

A CEO's Sequoia Meeting Notes - lanceweatherby
http://blog.weatherby.net/2008/10/a-ceos-sequoia.html

======
jmatt
There are bigger things in the global economy than the opinions of Sequoia.
This may not be very popular to say here. It is likely companies like Sequoia
got burned worse than many other businesses. Money that funds them comes from
investments like the stock market which has lost ~ 2 trillion dollars in value
in the last few months. On top of that the last thing most big companies are
thinking about are acquisitions - let alone IPOs. I understand their pessimism
but I don't think it necessarily applies to the whole economy over the next 15
years.

~~~
Prrometheus
I was wondering if I were the only one that wasn't terribly concerned. Certain
assets that were overvalued are readjusting to a reasonable valuation. Even
the stock market's average P/E could look reasonable again. We'll have a short
period of slow growth in economic aggregate statistics, then the singularity
will hit and we'll do just fine.

------
prakash
_We are in the beginning of a long cycle, what we call a “Secular Bear
Market.” This could be a 15 year problem._

Really grim news if it turns out to be true.

~~~
sabat
Here's some great reading for those who might be tempted to believe the
doombaya message.

[http://www.cnn.com/2008/POLITICS/10/09/eichengreen.depressio...](http://www.cnn.com/2008/POLITICS/10/09/eichengreen.depression/index.html)

Excerpt:

 _Barry Eichengreen is George C. Pardee and Helen N. Pardee Professor of
Economics and Political Science at the University of California, Berkeley._

 _Every time the economy and stock market turn down, financial historians get
predictable calls from reporters._

 _Could this be the start of another Great Depression? Could "it" possibly
happen again? My stock answer has always been no._

 _The Great Depression resulted from a series of economic and financial shocks
-- the end of a housing bubble in 1926 and the end of a high-tech bubble in
1929 -- but also from truly breathtaking neglect and incompetence on the part
of policymakers._

 _It couldn't happen again precisely because policymakers know this history.
Fed Chairman Ben Bernanke is a student of the Great Depression. Treasury
Secretary Henry Paulson remembers the mistakes of Andrew Mellon, Herbert
Hoover's treasury secretary._

~~~
davi
This is flawed logic, which goes like:

"The biggest economic problem we know about is the Great Depression.
Policymakers know how to deal with that; therefore we are fine."

Maybe the new global economy contains challenges which current policymakers
_don't_ know how to deal with. And if these challenges aren't met, we might
end up with Great Depression _effects_ , due to a different set of initial
causes.

Or, maybe everything will settle down in a week or two.

~~~
khafra
Insightful. "Fighting the last war" is one of the more popular ways for
generals to utterly fail.

------
iigs
_Operations review: Engineering: Since you already have a product, strongly
consider reducing the number of engineers that you have._

:(

~~~
timr
This bit of "advice" soured the whole thing for me -- a shining example of MBA
wisdom.

To be fair, maybe the advice was mis-communicated, or maybe the speaker was
talking about VC-funded monoliths who had grown too quickly (and hired
poorly), but it seems kind of foolish to fire engineers at a tech company,
just because you think you "already have a product".

~~~
thorax
I'd say follow it if you hired quick/not-solid engineers in a quick bid for
growth.

But you should fight _very hard_ to keep talented/experienced engineers around
and happy. They very much could become your strategic advantage while everyone
is cutting things!

~~~
SwellJoe
Agreed. Much like the stock market crash has led me to start thinking about
bargain hunting, and to move some of my capital into stocks, I'm viewing this
advice as a sign that I'll be able to hire great engineers at a good rate in
the not too distant future, as competitors without our profitability run into
problems and begin to extend their runway by reducing their headcount (and
since they've "already got a product", they don't need those pesky engineers
any more).

Then again, I believe that a team of three great engineers lightly managed by
another engineer (with some management skills) can outproduce a dozen or more
mediocre developers managed by an MBA, so I've always planned for our company
to produce more code in less time and for less money than our competitors.

