Sequoia Capital on startups and the economic downturn

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eric-eldon
  • 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% Dow Jones Industrials (solid line) 1970 1980 1990 2000 2008 Inflation (dotted line) 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 1996 2002 2006 Indexed global productivity 0 2 4 6 8 10% 1990 19 Fed funds 95 2000 2005 rate Sep 2008 0 1 2 3 4B 1980 1990 2000 2008 Size of global workforce DRIVEN BY PRODUCTIVITY AND CENTRAL BANK
  • Source: Bureau of Labor Statistics, Federal Reserve 0 4 8 12 16% Average 2000 Yield on 10-year U.S. treasuries 1960 1970 1980 1990 June 2008 -5 5 15 25% Av 1950 1960 1970 1980 1990 2000 U.S. inflation (annual year/year CPI change) 2007 erage RESULTING IN FALLING INFLATION AND COST OF DEBT
  • Source: Bureau of economic analysis -8 -6 -4 -2 0 2% 1985 1990 1995 2000 2005 U.S. current account / 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% 2002 2006 Alt-A Subprime Prime- Conforming Government Prime- Jumbo Distribution of U.S. dollar mortgage originations 0 1 2M Average 1980 1985 1990 1995 2000 2005 Single family housing starts 2008E LIQUIDITY AND EASING SPREAD TO HOUSING
  • Source: Robert Shiller 50 100 150 200 250 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 U.S. real home price index 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 in 2007 Source: Bank for International Settlements 0 175 350 $525T U.S. GDP 1995 1998 2001 2004 2007 Outstanding amount of open positions in OTC derivatives markets 35x U.S. GDP HUGE GROWTH IN DERIVATIVES
  • Source: Bridgewater SIGNIFICANT EXCESS CAPACITY
  • Source: Merrill Lynch 0 100 200 300 400 500 1998 2000 2002 2004 2006 2008 Investment grade spreads (basis points) 0 250 500 750 1,000 1,250 1998 2000 2002 2004 2006 2008 High yield spreads (basis points) VERY TIGHT CREDIT
  • Source: Bank of Japan, Yahoo Finance 0 10,000 20,000 30,000 40,000 1990 1995 2000 2005 Nikkei Index 1988 - present Oct 2008 0 2 4 6 8% 1990 1995 2000 2005 Japanese discount rate Jul-08 -6 -3 0 3 6% Average 1990 1995 2000 2005 Annual real GDP growth 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 $ TRILLIONS 1987 1997 2007 TOTAL U.S. GDP 4.7 8.3 13.8 CONSUMER SPENDING 3.1 5.8 10.1 CONSUMER AS % OF TOTAL GDP 66% 70% 73% DISPOSABLE PERSONAL INCOME 3.5 6.0 10.2 Source: Bureau of Economic Analysis.
  • EXPLOSION IN HOME OWNERSHIP LONG-TERM AVERAGE H O M E O W N ER SH IP % 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 Analysis, Federal Reserve, Haver, Bureau of Labor Statistics, Census Bureau, Factset, Morgan Stanley Research.
  • CONSUMERS BUCKLING UNDER DEBT HOUSEHOLD DEBT SERVICE RATIO HOUSEHOLD 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 Analysis.
  • 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, Census Bureau, Factset, Morgan Stanley Research, Case-Shiller & 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 Earnings Growth (Weighted-Avg. % / Y/Y) CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08E CY09E Financials 5% -10% 18% 25% 11% 5% 23% -37% -46% 109% Consumer Discretionary 0% -24% 33% 11% 28% 2% 9% -10% -16% 41% Media -1% -6% 34% 12% 33% 28% 27% 15% 11% 11% Information Technology 28% -63% 0% 46% 43% 20% 12% 21% 10% 17% Telecom Services 6% -24% -8% 0% -8% 14% 17% 5% -1% 10% S&P 500 17% -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 Census 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% Ju n- 95 D ec -9 5 Ju n- 96 D ec -9 6 Ju n- 97 D ec -9 7 Ju n- 98 D ec -9 8 Ju n- 99 D ec -9 9 Ju n- 00 D ec -0 0 Ju n- 01 D ec -0 1 Ju n- 02 D ec -0 2 Ju n- 03 D ec -0 3 Ju n- 04 D ec -0 4 Ju n- 05 D ec -0 5 Ju n- 06 D ec -0 6 Ju n- 07 D ec -0 7 Ju n 08 E S&P 500 EPS Growth Tech Spending Growth
  • ENTERPRISE INDICATORS P C U N IT S S O LD (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 1999 2000 2001 2002 2003 2004 2005 $  M il ‐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 1999 2000 2001 2002 2003 2004 2005 $  M il ‐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 2000 2001 2002 2003 2004 2005 $  M il ‐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 2000 2001 2002 2003 2004 2005 $  M il ‐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 http://www.time.com/time/magazine/0,9263,7601081013,00.html
  • 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 ENGINEERING DECREASE HEADCOUNT FOR NEXT VERSION?✔ PRODUCT WHAT FEATURES ARE ABSOLUTELY ESSENTIAL?✔ MARKETING MEASURING & CUTTING WHAT’S NOT WORKING? ✔ SALES & BUS DEV GETTING RETURN ON EXPENSE INCREASE?✔ PIPELINE REAL PROBABILITIES OF CLOSING DEALS?✔ FINANCE✔ CASHBURN WHERE CAN PAYMENTS BE DEFERRED? G&A WHAT DEPARTMENTS ARE ESSENTIAL?
