Sequoia Capital - Ceo All Hands Final - Warning to CEOs

Alex EvangManagement

Jan 27, 2012 (5 years and 8 months ago)

610 views

Good summary of the financial crisis of 2008 and it's impact on VCs and startups.

R.I.P.
GOOD
TIMES
1
NOW WHAT?
3
WALL STREET
HOW DID WE GET HERE?
ERIC UPIN
HOUSING LED RECESSION
OVER LEVERAGED FINANCIALS
FALLING ASSET PRICES
FROZEN CREDIT MARKETS
WEAK HOUSEHOLD BALANCE SHEET
GLOBALLY SYNCHRONIZED SLOWING EXACERBATING ALL OF ABOVE
FORCES OF INFLATION VERSUS FORCES OF DEFLATION
MULTIPLE PROBLEMS
0
5,000
10,000
15,000
5
10
15%
DowJonesIndustrials(solidline)
1970
1980
1990
2000
2008
Inflation(dottedline)
Source: Bureau of Labor Statistics, Dow Jones
Bear Market
1966-1982
Bull Market
1983-2000
MARKET CYCLES ARE LONG
Source: Federal Reserve, International Labour Organization
100
125
150
199620022006
Indexedglobalproductivity
0
2
4
6
8
10%
199019
Fedfunds
9520002005
rate
Sep2008
0
1
2
3
4B
198
0199020002008
Sizeofglobalworkforce
DRIVEN BY PRODUCTIVITY AND CENTRAL BANK
Source: Bureau of Labor Statistics, Federal Reserve
0
4
8
12
16%
Average
2000
Yieldon10-yearU.S.treasuries
1960197019801990June2008
-5
5
15
25%
Av
195019601970198019902000
U.S.inflation(annualyear/yearCPIchange)
2007
erage
RESULTING IN FALLING INFLATION AND COST
OF DEBT
Source: Bureau of economic analysis
-8
-6
-4
-2
0
2%
19851990199520002005
U.S.currentaccount/GDP
FUELING A NATION OF CONSUMERS
U.S.
BUYS
FOREIGN
GOODS
FOREIGN COUNTRIES USE
PROCEEDS TO BUY
TREASURIES
DEMAND
KEEPS
LONGER-
TERM
RATES
LOW
FOREIGN $s RECYCLED INTO TREASURIES
Source: Bridgewater
AS A RESULT, DEBT BALLOONED
Source: Bridgewater
DEPENDENT ON THE KINDNESS OF STRANGERS
Source: Bridgewater, National Association of Home Builders
0
20
40
60
80
100%
20022006Alt-A
Subprime
Prime-
Conforming
Government
Prime-
Jumbo
DistributionofU.S.dollarmortgageoriginations
0
1
2M
Average
198019851990199520002005
Singlefamilyhousingstarts
2008E
LIQUIDITY AND EASING SPREAD TO HOUSING
Source: Robert Shiller
50
100
150
200
250
1910192019301940195019601970198019902000
U.S.realhomepriceindex
2007
1998-2006
8.0% annualized
1930 -1997
0.7% annualized
1900-1929
-1.2% annualized
HOME PRICES GREW SUBSTANTIALLY ABOVE
MEAN
GROWTH IN SECURITIZATIONS
LEVERAGE ON THOSE STRUCTURES
INCREASED LEVERAGE ON BANK’S BALANCE SHEETS
OFTEN MIS-RATED BY AGENCIES
REPEAL OF GLASS-STEAGALL
REGULATORY CHANGES ENCOURAGING HOME OWNERSHIP
STRUCTURED PRODUCTS AND REGULATORY
CHANGES COMPOUND THESE ISSUES
Note: Outstanding amount is not a pure measure of risk as some positions are netted and have collateral; U.S. GDP was $13.8T in2007
Source: Bank for International Settlements
0
175
350
$525T
U.S.GDP
19951998200120042007
OutstandingamountofopenpositionsinOTCderivativesmarkets
35x
U.S.
GDP
HUGE GROWTH IN DERIVATIVES
Source: Bridgewater
SIGNIFICANT EXCESS CAPACITY
Source: Merrill Lynch
0
100
200
300
400
500
199820002002200420062008
Investmentgradespreads(basispoints)
0
250
500
750
1,000
1,250
199820002002200420062008
Highyieldspreads(basispoints)
VERY TIGHT CREDIT
Source: Bank of Japan, Yahoo Finance
0
10,000
20,000
30,000
40,000
1990199520002005
NikkeiIndex1988-present
Oct2008
0
2
4
6
8%
1990199520002005
Japanesediscountrate
Jul-08
-6
-3
0
3
6%
Average
1990199520002005
AnnualrealGDPgrowth
JAPAN MAY BE INSTRUCTIVE
GLOBAL
SECULAR
