Bad times have hit sunnily optimistic northern California. Does it matter if the mayhem on Wall Street had any real connection with the tech-powered Silicon Valley economy? Some of the region's most influential power brokers believe it will — and by pushing others around, they can make perception reality. A helpful insider has provided notes from a recent meeting of Sequoia Capital, a backer of Apple, Cisco, and Google which has risen to become the Valley's preeminent venture-capital firm. Michael Moritz had summoned CEOs of Sequoia's portfolio companies to tell them to prepare for a long, hard downturn. The bottom line: All startups must become cash-flow positive — in other words, earn more than they spend. Or in other, other words, act like the real businesses they always should have emulated. Here are what our tipster claims are notes from the meeting, apparently forwarded by one of the attendees:
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.