~~~
ardit33
"Then again, I believe that a team of three great engineers lightly managed by
another engineer (with some management skills) can outproduce a dozen or more
mediocre developers managed by an MBA, so I've always planned for our company
to produce more code in less time and for less money than our competitors."

\--- I fully agree with this. Best managers are the ones that are really
strong technically, and that still do some/little coding. They know exactly
what's going on, and reward competence over arse-kissing.

------
biohacker42
The whole "forget growth and get to positive cash flow" push sounds a lot like
the 37signals business plan.

~~~
josefresco
No, sounds a lot like 'fundamental business logic'. Nothing 37signals does is
new to the traditional business world (just VC funded 'exit strategy' startup
minded folks)

------
adrianwaj
The speakers at that meeting don't need to worry about survival. They're
probably all ultra high net-worth individuals. It's the CEOs who they want to
make tough choices and live tough. In the end, the downturn just has status
and reputation implications for these partners, and making sure they feel the
pain of (or with) their comrades, or at least appear that way, like they are
here.

------
fallentimes
I just sent these notes to many of my founder friends. Please do the same. I
don't think I'd ever bet against Sequoia.

Even if they're wrong, most of what they said is a good practice regardless of
economic state.

~~~
acgourley
That's not true ... if you define 'good' as what will lead to maximum growth
then you would not want to follow these survival tactics in 'good times'

~~~
fallentimes
That's why I said "most".

Focusing on profitability, becoming cash flow positive, trimming fat &
reducing overhead are good practices always. Some of the other ones,
especially if you're trying to attract and retain talent, are not.

You'd think this would be common sense, but based on how many companies are
run, it's not.

~~~
DaniFong
I don't think that focusing on profitability is always a good idea. If you
extend the argument to what you work on personally, then there's no way to
ever start a product company, or a new line. And in the last bust, Google
didn't focus on profitability until much of the storm had already passed.
They're doing fine now.

The difference was that they had time. Lots of runway. We might very well not,
and the goal is to extend that runway.

~~~
fallentimes
I wasn't talking about what I or anyone works on personally; I was talking
about Companies.

Google is the exception, not the rule.

~~~
acgourley
Statistically speaking, most startups ventured have a poor chance of being a
Google, but must dollars earned have a good chance of being a Google's.

Don't discount their type of business strategy just because it doesn't suit
your personal risk preference.

~~~
fallentimes
I'm trying to understand what you're saying.

 _"but must dollars earned have a good chance of being a Google's"_

Are you saying that the few companies "make" the portfolio (i.e. the anomalies
and hits carry the return) or? If so, I agree, but the hits aren't all run
like Google.

My personal risk preferences have nothing to do with this argument.

~~~
acgourley
Just to set things straight, you are suggesting companies shouldn't start like
Google where they are focused on a technology that has no obvious way to make
money (at the time). You agree the high growth long term strategy has its
place, but claim companies should not just start down their runway before
making sure there is even a profit to be made there.

I was talking past you because in my mind I wasn't seeing a distinction
between having a long term, high growth business and being unsure of how to
monetize.

While your stance is prudent, most of the greatest tech company success
stories of this decade were from companies that didn't know (for certain) how
to monetize, because they were so far into uncharted territory. And even
though there are only a few of those companies, they seem to be earning most
of the money between companies started in this decade. So being more focused
on technology than profitability is a valid business strategy, as long as you
have runway. That's what I'm saying, and what I think you disagree with.

~~~
fallentimes
Thanks for putting everything in one paragraph.

 _"So being more focused on technology than profitability is a valid business
strategy, as long as you have runway."_

Yes, I agree with this. Which is why I don't really have a problem with
companies like Twitter (you can debate the technical merits, but it's
certainly _different_ ). They've kept their team lean and haven't taken gobs
of money right away and all at once like some of these other startups

My comments were more aimed at investors & companies that spend money just to
spend money on either me-too ideas (e.g. many many ad networks, social
networks) or overcapitalizing companies that aren't ready for it. They and
their brethren aren't investing in the development of cutting edge technology
at all, they're doing something because everyone else is.

------
wschroter
This whole line of thinking is great for companies as a whole. If it forces
more companies to be more responsible and efficient with capital, I don't see
a problem.