NOT “NORMAL CRISIS”, WILL TAKE TIME
CREDIT NOT EQUITY DRIVEN
SIGNIFICANT RISK TO GDP GROWTH
POTENTIAL FOR GREATER REGULATORY REFORMS / SCRUTINY
KEY THEMES
MANAGE WHAT YOU CAN CONTROL
SPENDING
GROWTH ASSUMPTIONS
EARNINGS ASSUMPTIONS
FOCUS ON QUALITY
LOWER RISK
REDUCE DEBT
OUR TAKE
21
MAIN STREET
WHERE ARE WE NOW?
MICHAEL BECKWITH
THE U.S.: A NATION OF CONSUMERS
THE CHANGING FACE OF THE ECONOMY
$ TRILLIONS198719972007
TOTAL U.S. GDP4.78.313.8
CONSUMER SPENDING3.15.810.1
CONSUMER AS % OF TOTAL GDP66%70%73%
DISPOSABLE PERSONAL INCOME3.56.010.2
Source: Bureau of Economic Analysi
s
.
EXPLOSION IN HOME OWNERSHIP
LONG-TERM AVERAGE
HOME OWNERSHIP %
Source: Current Population Survey/Housing Vacancy Survey, Series H-111 Reports, Bureau of the Census, Washington, DC 20233.
WAGE GROWTH & PERSONAL SAVINGS
PERSONAL SAVINGS RATE
FALLING REAL WAGES ERODING PCE
PERSONAL SAVINGS RATE EVAPORATED
REAL WAGE GROWTH FELL
Source: Bureau of Economic Analysi
s
, Federal Reserve, Haver, Bureau ofLabor Statistics, Censu
s
Bureau, Factset, Morgan Stanley Research.
CONSUMERS BUCKLING UNDER DEBT
HOUSEHOLD DEBT SERVICE RATIOHOUSEHOLD FINANCIAL OBLIGATION RATIO
DSR = DEBT PAYMENTS ON OUTSTANDING MORTGAGES AND CONSUMER
DEBT/DISPOSABLE PERSONAL INCOME
FOR = ADDS AUTOMOBILE LEASE PAYMENTS, RENTAL PAYMENTS, H/O’S INSURANCE
AND PROPERTY TAX PAYMENTS TO THE DSR
Source: Bureau of Economic Analysi
s
.
MEWs BECAME THE NEW PIGGY BANK
MEW CONTINUES TO FADE…
Source: Haver, BEA, NAHB, Conference Board, EIA, Morgan Stanley Research.
FROM VIRTUOUS TO VISCIOUS CYCLE
MORTGAGE RESET
DELINQUENCIES/FORECLOSURES
PRICES FALL
MEWS DECREASE
CONSUMER SPEND FALLS
JOB MARKET ERODES
RECESSION
UNEMPLOYMENT SPIKES HIGHER
Source: Federal Reserve, Haver, Bureau of Labor Statistics, Censu
s
Bureau, Factset, Morgan
Stanley Research, Case-Shil
l
er & DB Global Market Research.
ON THE BRINK OF A RECESSION
CONSUMER CONFIDENCE AT MULTI-DECADE LOWS
ISM IS FALLING FAST
GDP IS POISED TO TURN NEGATIVE
Source: Haver, NAHB, Conference Board, NFIB, Morgan Stanley Research, DoL & DB Global Markets Research.
EARNINGS BEGINNING TO ROLL
EARNINGS DOWN 18% ON ESTIMATES MADE 12 MONTHS AGO
Source: Datastream, Robert Shiller, Factset and Morgan Stanley Research.
V-SHAPED RECOVERY UNLIKELY
S&P 500
IT
MEDIA
TELECOM SVCS
Y / Y
Current S&P 500 Consensus Actual and Expected Operating EarningsGrowth (Weighted-Avg. % / Y/Y)
CY00CY01CY02CY03CY04CY05CY06CY07CY08E
CY09E
Financials5%-10%18%25%11%5%23%-37%-46%
109%
Consumer Discretionary0%-24%33%11%28%2%9%-10%-16%
41%
Media-1%-6%34%12%33%28%27%15%11%
11%
Information Technology28%-63%0%46%43%20%12%21%10%
17%
Telecom Services6%-24%-8%0%-8%14%17%5%-1%
10%
S&P 50017%-17%5%18%20%15%16%-4%1%
23%
ADVERTISING MARKETS ARE CRACKING
Y / Y
Source: TNS U.S. Advertising Expenditure Estimates
RETAIL/ECOMMERCE DETERIORATING
Y / Y
Source: US Censu
s
Bureau.
MOBILE IS NOT IMMUNE
Y / Y
Source: TNS U.S. Advertising Expenditure Estimates
TECH SPENDING DEPENDS ON ECONOMY
Y-Y Change in S&P 500 Earnings, Technology Spending (1996-2008E)
Source: Bernstein Strategy Group; First Call
Drop in earnings in Dec 07 was partly due to financial services industry write offs
-30%
-20%
-10%
0%
10%
20%
30%
Jun-95
Dec-95
Jun-96
Dec-96
Jun-97
Dec-97
Jun-98
Dec-98
Jun-99
Dec-99
Jun-00
Dec-00
Jun-01
Dec-01
Jun-02
Dec-02
Jun-03
Dec-03
