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A CEO's Sequoia Meeting Notes

Oct 09, 08 in Venture Capital   26 Comments

From The Funded.  Not sure of the source.

Update:  Seems like the source was fairly accurate.  TechCrunch and VentureBeat now have the actual presentation online.  It is also on SlideShare.  I have embeded the presentation at the end of the notes.

Today, Sequoia Capital hosted a mandatory CEO All-Hands Meeting on Sand Hill Road. 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.***

Speakers:

· 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 Partner, 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.

Mike Moritz:

· 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.

Eric Upin:

· 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.

· Advice:

- 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.

Michael Beckwith:

· 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.

Doug Leone:

· 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:

- Capital Preservation ß----------------------------------à Grab Market

- Everyone should be far to the left (capital preservation)

Requirements of our companies. 

  1. You must cut expenses. Now and deep.
  2. Your product should reduce expenses and drive revenue
  3. Honestly assess your solution vs. your competitors.
  4. Cash is king [have you gotten this message yet?]
  5. You must get to profitability as soon as possible to weather this storm and be self-sustaining.

Operations review:

  • Engineering: Since you already have a product, strongly consider reducing the number of engineers that you have.
  • Product: What features are absolutely essential? Choose carefully and focus.
  • Marketing: Measure everything and cut what is not working. You don’t need large Product Marketing, Product Management teams.
  • 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.
  • Pipeline: Scrub the shit out of it and be honest with yourself.
  • 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.)

  • The death spiral sucks you in, you’re in it before you know it and then you die.
  • Survival of the quickest.
  • Cutting deeper is the formula for survival.
  • You should have at least one year’s worth of cash on hand.

Tactics:

  • 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.

Sequoia Capital on startups and the economic downturn
View SlideShare presentation or Upload your own. (tags: depression recession)

Comments

Thanks Lance. Interesting read. what's your take?

Mukund Mohan  |  Oct 09, 08 at 01:00 PM

Ron Conway steered his message to young companies looking at Seed or Round 1. It's gonna get tighter, so get tougher. (ok, I paraphrased)

His suggestions...
- close on maximum capital immediately, being realistic on valuations, marquee investors, forecasts, et al
- raise money by cutting costs (3-6 mos worth)
- look at M&A, corporate partners for support/survival

http://news.cnet.com/8301-17939_109-10062086-2.html?part=rss&subj=Webware

Dean...  |  Oct 09, 08 at 01:10 PM

doom and gloom. things are rough right now.

amro  |  Oct 09, 08 at 01:47 PM

Clearly times are tough, but I hope this email doesn't discourage companies from innovating and investing while the masses (and probably their competitors) bunker down into survival mode. There were some strong companies built on the backs of the last downturn and I don't see why the same can't happen this time around. Even though finances are tough doesn't mean that innovation needs to suffer. Just my two cents.

Boris Epstein  |  Oct 09, 08 at 03:44 PM

Mukund: My take is that the guys that were speaking at this meeting are pretty darn smart and have been through it before. They have specific experience with startups during downturns which I do not.

During the last down cycle I was an EVP at EarthLink, creating their mobile wireless business. EarthLink had over $500 million in the bank and had lots of customers generating cash. What I ended up doing at the time was execute a little rollup. I purchased a company that had raised $250 million in a bankruptcy proceeding for $2.5 million cash plus the assumption of certain debt that was about the same amount. The company could not scale backs its expenses quick enough to weather the storm.

So I think valuations are going to come down and you need to converse cash. I also think there will be opportunities in the near future to pick up some assets on the cheap.

Lance  |  Oct 09, 08 at 04:16 PM

Comes pretty close to a very selective and exclusive newsletter I'm a subscriber to. The info on that have been a coming disaster with widespread depression hitting hard. The latest outlines, sorry guys, is that the bottom will not come before 2018! Mark my words, this newsletter have been right on the spot for a long, long time ...

So I guess it's about time to do take the necessary steps fast and without any hesitations whatsoever.

Thanks for your info, GREAT!

