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Sequoia Capital on startups and the economic downturn
r.i.p. good times now what?
wall street how did we get here? eric upin sequoia capital multiple problems housing led recession over leveraged financials falling asset prices frozen credit markets weak household balance sheet globally sinchronized slowing exacerbating all of above forces of inflation versus forces of deflation market circles are long dow jones industrials solid line inflation dotted line bear market 1966 1982 bull market 1983 200015000 10000 5000 0 1970 1980 1990 2000 2008 15% 10 5 resulting in falling inflation and cost of debt u.s. inflation (annual year/year cpi change yield on 10- year u.s. treasuries fueling a nation of consumers us current account /gdp 2% 0 -2 -4 -6 -8 1985 1990 1995 2000 2005 foreign $s recycled into treasuries demand keeps longer term rates low us. buys foreign goods foreign countries use proceeds to buy treasuries dependent on the kindness of strangers foreign ownership of us treasuries % total market capitalization liquidity and easing spread to housing home prices grew substantially above mean u.s. real home price index 250 200 150 100 50 1910 1920 1930 1940 1950 annualized 1.2% 2006 structured products and regulatory changes compound these issues 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 huge growth in derivatives outstanding amount of open positions on otc derivatives markets note: oustanding amount is not a pure measure of risk as some positions are netled and have colletoral: u.s. gdp was !13.8t in 2007 source bak of international settlements. significant excess capacity world fixed investment (%gdp) tremendous amount of capacity built up japan may be instructive ''key themes global secular not ''''normal crisis'''', will take time credit not equity driven significant risk to gdp growth potential for greater regulatory reforms/scrutiny'' our take manage what you can control spending growth assumptions earnings assumptions focus on quality lower risk reduce debt main street where are we now? michael beckwith sequoia capital the entrepreneurs behind the entrepreneurs the u.s. : a nation of consumers the changing face of the econpmy $trillions 1987 1997 2007 total u.s. gdp 4.7 8.3 13.8 consumer spending 3.1 5.8 10.6 consumer as % of the total gdp 66% 70% 73% disposable personal income 3.5 6.0 10.2 ''explosion in home ownership home ownership % 70 69 68 67 66 65 64 63 62 long-term average 1965 1967 1969 1971 1973 1975 1977 1979 1980 1982 1984 1986 1988 1990 1992 1993r 1995 1997 1999 2001 2002r 2004 2006 2008 source: curent population survey/housing vacancy survey, serie h-111 reports, bureau ofthe census, washington, dc 20233 slideshare 24/56'' ''wage growth & personal savings personal savings rate -1 1 3 5 7 9 11 q186 q27 q491 q194 q296 q398 q400 q103 q205 q307 failing real wages eroding pce real personal consumption expenditure( _) real after-tax wages & salaries (_) -5 -3 -1 1 3 5 7 1971 1974 1977 1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 personal savings rate evaporated real wage growth fell source: bureau of economic analysis, federal reserve, honor, bureau if labor statistics census bureau facebook morgan stanley research'' mews became the new piggy bank mew continues to fade‰Û_ from virtuous to viscious cycle mortgage reset delinquencies/fore closures prices fall mews decrease consumer spend falls job market erodes recession unemployment spikes higher on the brink of a recession. consumer confidence at multi-decade lows. ism is falling fast. gdp is poised to turn negative. earning beginning to roll earning down 18% on estimates made12 months ago s&p 500 rolling earnings surprise % 12mo forward estimates vs. actuals under-estimate earnings over-estimate earnings grey shading represents us advertising markets are cracking retail/ecommerce deteriorating total us ecommerce total us retail sales mobile is not immune 15% 10% 5% subscibers 0% q1'07 q2'07 q3'07 q4'07 q1'08 q2'08 q3'08 -5% handsets -10% source: tns u.s. advertising expenditure estimates ''tech spending depends on economy y-y change in s&p 500 earnings, technology spending(1996-2008e)'' your street where do we go from here? doug leone sequoia capital the entrepreneurs behind entrepreneurs ups and downs always occur slideshare 40/56 its different this time the new hard times recovery will be long $ time ''changes in financing environment fortune 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, $15 m, 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 must have product established revenue model understanding of market uptake customers abilities to pay assessment vs competitors cash is king need for profitability ops review engineering product marketing sales & bus dev pipeline finance cashburn g&a decrease headcount for next version? what features are absolutely essential? measuring & cutting whats not working? getting return on expense increase? real probabilities of closing deals? where can payments be deferred? what departments are essential? death spiral survival of the quickest no one moves fast enough cisco systems emc2 adobe yahoo amazon.com cisco emc adbe yhoo amzn average choices what decisions do you plan to make? vs. what decisions do you wish you had made? the solution perform situation analysis adapt quickly use a zero-based budgenting approach make cuts reviews salaries employ a heavenly 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 q & a sequoia capital the entrepreneurs behind the entrepreneurs