. In a downturn, aggressive PR and communications strategy is key.”
I work for a PR firm, so my opinion is biased. However, I also have a lot experience as an entrepreneur and know that for small companies, a lot of the PR work can be done internally without hiring a firm. The worst thing to do is to stop communicating with potential customers, either on your own or with outside consultants. If you do, then your company will look dead. Customers generally want to go to the most vibrant company in the space.
Many companies are also using social media techniques and directly tying campaigns to registrations, downloads, or even sales. I’m actually working on a big social media campaign now where the main metric for success is increase in sales.
@Niraj,
We are doing whatever it takes to stretch our dollars and stay small and nimble so we come out at the other end pretty intact. again you can’t fight the tidal wave, but want to make sure we are out of its way.
Wow, this borders on the irresponsible in my opinion. What happens if the economy bounces back in a year? All Sequoia’s investments will be underfunded and undermanned and they will have let a lot key players out into the market to be picked up by competitors. Granted times will be tough, but great investments come out of tough times. Just ask Google. In fact, I think that the greatest investment opportunities come from times when global economic relationships are restructured. Change = opportunity. Those who are scared into submission will lose.
Dude.. this is SEQUOIA’s gameplan.. spread FUD.. so like all VCs are like WTF.. then like.. SEQOUIA goes backdoor and invests in a huge shit load of new cool startups.. awesome strategy..
Great message from those VCs. I agree with them. Great post OM. Congrats for your warchest 🙂
My philosophy has always been get revenue and focus on the long term mission – not what the VCs think the sector is (personal experience there). All the VCs who don’t push their companies to get revenue will get trashed in the market.
I know of a specific examples recently of VCs killing their startups that developed a solid client list and $7m run rate business but they just didn’t like where it came from. Those models would look good now.
http://furrier.org/2008/10/10/silicon-valley-economy-no-crater-here-startups-still-happening-revenue-is-king/
Michael Partner??? I think you mean Michael Beckwith.
@om
It shows VCs are simply trend driven. Sequoia and Ron Conway should not paint Doomsday picture. Internet is not going away and there are plenty of opportunities.
Michael Mortiz, John Doer, Vinod Khosla, Ron Conway type highly accomplished Tier1 VCs during these times should in fact take the leadership role to fuel Silicon Valley economy and make more money available.
There is plenty of cash sitting on sidelines and markets will rally up soon. The future is always bright!
Best wishes to all!
Om, I have been following your take on the Sub Prime woes for the valley, remember your last article with one of your mentors who said that it ain’t that bad!
Well perhaps liquidity woes are driving beancounters in the forefront. I would also love to see you covering innovation in workplace and disruptive practices for a change. It is time to embrace innovation however small or large and send positive vibes to the community.
Btw, I have learnt technology here on Gigaom, all kudos to you (I am an HR Specialist and Chem 2000, SSC)
Cheers
Harish
wow, i wouldn’t want to see that happened. and congrats for your warchest!
For most of these start-ups, many of them overspend to begin with. When creating a new company or product… it is essential to balance %50 of a great innovative idea with a 50% great innovative business model.
When we work on new products, I make sure we do it all on a 9 to 5 budget, meaning, using the money you would make from a 9 to 5 job to develop and realize the project.
“Start-up” is just that.. starting a project… If you get capital after you are in existence (such as gigaom.com) this is ok because the investors can see there is a live usership and room for service growth to the dedicated traffic.
The big mistake made by most start-up is they submit a few pages of a business plan, call in a few connections with some college buddies, and BAM! $6,000,000 in capital without even a trace of a product….
Now said company have to burn through 85% of the seed capital to find a product and identity.. then on to the next rounds of funding… this type of practice makes it hard for us with REAL innovative ideas to gain the start-up support we need when you take the extra time to build and release initially independently.
This is similar to high school grads going directly to the NBA… what you end up with is a crappy NBA league. When guys went to college for 3-4 years then went to the NBA we got Magic, Bird and Jordan.
The current financial squeeze does not effect the best of us because we had to think of cleaver ways to gain profitability on day 1 due to the VC clic circle of buddies of the Valley.
I don’t see how any of the advice Sequoia is giving is at all unique to the situation … these are simply good business principles that should be followed in all times, good or bad.
really, when is it good to add fat? is there a time when not using metrics is good?
> If the product is ready, cut the number of engineers.
That’s going to make it tough for Sequoia companies to get engineers. The ones that they get are going to resist four year vesting and one year cliffs. They’re going to jump 3/4 through a product to another company/product that is only 1/4 through.
“Cut engineers when ready” makes sense only if Sequoia companies only have one product and it’s “done” at some point. (Google is still working on search.) Companies that work that way shouldn’t employ engineers – they should contract out.
Even they are not painting the worst case scenario -i.e NO RECOVERY AT ALL…or is this as worse as it will get (i.e it is all recovery from now on?) wooohooo…
While all this ‘doomsday’ advisory is good,all these recommendations should have been thought and applied earlier consistently as a part of active risk management and rather should be a way of living going ahead…
The whole problem that has come around is a result of greed,excesses,thoughtlessness,irresponsibilties and arrogance at various levels which has boomeranged on the whole society and the economy.
So,Going forward, Ethics,Humble & God fearing,Binding together ,Personal and Social responsibilities will gain greater values alongside the thrift,quality and other aspects that people & companies have to breathe to live their lives in PEACE..
The situation is not as bad for tech as in 200 because there is no bubble waiting to burst.There will be a downturn matching the general economy followed by a recovery in tandem as well.
The situation is not as bad for tech as in 2000 because there is no bubble waiting to burst.There will be a downturn matching the general economy followed by a recovery in tandem as well.