Jun-04
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun 08E
S&P 500 EPS Growth
Tech Spending Growth
ENTERPRISE INDICATORS
PC UNITS SOLD (Y/Y)
“IT spending is being more scrutinized
now than at any point in the 2003
through 2007 timeframe …customers
are showing more caution.”
-EMC, JUL 2008
“It's now clear that this economic
softness is continuing into September.”
-INGRAM MICRO, SEP 2008
“Market developments of the past
several weeks have been dramatic and
worrying to many businesses. These
concerns triggered a very sudden and
unexpected drop in business activity.”
-SAP, OCT 2008
Source: Gartner Personal Computer Quarterly Statistics Worldwide Database, 5/08. JPMorgan estimates for 2008-2009
AMAZON.COM & BUY.COM
•Strong business model
•Focus on core value proposition
•Profitable growth
•Trim fat during lean times
Amazon.com Financial Performance '99‐'05
$0
$1,000
$2,000
$3,000
$4,000
$5,000
$6,000
$7,000
$8,000
$9,000
1999200020012002200320042005
$ Mil
‐40%
‐20%
0%
20%
40%
60%
80%
Revenue
Opex
Revenue Growth
EBIT Margin
Buy.com Financial Performance '99‐'05
$0
$100
$200
$300
$400
$500
$600
$700
$800
$900
1999200020012002200320042005
$ Mil
‐60%
‐50%
‐40%
‐30%
‐20%
‐10%
0%
10%
20%
30%
40%
Revenue
Opex
Revenue Growth
EBIT Margin
SALESFORCE.COM & SIEBEL
•Tailor sales message to environment
•Take advantage of competitors’weakness
•Understand your true customers
•Value of quick ROI and low cost
Salesforce.com Financial Performance '00‐'05
$0
$50
$100
$150
$200
$250
$300
$350
200020012002200320042005
$ Mil
‐150%
‐100%
‐50%
0%
50%
100%
150%
200%
250%
300%
350%
Revenue
Opex
Revenue Growth
EBIT Margin
Siebel Financial Performance '00‐'05
$0
$500
$1,000
$1,500
$2,000
$2,500
200020012002200320042005
$ Mil
‐25%
‐20%
‐15%
‐10%
‐5%
0%
5%
10%
15%
20%
25%
Revenue
Opex
Revenue Growth
EBIT Margin
38
YOUR STREET
WHERE DO WE GO FROM HERE?
DOUG LEONE
UPS AND DOWNS ALWAYS OCCUR
IT IS DIFFERENT THIS TIME
RECOVERY WILL BE LONG
TIME
$
CHANGES IN FINANCING ENVIRONMENT
Venture firms brace for cash crunch
Big investors turn away from VCs as the financial crisis takes its toll.By Michael V. Copeland “If you are a venture capitalist looking for a new limited partner, don't stop in here
.
Don't try and sell me on a new fund, and good luck trying with everyone else."
“If you’re a second or third-tier venture firm trying to raise another fund, forget about it
.”
“It will start first in private equity funds where there will be a substantial miss on capital
calls
. Then we'll see it next in venture capital."
"If you are start-up that is not cash-flow positive you are in a tough spot right now. If you
haven't figured out your business model yet you are in trouble
.”
“It's going to be hard to get another round
. You aren't going to get a second life this time."
NEW REALITIES
$15M RAISE @ $100M POST IS GONE
SERIES B/C WILL BE SMALLER RAISES
CUSTOMER UPTAKE WILL BE SLOWER
CUTS ARE A MUST
NEED TO BECOME CASH FLOW POSITIVE
INCREASED CHALLENGES
M&As WILL DECREASE
PRICES WILL DECREASE
ACQUIRING ENTITIES WILL FAVOR PROFITABLE COMPANIES
IPOs WILL CONTINUE TO DECREASE AND WILL TAKE LONGER
SURVIVAL
PRESERVE
CAPITAL
GRAB
SHARE
CASH IS KING
UNDERSTANDING OF MARKET UPTAKE
ASSESSMENT VS. COMPETITORS
CUSTOMERS’ABILITIES TO PAY
NEED FOR PROFITABILITY
ESTABLISHED REVENUE MODEL