  • DEATH SPIRAL
  • SURVIVAL OF THE QUICKEST TIME EX PE N SE S 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% YHOO 14% 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
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  • 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% Dow Jones Industrials (solid line) 1970 1980 1990 2000 2008 Inflation (dotted line) 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 1996 2002 2006 Indexed global productivity 0 2 4 6 8 10% 1990 19 Fed funds 95 2000 2005 rate Sep 2008 0 1 2 3 4B 1980 1990 2000 2008 Size of global workforce DRIVEN BY PRODUCTIVITY AND CENTRAL BANK
  • Source: Bureau of Labor Statistics, Federal Reserve 0 4 8 12 16% Average 2000 Yield on 10-year U.S. treasuries 1960 1970 1980 1990 June 2008 -5 5 15 25% Av 1950 1960 1970 1980 1990 2000 U.S. inflation (annual year/year CPI change) 2007 erage RESULTING IN FALLING INFLATION AND COST OF DEBT
  • Source: Bureau of economic analysis -8 -6 -4 -2 0 2% 1985 1990 1995 2000 2005 U.S. current account / 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% 2002 2006 Alt-A Subprime Prime- Conforming Government Prime- Jumbo Distribution of U.S. dollar mortgage originations 0 1 2M Average 1980 1985 1990 1995 2000 2005 Single family housing starts 2008E LIQUIDITY AND EASING SPREAD TO HOUSING
  • Source: Robert Shiller 50 100 150 200 250 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 U.S. real home price index 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 in 2007 Source: Bank for International Settlements 0 175 350 $525T U.S. GDP 1995 1998 2001 2004 2007 Outstanding amount of open positions in OTC derivatives markets 35x U.S. GDP HUGE GROWTH IN DERIVATIVES
  • Source: Bridgewater SIGNIFICANT EXCESS CAPACITY
  • Source: Merrill Lynch 0 100 200 300 400 500 1998 2000 2002 2004 2006 2008 Investment grade spreads (basis points) 0 250 500 750 1,000 1,250 1998 2000 2002 2004 2006 2008 High yield spreads (basis points) VERY TIGHT CREDIT
  • Source: Bank of Japan, Yahoo Finance 0 10,000 20,000 30,000 40,000 1990 1995 2000 2005 Nikkei Index 1988 - present Oct 2008 0 2 4 6 8% 1990 1995 2000 2005 Japanese discount rate Jul-08 -6 -3 0 3 6% Average 1990 1995 2000 2005 Annual real GDP growth 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 $ TRILLIONS 1987 1997 2007 TOTAL U.S. GDP 4.7 8.3 13.8 CONSUMER SPENDING 3.1 5.8 10.1 CONSUMER AS % OF TOTAL GDP 66% 70% 73% DISPOSABLE PERSONAL INCOME 3.5 6.0 10.2 Source: Bureau of Economic Analysis.
  • EXPLOSION IN HOME OWNERSHIP LONG-TERM AVERAGE H O M E O W N ER SH IP % 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 Analysis, Federal Reserve, Haver, Bureau of Labor Statistics, Census Bureau, Factset, Morgan Stanley Research.
  • CONSUMERS BUCKLING UNDER DEBT HOUSEHOLD DEBT SERVICE RATIO HOUSEHOLD 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 Analysis.
  • 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, Census Bureau, Factset, Morgan Stanley Research, Case-Shiller & 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 Earnings Growth (Weighted-Avg. % / Y/Y) CY00 CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08E CY09E Financials 5% -10% 18% 25% 11% 5% 23% -37% -46% 109% Consumer Discretionary 0% -24% 33% 11% 28% 2% 9% -10% -16% 41% Media -1% -6% 34% 12% 33% 28% 27% 15% 11% 11% Information Technology 28% -63% 0% 46% 43% 20% 12% 21% 10% 17% Telecom Services 6% -24% -8% 0% -8% 14% 17% 5% -1% 10% S&P 500 17% -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 Census 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% Ju n- 95 D ec -9 5 Ju n- 96 D ec -9 6 Ju n- 97 D ec -9 7 Ju n- 98 D ec -9 8 Ju n- 99 D ec -9 9 Ju n- 00 D ec -0 0 Ju n- 01 D ec -0 1 Ju n- 02 D ec -0 2 Ju n- 03 D ec -0 3 Ju n- 04 D ec -0 4 Ju n- 05 D ec -0 5 Ju n- 06 D ec -0 6 Ju n- 07 D ec -0 7 Ju n 08 E S&P 500 EPS Growth Tech Spending Growth
  • ENTERPRISE INDICATORS P C U N IT S S O LD (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 1999 2000 2001 2002 2003 2004 2005 $  M il ‐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 1999 2000 2001 2002 2003 2004 2005 $  M il ‐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 2000 2001 2002 2003 2004 2005 $  M il ‐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 2000 2001 2002 2003 2004 2005 $  M il ‐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 http://www.time.com/time/magazine/0,9263,7601081013,00.html
  • 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 ENGINEERING DECREASE HEADCOUNT FOR NEXT VERSION?✔ PRODUCT WHAT FEATURES ARE ABSOLUTELY ESSENTIAL?✔ MARKETING MEASURING & CUTTING WHAT’S NOT WORKING? ✔ SALES & BUS DEV GETTING RETURN ON EXPENSE INCREASE?✔ PIPELINE REAL PROBABILITIES OF CLOSING DEALS?✔ FINANCE✔ CASHBURN WHERE CAN PAYMENTS BE DEFERRED? G&A WHAT DEPARTMENTS ARE ESSENTIAL?
  • DEATH SPIRAL
  • SURVIVAL OF THE QUICKEST TIME EX PE N SE S 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% YHOO 14% 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
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