Watcher  |  Oct 09, 08 at 06:24 PM

Yes, VCs, angels, and entrepreneurs predict very hard times ahead. I've heard various points of views, some say finding funding is almost impossible, others say good companies can still find their series B, C or D rounds. Most everyone agrees startups need to get lean and find ways to weather the storm.

This means is that there's fewer opportunities for young, passionate and skilled people to work for startups. For people like myself, the possible next generation of entrepreneurs, who with somewhat limited experience, should we try to join a startup we think can succeed, or even start something (with the small possibility of getting funded), or should we take the safe route and work in industry for a few years until this storm is over and then pursue our entrepreneurial passions?

Blake Perdue  |  Oct 09, 08 at 10:27 PM

Vulture capital economy is coming to and end, this means the reality has to sink in, capital is produced by people who store more energy than they use and not by printing currency/tokens.

Last 30 years economy used to work like - the highest will print currency and rest of the people will serve them. ie. top down economy.

In the future it will be like the highest among you shall serve the rest or *starve*. ie. bottom up economy.

Goodbye vulture capital economy!

Joe D  |  Oct 09, 08 at 11:45 PM

Blake: I have close relationships with a good number of angels, entrepreneurs, and venture captialists. This week I have heard of both angel round and last series round investors "decommitting". I have had an entrepreneur tell me he is putting his plans to double his team on hold.

I am also on the board of the Kelley School Alumni Association. The placement office was already greatly concerned when I was in Bloomington in mid September about the prospects of grads targeting the Wall Street and consulting industries.

Worthy of an article in and of itself and on the to do list.

Lance  |  Oct 09, 08 at 11:58 PM

Blake, right now, there are probably a lot of folks way smarter than me who will probably disagree, but I say... do what you feel is best, at that point in time.

I launched my first startup in the middle of 2000, right after leaving Lance's tutelage (and Big Country's, before him). I was ill-prepared in product development and executive management. Plus, the dot-com bubble had developed numerous anuerisms, so we "napkin visionaries" were having trouble raising money. On both coasts.

After failing to get traction (admittedly, as a result of my own inexperience, more than the bubble's impact), I needed to lick my wounds for a while. But then, I started another company. This one had a modicum of success.

I started another after that, but this time, I lost *nearly* everything. So, after more wound-licking, I earned some money, bought a struggling company, turned it around, and sold it. Then, back in December, I helped launch startup number... whatever.

My point is, if it's in your blood, you're going to do it. And I think every entrepreneur would agree. But it comes down to timing, product, and experience. Especially today.

So, if I could be so bold as to offer a little advice, I'd suggest taking a hard look at your current situation.

Can you afford to live without a paycheck for 12 mos? (6 while you try to get the company going, 6 if it fails and it takes you some time to land a job)

Are there people who rely on your support (financial and otherwise)?

Can you enlist friends' help to get the product launched quickly (for equity, not cash)?

If you need capital, do you have the skills necessary to convince investors to write you a check?

If even 1 of these Q's give you pause, I feel it would be a wise idea to either take a stable job and build your dream on the side, or work for a startup and bring your ideas to the table, as addt'l/supportive products.

If you choose the former, quickly get a product launched, quickly generate some revenue, and then craft your plan for getting out of the ball-and-chain, so you can focus on your brainchild.

If you choose the latter and it's a success, you'll have considerable street cred and startup experience.

Most importantly (and you should read this sentence 100 times), you must be *absolutely* sure that you can handle failure -- financially and emotionally. Cuz failure is a helluva mentor, but it ain't no fun.

Dean...  |  Oct 10, 08 at 12:41 AM

Great article Lance. I feel like I should print this out and post it where I'll see it often.

Paul Stamatiou  |  Oct 10, 08 at 01:04 AM

Thanks for posting this Lance. I also received an internal Benchmark Capital letter which I posted this evening. I also posted my opinions based on what we're hearing and seeing out West along with some of what I learned from the dot com crash.

http://blog.jeffhaynie.us/the-economic-downturn-and-your-startup.html

Jeff Haynie  |  Oct 10, 08 at 01:26 AM

WHAT? Does that mean no more Superbowl ads for my startup?!? Sheesh, what's the world coming to when we can't toss our testosterone around like that?