MUST-HAVE PRODUCT

OPS REVIEW
ENGINEERINGDECREASE HEADCOUNT FOR NEXT VERSION?

PRODUCTWHAT FEATURES ARE ABSOLUTELY ESSENTIAL?

MARKETINGMEASURING & CUTTING WHAT’S NOT WORKING?

SALES & BUS DEVGETTING RETURN ON EXPENSE INCREASE?

PIPELINEREAL PROBABILITIES OF CLOSING DEALS?

FINANCE

CASHBURNWHERE CAN PAYMENTS BE DEFERRED?
G&AWHAT DEPARTMENTS ARE ESSENTIAL?
DEATH SPIRAL
SURVIVAL OF THE QUICKEST
TIME
EXPENSES
DEATH SPIRAL
10/08
COMPANY A
COMPANY B
NO ONE MOVES FAST ENOUGH
OP EX % Y/Y
CY01
CY02
CY03
CY04
CSCO-3%
9%
-2%
-3%
-15%
-3%
-10%-1%9%
EMC-22%-4%31%
ADBE-1%12%18%
YHOO14%33%57%
AMZN-4%10%24%
Average-5%10%28%
CHOICES
WHAT DECISIONS DO
YOU PLAN TO MAKE?
WHAT DECISIONS DO YOU
WISH YOU HAD MADE?
vs.
THE SOLUTION
PERFORM SITUATION ANALYSIS
ADAPT QUICKLY
USE A ZERO-BASED BUDGETING APPROACH
MAKE CUTS
REVIEW SALARIES
EMPLOY A HEAVILY COMMISSIONED SALES STRUCTURE
BOLSTER BALANCE SHEETS
BECOME CASH FLOW POSITIVE AS SOON AS POSSIBLE
SPEND EVERY DOLLAR AS IF IT WERE YOUR LAST
GET REAL OR
GO HOME
54
Q & A