~~~
sabat
Some of it is good thinking for any startup or small company -- it's so easy
to be lulled into parting with cash unnecessarily.

But the full recipe seems like it's designed for stasis, not growth.

~~~
jksmith
Absolutely. My deal was going along pretty well until all this crap made the
investors look like a herd of spooked wildebeests.

My deal includes a mix of startup and acquisition (with cash flow). The M&A
investors I've worked with are hardly vision-oriented, and their schemes are
just variations on the house-flipping theme. So guts and vision are just not
part of their makeup or mission. Their latest analogy is the ship dropping
anchor and waiting for the fog to pass, but this sounds more to me like they
think they're in quicksand and just don't want to move for fear of sinking
more.

There will be a "Next Big Thing," but this current crop of investors (if
exemplified by who I've worked with) will not be a part of it.

------
smakz
It makes sense. The credit markets are imploding so it's going to be harder to
borrow. Basically you need to survive by not borrowing, so get cash flow
positive.

I think this crash is analogous to the long depression:

<http://en.wikipedia.org/wiki/Long_Depression>

But I doubt it will take as long to recover as it did in 1873.

~~~
shedd
Yep, finding a business model that generates revenue quickly seems to be the
emphasis across the board. The get users, find cash later, models of the past
are certainly out for the most part as long as this economic cycle is with us.
Back in are real business models that actually make money.

------
sabat
Counter this doombaya ceremony with these (wiser) comments (pulled from a CNN
economic report), below. Most salient point: _This is a financial panic, not
an economic one._

QUOTE:

 _The weak dollar is boosting demand for our goods abroad, and lower gas
prices are making Americans feel more flush. Add in the cash that the Fed has
been hosing into the banking system and we are bound to see growth in 2009.
"If all this stimulus has no effect on the economy, that would be a rarity
indeed," says Paulsen._

 _Standard & Poor's chief economist David Wyss expects a mild recession that
ends next spring. "Gradually we will regain confidence in the market. Lower
oil prices and a falling trade deficit will help," he says. "This is a
financial panic, not an economic one."_

 _Of course, that could change if the financial panic doesn't abate soon. If
banks remain too scared or broke to lend, would-be home buyers will be frozen
out of the market. If that happens, home values could fall even more, crimping
confidence and putting the brakes on the economy's greatest engine: the
consumer._

~~~
iigs
I think that the benefit from "hosing money into the banking system" is front
end loaded. That is to say: we've been living above our means for a while now
and we've done the (inter-)national equivalent of kiting checks for the last 5
years. Now that there are some calls on this money (via defaults in the
mortgage field) we're seeing that all of that leveraged money isn't quite as
useful, real, or protected as we thought.

"demand for our goods abroad" is barely a consolation prize. The effects from
that are so long term and abstract that while they might help us climb back
out, they certainly don't fix the immediate problem, which is businesses
having to cut back because they don't have the cash to operate _today_. It's
like saying you get to take a tax deduction because you had a big loss. Sure
it might help but it's not nearly as nice as not having the loss in the first
place. Same deal with oil.

Financial crisis + time becomes an economic one. Financial crisis means that
employers are considering layoffs (it's even in the article). Risk of job loss
is the biggest thing controlling my _personal_ confidence level, and I
certainly can't be alone in that regard. Discretionary spending drops (things
are already hurting in tourist towns), and the layoffs continue.

I suspect the depth and breadth of this depend on the health of the remaining
financial institutions. I feel unprepared to speculate on that, since I don't
understand the complexity of what we're already in, but things sure aren't
looking good right now. :/

------
sabat
Smacks more of abject panic than it does common sense. If a company has to
work _that_ hard to survive, then it would never survive a 15-year (??
unprecedented and hyperbolic) depression anyway. Better to sell everything off
and close the doors.

Seriously. If things are as bleak as the Sequoia panickers are saying, then
most of their companies should probably just cut their losses by selling off
capital assets and closing their doors. Better that than going down in three
years with nothing left.

