Inside Details of Sequoia Capital's Doomsday Meeting With its Companies

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.

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