Sequoia Rings the Alarm Bell: Silicon Valley Is in Trouble

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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 Comments

Divi

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.

JOE BILL JONES

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.

Raza

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.

http://www.confiz.com
your offshore development partner

JVV

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.

Mr.Snow

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…

Allan

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.

JoeInsider

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.***

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 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.

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:

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.

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:

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.

o 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.

salil

@Niraj J.

If the “open source” in question has a source of cash, things will be ok, otherwise it will be closed source.

Bozo

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.

ELSE if
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.

END IF

Ted Murphy

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.

sansa

Food, Fear and Sleep

The more you increase it the more they increase

— small east Indian Proverb

I say Chill Out!

ps

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.

Scott Lockhart

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.

martin varsavsky

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.

Sean Ellis

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 .

C Wagner

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.

jojoe

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 ?

Arik Czerniak

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..

moto

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?

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