
Sequoia Rings the Alarm Bell: Silicon Valley Is in Trouble - jasonlbaptiste
http://gigaom.com/2008/10/08/sequoia-rings-the-alarm-bell-silicon-valley-in-trouble/
======
lowkey
This post sent a chill of reality down my spine. We are a cleantech startup
currently in the process of raising our seed round. This tells me that the
window may be closing fast.

<rant/>Let me tell you after years of work to get to a truly fundable
opportunity there is nothing more painful than watching it all slip away
because the banks don't trust each other's balance sheets. I realize that
there are bigger problems in the world right now than ours, just look at
Iceland, but still this makes me want to go out and strangle a banker. </rant>

~~~
Prrometheus
Cleantech is a luxury good, pursued by people and their politicians when they
feel wealthy. I don't envy your situation at the moment.

~~~
Tichy
Only a luxury good if you are allowed to freeride on society by dumping your
dirt on it for free as an alternative to using clean technology.

~~~
biohacker42
Indeed it's a luxury only because we've socialized the cost of the
externality.

------
aditya
The average Sequoia startup raises a lot of money, so it makes sense for them
to sound all kinds of alarms, if you started out being frugal and efficient
you're already trying to survive. If you're a mega startup with Aerons, yeah
okay.

~~~
SwellJoe
Don't pick on Aerons. My back has been thanking me every day since I acquired
an Aeron from the Arthur Anderson bankruptcy auction many years ago. Given how
long these things last, and how little they cost relative to the cost of
employee retention, even new, I think it's a no-brainer. Good chairs are
mandatory.

~~~
sown
This is very true. I bought a cheap office chair from a box retailer a year
ago and completely regret it. Sitting and trying to do work becomes work in of
it self. In fact, it is painful. A chair is one of those programmer's tools
that you should spend a little money on (keyboards being another example).

~~~
SwellJoe
Yeah, I lived through several Office Max/Office Depot/Walmart chairs. They're
kinda like inkjet printers...they wear out so fast, and work so poorly, that
when you finally break down and buy a laser printer (or good quality chair),
you look back and think, "What kind of idiot must I be to keep going back and
buying the same crappy thing over and over and expecting it to be any
different?" Sure, I'd buy different brands and models every time, just like
with chairs, but in the end the level of quality at that end of the market for
those particular goods just isn't worth buying at any price. I've now had the
same chair and the same color laser printer for many years, and several times
the lifespan of a cheap office chair or an inkjet printer. Both have provided
fantastic value, and are still working great, and I expect to get another
several years out of both of them. I just wish I'd learned that lesson a
little earlier in life.

And, I agree on keyboards, though the longevity of even good keyboards is not
_quite_ comparable. But, when I found a keyboard I liked a few years ago (an
IBM small form-factor keyboard, where escape, function row and the number pad
are all closer to home), I bought two of them--I'm still using the first, and
the second is ready to step in at the first signs of breakage in the first.

~~~
sown
I meant more like Maltron ergonomic keyboards: <http://www.maltron.com/>

~~~
SwellJoe
I don't buy into none of them fruity keyboards. I might start considering
options like that, if I experienced any pains in my hands, wrists, or arms.
But, once I switched to a good chair, I've never had any keyboard related
pains (while I'd experienced tons of problems before that, and experimented
with split keyboard layouts to no avail...one thing that did help, was
switching to a tiled window manager and almost completely killing the mouse
from my workflow). I guess everybody is different, but I'm perfectly content
with a good quality traditional keyboard (though a shorter reach to escape is
a nice feature).

~~~
sown
I've never tried any of them either but have met some devout followers:
<http://infohost.nmt.edu/~shipman/ergo/kinesis.html>

------
bokonist
The recent IPO drought has been very disturbing. But does anyone know if the
reason companies have not been IPOing? Is it a lack of cash flow and profits?
Are the newest round of tech startups not making money? Or are the companies
as good as ever, but investor interest has disappeared? If the profits are
there, tech companies could just start paying dividends, and the investors
will come. I'd buy stock in a tech company that paid a 4% dividend yield that
grew each year. But buying stock in a non-dividend paying tech company is a
game for speculators. The market for speculation is down, and I don't expect
to see it come back any time soon.

~~~
lowkey
I really like the way you think. It's true that the stock market has become
one big ponzi scheme over the past few decades. Dividends seem to have gone
out of style, leaving capital appreciation by selling to a 'greater fool' as
the only way to profit. I suspect that this train of thinking will change, but
not right away. Give us 2-3 years of nuclear winter in the markets and things
may change. Hey anything is possible, even MSFT now pays a dividend.

~~~
netcan
Even MSFT pays only 1.3% p/a. Even in that case, it's a gesture.

What if startups directly paid investors. Gave them back their money + some or
paid dividends or something like that. Theoretically, that should be just a
different way of doing approximately the same thing.