(Sorry, couldn't resist an likely failed attempt at levity. :)

Mike Schinkel  |  Oct 10, 08 at 02:58 AM

Something seems really wrong with this: "Requirements of our companies."

What the hell? Was this some sort of group board meeting? What if NEA (or VC x) is also an investor and sits on the board of one of these companies. And what if they think now is a great opportunity go counter? Like GOOG or PayPal during the last VC downturn?

How dare Sequoia make these one-size-fits-all pronouncements on behalf of all of their co-investors and boards?

Paul Freet  |  Oct 10, 08 at 08:20 AM

Hmmm. What part of this is "Brilliant"? This is all economics 101. I might add it's also a self fulfilling prophecy stuff. What would have been impressive would have been something creative vs destructive.

However, given some of the comments above they probably know this audience is unique in owning huge rose colored glasses so make it very clear turbulence ahead.

Justin Benson  |  Oct 10, 08 at 05:10 PM

This is the kind of reactionary crap that got us into this mess we're in. Why does one reaction have to be met with another?

As for the advice to "trim the fat" there's not much mention of cutting CEO salaries and bonuses. Hmmm, that's the first thing I'D cut.

It's like a traffic jam: Slamming on your breaks just causes everyone behind you to do the same. Just don't follow the car ahead of you so closely and slow downs won't be so disastrous and deep.

Natobasso  |  Oct 11, 08 at 01:11 AM

Oh, something just occurred to me! Gee, Sequoia invited all the firms who've benefited from their infusions of capital in order to tell them to "Stay Profitable or Die"? What a brilliant f-ing plan. What they mean is, "Don't lose us any money or Die".

Nice one Sequoia. Freakin fear mongerers.

Natobasso  |  Oct 11, 08 at 01:15 AM

Why is it no one suggested cutting out ALL advertising and promotional costs and substitute an employee to market word-of-mouth campaign? The advertising companies are getting fat and hiring more high paid people to spend money in times when the money is better spent on more economical and efficient methods of generating the buzz. I observe and assess the marketing and sales operations and can suggest that a) sales is waiting for marketing to generate the buzz, when in fact the sales machine is a better source of buzz, testimonials and word of mouth than the traditional marketing person. This is not a "fear" confirmation endorsement, only a suggestion that there are better, effective and certainly less costly methods of promoting, comparing and contrasting competitive products and services and stop funding profits at advertising firms. Get creative!

Sandy Waters  |  Oct 12, 08 at 05:43 PM

The article is probably very timely and gets the current mood and the action to be taken very candidly.

I am surprised (and happy!!) to see venture investors suggesting that the xls sheets are no longer valid as the assumptions are all things of the past.

Yes, the period is uncertain. Yes the tunnel does not look short, and the light may be quiet a distance away. However, understand from history that best of the robust businesses were built when there was a recession. Sure, there are such opportunities and though valuations currently may not reach our expectations, businesses can still be built in the current context.

Sure, success will come to those who will take these conditions as a challenge and create businesses that stand the test of (trying) times

KS  |  Oct 13, 08 at 12:26 AM

fwiw, I'm hearing from service providers to companies owned by Berkshire-Hathaway that they're being told (from on high) to "double-down" the highest ROI marketing investments, get aggressive, and take market share while others flinch. This is called hard balls.

Edw3rd  |  Oct 14, 08 at 12:36 AM

i have been reading both fear-inducing entries such as this one, and laissez faire entries that say we will be fine by Christmas. of course, neither one is 100% right -- somewhere in between the truth shall lie.