Sequoia is obviously one of the best VCs in the business and a great capital partner to work with – a reputation I’ve heard repeated by multiple members of our entrepreneurial community. That being said, Sequoia’s comments are excellent warning beacons that keep entrepreneurs focused ; yet I would argue that we still need to “be true to ourselves” by navigating the waters cautiously, but still pushing forward.
On this note, I would like to comment on several of their points made by various quoted speakers potentially out of context, but here goes. One qualifier before I start, I am a pretty big advocate of Buffett and have tried to live his best investment advice. While it may not be totally applicable to the start-up world, I do think it is pertinent advice.
“Occasional outbreaks of those two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics is equally unpredictable, both as to duration and degree. Therefore we never try to anticipate the arrival or departure of either. We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”
Warren Buffett
• “Decline in M&A will mean that only lean companies with sales models that work will get bought.” Certainly, M&A shrinkage will have a significant affect on later-stage companies, but for earlier stage start-ups I think this is a non-issue. Quite the contrary, I believe the potential for an acquisition 3-7 years from now has gone up vs. 12 months ago. As the fear in the market subsides and “a new normalcy” develops, quality companies that survived and experienced slower or negative growth will look to grow inorganically while many of their competitors are either beaten or gone.
• “If you have a product, reduce expenses around it and boost sales. If the product is ready, cut the number of engineers.” Focus and driving good business decisions is always a key for entrepreneurs; however, I believe now is an ideal time to be launching a new product as long as the focus is on solving a customers pain at a reasonable cost. In hindsight, I was lucky to launch our company at a time when customers are desperate for new solutions. It certainly has not been easy, but we have blown away some of our milestones and customer acquisition targets, because they are looking for new models on how to do things. Be greedy when others are fearful.
• Start-ups are always playing the survival game, but if played purely from the defensive side, I think most start-ups will lose. My company’s culture of hungry and lean is how we stay aggressive and must be in a marketplace with lots of distractions, not defensive.
• “Don’t burn through your cash, for cash is king.”
Well, I can’t really argue with this one, but I do have one caveat. Use the cash when you see opportunity. That is what it is there for. That might mean hiring a team member that you normally might never be able to attract or creating a new product or core product enhancements to serve new customer needs.
The points made by the Sequoia Capital Executives are all valid and accurate. Times are tough, very tough, and will probably get tougher. However, it is not all doom and gloom. It needs to be understood (and which history has repeatedly proven) that some businesses will emerge from this major economic downturn exceedingly successful, incredibly well-positioned and far more profitable as a result. Each business just has to truly decide if they are going to be one of those entities. Once the decision and commitment has been made to achieve that success, it is a matter of applying a relevant, well-thought approach to three basic aspects: Attachment, Gearing and Value.
Attachment:
The issue of attachment is, as in life, to let go of your pre-conceived notions of the way things ‘should’ be and potentially see business opportunities that you never knew existed. Your customers are going to act differently, the markets are going to behave differently, everything is going to change. If you are completely ‘attached’ to the way you have been doing business in the past (i.e. to the areas, the manner and the percentages in which you are used to earning profits), and you are not able to evolve and adjust your business, your approach and/or your offerings, then chances are you will go the way of the dinosaur (they too had trouble adapting to their changing conditions). The name of this game is ‘adaptability’ and we are all sitting at a high-stakes table.
Gearing:
Once you are ready to ‘adapt’ to changing conditions, you need to determine how you can ‘gear’ your business towards meeting the new needs of your market (both current and new customers) in this distinctly different economic environment. This type of ‘gearing’ may mean, for example, selling smaller product/service sets, putting more of a focus on providing services and refurbishments on your client’s current equipment and assets instead of selling them new ones, or devising creative ways of offering additional discounts, promotions, bundled products, better service and other compelling reasons for new prospects and current customers to do business with you.
Value:
The last point is around delivering value. The more value you can deliver to your buyers, the less likely they are to buy from anyone else. When you truly understand your customer and what they are looking for in their purchasing process, you understand exactly what they need. It is then far easier to understand how you can satisfy their needs at the lowest price point that makes sense for all parties.
In conclusion, we know that change in business, as in life, is both inevitable and comes in waves. So it is only those people that embrace change and that transform themselves to work within the change, that will thrive. Those that are able to ride out and harvest from this crashing wave of change today, will be both better stabilized and better prepared to take advantage of the next upsurge. The only question left to ask is…which group will you be in?
I do think Sequoia may be biased about the current economic downturn because it is precisely the financial elite that are taking it on the chin here. They have been enjoying a period of extraordinary largesse over the last 25 years, in terms of lower tax rates, easy access to low cost money, and — due to the benefits of globalization — a larger and more talented labor pool and a growing end-user marketplace.
I think that the majority of us far below the waves (glug) will find that this perfect storm only mildly impacts the growth trends that matter to us — the steady rise in Internet usage and social networking.
invaluable advice. im a strong beleiver in the fact that this will lead to a spurt in demand for strong enterprise 2.0 companies which offer solid benefits, as companies across the board are bound to look for ways to cut costs.
cost cutting initiatives in companies may also mean more telecommuting and outsourcing of jobs, and an increase in demand for communications and collaborations technologies.
Why is it when rich people give advice on tough times, then end their presentation with a martini being served, it just doesn’t ring true?
Are we in a downturn economically? Yep. But during a downturn is also the time that VCs should be leading the charge to find and invest in new businesses to be ready when thing get better.
If you have a product, reduce expenses around it and boost sales. If the product is ready, cut the number of engineers.