~~~
Retric
MSFT also does stock buyback which works like a dividend but with better tax
implications.

~~~
netcan
Aren't those 'one -offs?'

~~~
Retric
No, they are ongoing. There is a lot of administrative overhead to dividends
so you only want to do it 1 to 4 times a year. But, buybacks are best spread
out over time so they don't cause the price to spike. MSFT decided on a 50 /
50 split with a massive dutch auction for 8.1% of the stock and then the other
20 billion as an ongoing buyback until 2011. Which they finished so they are
now doing a 40 billion buyback until 2013. (This will probably also finish
early.)

What's odd about buyback's is in theory they should have little effect on
today's stock price, but because they concentrate value in decreasing number
of shares they simulate exponential growth when the company is just milking a
cash cow. Which should over time drive up the stock price and force a split.

------
ALee
Curious to hear what the investors, PG, and others think on HN- it's not as if
VCs stopped deals that they had already signed off on. Are their LPs
revolting?

If that's the case, then it means there is less cash to go around. If you're
still a bad-ass startup, it still seems that your valuation would still be
relatively the same at such an early stage, right?

~~~
biohacker42
Good question.

I wonder if we'll see a shift from what pg advocates, to what DHH advocates?

Small steady profits vs. high growth and buyout.

------
puzzle-out
The main costs of say a YC startup are living costs - in a downturn, these
should drop. Raising second round funding will be more difficult, sure. But in
times of trouble, people cut back on bars and stay in, and will spend even
more leisure time online. I see the ecommerce space surviving this very
nicely; ads will take a big hit; and god be praised there will be less
unjustifiable multi-millino M and A's of small start-ups that have not even
reached revenue stage - start up entrepreneurs will be forced to actually
build a business!

------
gscott
Instead of big exits over a long period of time with big funding rounds you
have shorter exits for less money with less and smaller funding rounds. I
think this has already been happening.

It is nice to have big well funded unprofitable ventures out there to employ
people (like ning.com) but with fewer of those around the corner the job
market is probably not going to look too good.

~~~
netcan
you think the small investment- small exit complex is more stable or more
recession proof?

~~~
gscott
Yes it is a lot like KB Homes trying to stay in business by building smaller
houses. They are having success with that while the bigger houses just are not
selling or are selling at a loss. There have been a lot of "small" exits
(small as in tens of millions instead of hundreds of millions). I believe it
is better to have an exit, regain all of the money you spent + take away a
couple of extra million then going for broke.

~~~
netcan
Better? Sure. But I'm not sure if your example holds. I don't know the
situation, but I'll guess that building smaller homes is producing a type of
product that is more recession proof. Similar to producing household or
business basics, or (even better) cheaper substitutes.

I'm not sure you have an equivalence here. The small startup/small exit
"industry" can be thought of as producing small businesses for purchase.
Therefore, it is subject to the market for small businesses. I agree that the
demand in this market is somewhat independent of the demand in mega-
acquisition or IPO markets, but I think it's a big statement to say it is more
_recession proof._

------
trevelyan
I welcome any changes that make bandwagon VC less profitable and dominant.
This will encourage other forms and structures of funding more friendly to
people who are actually building businesses.

~~~
fallentimes
That's what's funny - most VCs aren't profitable - at least not to their
investors. They make their money administrating. That's why the best VC firms,
and hedge funds for that matter, waive or reduce their admin fee (normally
~2%).

~~~
SwellJoe
You realize, I hope, that Sequoia cannot be accused of either being a
"bandwagon VC" or not being profitable.

Sequoia is, by most measures one of the best, if not the best, VCs in the
world, in terms of success and respect from peers and the companies they fund.

So, pick on the VC model all you like...but this is an article about something
Sequoia has said that effects pretty much all of us. If Sequoia-backed
companies are being told to tighten their belts, then we'd all be smart to do
the same. Sequoia hasn't gotten to where they are by investing in companies
that waste money...so the assumption that they're saying, "Stop wasting money,
as you've been doing lately." probably isn't the right way to take this
advice. It should probably be taken as, "I know you all run a tight ship, and
you're doing the best you can to maximize returns without being wasteful, but
now might be the time to focus on outlasting your competitors, rather than
outgrowing them."