The "seasoned professionals" who wrote the fear-inducing entries failed to notice that we are not longer a "USA is #1 and only" world, but an extremely large and complex global conglomerate of markets and countries. the internet - that great equalizer - changed the terms for recessions, depressions, and even downturns. if you read some of the latest economic theories coming out of academia, they all focus on how globalization changed the game.

you want to be scared? fine, but this is not the time to batten your hatches and weather the storm. the smart money is not doing that. they are growing, within their means, and capturing as muck market share and loyal customers as they can. they know that this too shall pass... and when that happens, the one with the most customers wins (isn't that the reality of biz all along?).

final words, it is NOT a different world for startups. as long as they consider themselves "different" from other business they shall not succeed. the role of the vc / angel / funding partner is not to simply put money and hope that eventually they get something back. they need to be responsible enough to know that a sock puppet is no more a market differentiator than a clown is. in other words, if mcdonald's does not rest on its laurels and relies on ronald to pull them through whatever they are going through, neither should a startup. business is business.

esteban kolsky  |  Oct 14, 08 at 12:59 PM

Good post, Lance. Employee benefits are a significant portion of an employer's costs. I recently wrote on ways an employer can reduce these costs without significantly harming the goal of attracting and retaining employees - http://blog.angusmcrae.com/?p=60. A recent CFO article (http://www.cfo.com/article.cfm/10722998) shows employee benefits expense at about 43% of payroll with medical insurance at about 12%. Hopefully this information can help some of your readers. Keep up the good work...

Angus McRae  |  Oct 14, 08 at 01:26 PM

During the Great Depression, companies like Kellogg, Proctor & Gamble, Chevrolet, and Camel marketed heavily and emerged as leaders. Reason being, when consumers began spending more freely, the brand loyalty remained.

http://answers.google.com/answers/threadview?id=178334

But, it's not a matter of Smart Money vs. Dumb Money. It's simply a matter of... money.

If a startup (or Fortune 500 company) has it, then yes, this is an unparalleled opportunity. But more likely than not, startups will have to batten their hatches and weather the storm, because they don't have a budget for umbrellas and raincoats.

I'm no fortune teller; admittedly this caught me by surprise. But from what I've learned, it wasn't a surprise to smart investors (Buffet's talked about it for a while). If Sequoia and others were really smart, they'd have had this conversation, as a contingency plan, 12 months ago.

That is the kind of leadership a startup CEO needs from a VC or Angel. In every sense, that *is* Smart Money.

Dean...  |  Oct 15, 08 at 04:27 AM

There is no question that thousands of venture backed startups are bound to impacted by the general state of the global economy - however I think it is important to note the different ways that such a company can go about bracing itself. Balihoo's CEO posted a blog in which he wrote: "Smart companies will use this opportunity to retrench, get back to good solid business principals and eat the lunch of their competition. If the world follows the advice of Sequoia all of the early stage companies will be cutting to the bone and just entering survival mode. What an opportunity!"

You can read the full posting here: http://blog.balihoo.com/index.php/2008/10/14/turbulence/


Marcie Blagden  |  Oct 15, 08 at 11:02 AM

I've seen the Sequoia presentation, I've read all the comments. As an entrepreneur who's gone through both the good and the bad times (I guess most of you have), it seems to me that the tactics they discuss are pretty logical.
What disappointed me about was the overall negative tone. I felt like I was being reprimanded by Sequoia. Yes, their guys are far smarter than I am, but Silicon Valley didn't get started by being afraid.
No doubt the VC funds are going to have some rough times ahead, but I don't see that as a reason to stop in your tracks and hunker down.
We have plenty of incredibly important things to work on in the world - energy, water, life sciences, you name it. And plenty of really ordinary but solid businesses to own and operate.
I'm really sorry that the market for VCs will be tough for a while, but I work 7 days a week with entrepreneurs all over the world, and I can tell you there is no shortage of ideas, innovation, personal energy and down right tenacity. The world is not coming to an end. It's just getting started on the next level of being a truly global village.
So I say yes, spend your money wisely, know your market and your customers, run your business as effectively as you can. But don't hide under a rock. The world has never been more in need of the entrepreneurial spirit!

John Matthesen  |  Oct 19, 08 at 09:29 PM

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