The companies that survive will be the ones that will be best placed to become
market leaders when the market begins to recover. That's the points I'm taking
away from this, anyway. I guess I could be wrong.

~~~
fallentimes
Definitely. I've met them and I'm well aware who they are and what they've
done.

I was _not_ talking about Sequoia or any of the VCs listed here:
<http://ycombinator.com/topvcs.html> (I know for a fact Greylock doesn't take
a management fee). That list is roughly the smart money even if it is somewhat
dated. On the hedge fund front, Clarium has reduced management fees and higher
performance payouts. Those types of VCs and hedge funds are few and far
between, however. I was talking about the industry in general.

Love the outlast instead of outgrow quote. I think your last paragraph is dead
on.

------
sfamiliar
i can see articles like this, and other chicken little articles and notices
applying to big-funding startups, but what i haven't seen is how this applies
to the little guys. me and my partners launched very recently (and were
reviewed here, flowmingle.com for the curious), and we are currently unfunded.
we're in the very very early stages of seeking funding, but on the scale of
bubble money we're not looking for much -- just enough to move the servers to
EngineYard and get a few ad campaigns out in a few major markets to start
building a user base.

so in our case, i have a day job, and that job helps support the crew, both of
which live very lean. i have the highest expense set (and the most experience,
and can generate the highest salary) so i'm the one who works.

what does this mean for the little guys? is there still money out there for
people who don't need a dump truck full, but still have a phenomenal idea?

these are the questions i'm looking to have answered. someone want to write
that article?

(xp)

~~~
quasimojo
well if all you want is hosting fees and money for ramen, you don't need
funding at all. just use your VISA.

------
joanou
This is great news for those who opted for the slower route of developing
services/solutions without external funding. It has the effect of reducing
competition within the marketplace. It will also divert developers to projects
with better business models.

------
ojbyrne
Call me a marxist, but the first thought that came to mind when I read this,
is "Are the LPs (correction: GPs) at Sequoia going to get frugal?" Is Mike
Moritz going to reduce his (most likely seven digit) salary?

~~~
ericwan
Mike Moritz is a general partner but not an LP I think... an LP is the
institutional or individual investors who put money in the fund.

~~~
ojbyrne
Oops. You're correct. Sorry. I edited it but in a way that still makes your
comment relevant.

------
mjnaus
If you need your investors to tell you to buckle up and cut costs because hard
times are ahead, you're probably not the most suitable person to run a company
and you might want to consider getting out asap...

------
motoko
I'd be worried if YC canceled their program. Otherwise, I'll abide.

------
known
Entrepreneurship for people who can think and act "out of the box". And
society should appreciate these risks.

~~~
quasimojo
yeah like starting a website is real "out of the box" thinking in the bay area

------
sabat
_Dr Ray Stantz: Fire and brimstone coming down from the skies! Rivers and seas
boiling!

Dr. Egon Spengler: Forty years of darkness! Earthquakes, volcanoes...

Winston Zeddemore: The dead rising from the grave!

Dr. Peter Venkman: Human sacrifice, dogs and cats living together... mass
hysteria!_

No one knows what is going to happen. Not Mike Moritz, not John Doer, not Guy
Kawasaki. It doesn't surprise me that Sequoia is telling its startups to be
frugal, but they should be doing that anyway. Startups that run in anything
but Frugal Mode are begging for failure.

Until society entirely breaks down -- government has dissolved, people running
wild in the streets, tent cities springing up by the thousands, people
fighting over who gets the last mudcakes -- business will continue.
Unemployment could reach as high as 10 percent, but business needs will still
exist, as will the need for innovation that saves money and increases
efficiency.

Outright panic caused by petulant bankers is not only annoying, it's downright
stupid.

~~~
pmorici
Well we have the tent cities.... <http://www.msnbc.msn.com/id/26776283/>

~~~
hugh
Well, all that proves is that some bastard has been handing out tents to the
homeless.

------
quasimojo
even without the downturn, a reality check was coming. literally hundreds of
little websites have been surviving due to only one factor: costs have dropped
so low for producing a website that you can run it on poverty wages for years.
in the 90s this wasn't the case...higher burn rates put more companies under
quickly.

and the web economy is maturing in ways that just aren't friendly to small
sites. google has become an accretion disc for all ad revenue that even other
big websites can't compete with. the major sites are paying good wages to good
talent...increasingly engineers will take $120k for 9-5 from yahoo over a
lottery ticket and slave labor from a startup

the recession will just wake most "founder" types up to the reality that their
payday will never emerge

------
kingkongrevenge
I've seen no discussion on targeting international customers. In the
intermediate term this is a global recession. But I believe it will be longer
and worse in the US than in many other places. It would be prudent to consider
reducing exposure to the US in your plan.

~~~
anamax
> But I believe [the recession] will be longer and worse in the US than in
> many other places.

Why?

