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A CEO's Sequoia Meeting Notes (weatherby.net)
123 points by lanceweatherby on Oct 9, 2008 | hide | past | favorite | 61 comments

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.

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.

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.

Yes, because it will mean a whole generation will struggle.

But these are the cards life is throwing at us. We are not the first generation to go through this, nor we are the last. One day we will look back and be proud we endured. It will be a great opportunity to refocus our priorities, to work on preventing this to happen again.

This is exactly what I thought as I read the article. We're talking about an entire generation of young workers who might not be able to reach their full financial potential (as measured against the past six years, at least).

But you're right. Thems the breaks. Make money for people, and you will make money. Who knows, in 15 years you might find yourself in the perfect position to make a lot of bank.

Or maybe Sequoia is overestimating the damage and we'll be fine in 36 months. Keep hope alive?

Hope for the best, prepare for the worst.

...and maybe wind up somewhere in the middle. - Bright Eyes, Loose Leaves

> Yes, because it will mean a whole generation will struggle.

Which Generation? The baby boomers trying to retire on their savings that are slowing being wiped out?

The Gen Xers that should be comming into their peak earning years?

The Gen Yers that are starting out in the work force?

Or did you mean to say that the entire population will suffer for a generation, generally considered to be 20 years?

> The Gen Xers that should be comming into their peak earning years?

Drats, screwed again! Curse you demographics.

//shakes fist

Great question.

My guess is that the Gen Yers will be most affected.

Here is my reasoning based on my moms family. She has 12 siblings.(No TV:) The stage is the Mexican crisis from 1976 to 1994. The older siblings had already achieved something when the crisis started and they fared ok, some even did very well. However, the younger siblings have always struggled. They entered the workforce just when the crisis started. And they were never able to do ok, even after the crisis ended. By that time they were in their late 40s.

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



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.

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.

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

Or, we're facing a far larger economic calamity than that of the Great Depression itself.

> 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.

Andrew Mellon remembered the mistakes of 1873....

I wasn't quite sure how to interpret this part of that article, but I think Professor Eichengreen later explains that his traditional answer ("it can't happen again") is no longer true.

"We can be confident, I always answered, that there will not be another Great Depression because policymakers have read financial histories like mine. At least that was my line until recently. Now I have stopped taking reporters' calls."

While he could mean that he's now getting so many requests that he can't be bothered to return them any more, I wonder if instead he meant that he can no longer give the "it can't happen again" message. Lending credence to this interpretation I think, he goes on to point out the ways in which the problem could continue to worsen without drastic action.

> 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.

The Great Depression wasn't "Great" because of Hoover, but because of FDR's policies, which extended it for seven years (according to the latest research from UCLA). If it wasn't for WWII, the GD might have gone on even longer.

Most likely it's panic about their own short-term losses in the market. Headlines like this (below) have scared them into a kumbaya-doombaya share-our-pain session with their underlings.

Truth is that the Dow can drop -- mainly out of emotional overreaction -- but if companies are genuinely producing value, then it will correct upwardly. A sudden, huge loss in the market like we've been seeing is never a sign of anything except emotion. Actual bear markets are signaled by trends, not jumps.

Dow falls below 9,000

Stocks slumped Thursday afternoon with the Dow falling below 9,000 as the Treasury's eye on buying stakes in struggling banks failed to reassure investors amid the ongoing credit crisis.

The guys at Sequoia, whatever their flaws, don't panic easily and wouldn't call all of their portfolio CEO's together to issue this set of warnings--which will lead to layouts and cutbacks of all sorts--if they didn't believe that it was necessary.

They may not panic easily, but they certainly are panicking. I'm sure they believe it's necessary, but that doesn't make them wise. They're human, and they can't see the future any more than we can. If things really are as dire as they fear, then most of their companies should sell off assets and shut down. Most of them wouldn't survive a 15-year depression, even if they're frugal. Cooler heads would just shut them down.

A 15-year secular bear market is not the same as a 15-year depression, or even a 15-year recession. It's fifteen years of overall crappy growth, not fifteen years of straight negative growth.

The last fifteen years, you'll note, have been especially good: only one minor blip in 2001 since the last recession ended in 1992ish. We can't expect that kind of thing to last forever.

According to this analysis:


there were secular bears (as measured on the Dow) from 1906-1921, 1929-1949 and 1966-1982. No reason there shouldn't be another one now.

On the upside, this means relax. It doesn't mean we're all gonna die. It just means we might have to live though the 1970s again, except with better clothes and worse music.

IMHO, the secular bear market started in 2000, and we're halfway through it. The peak in Oct 2007 just barely bested the market peak in 2000, and then like a month later started its slide. Right now, stocks are where they were in 97/98, so that's 10 years with zero overall growth.

You're forgetting about dividends and inflation.

The stock price is based on what people think is going to happen if look at our GDP and savings rate to see if there is any economic growth.

I credit them with a lot of experience and access to a lot of good information. I don't know why you believe that they are panicking in a week that the DOW has dropped about 16%: this will weld the IPO window shut and limit the value of any acquisitions that occur. If their companies are cash flow positive then there is no reason to sell off assets, but if they need more funding to survive it may not be available. If they were to shut them down and return the funds to their limited partners that would be the end of Sequoia: their partners expect them to earn an above average return with the risk capital that they have invested. Some investment firms, Sequoia likely among them will find a way to earn a positive and above average return from their portfolio of investments. They can't do that if they liquidate all of their holdings.

Operations review: Engineering: Since you already have a product, strongly consider reducing the number of engineers that you have.


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".

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!

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.

"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.

Cheap outsourcing is probably going to start looking pretty good to the management-types. Quantity over quality...

outsourcing has been disastrous so far. We have tried three times in my company, and with bad results.

Doesn't save money, or time in the long run, especially in engineering. It makes sense only in things like design, logos, etc, but not in your core business.

I would fully recommend to all my competitors to outsource their engineering as much as they can.

I tell this to everyone:

In the 90s, I was terrified of outsourcing. It started becoming very popular and there were quite a lot of people declaring the end of the American developer as a result.

Then I found out I was going to be working with an offshore team during a project for a large financial firm. The offshore company that this financial firm was using was reputed to be one of the best in the business.

When the code came back, I was no longer concerned about outsourcing. If anything, there was a whole career to be had resolving the issues in the cut and paste code that got sent back.

Never under-estimate the damage that the language barrier can do to a product.

IMHO it's about finances. In these dire straits you either load up on talent, make your product the absolute best, and take over your entire market segment while everyone else is hurting... or you lay low and weather the storm. For companies where they simply don't have the cash reserve to keep that many people on board for that long, the second option is the only one.

If your product pipeline is empty - you have your product ready and you have no clear plans to upgrade it, you can reduce your engineering headcount. You will feel the pain of hiring back as soon as you decide what to build next, but if it is in a remote enough future, I say do it.

While it's not always the brightest strategy, it's not always a stupid idea either.

Maybe it was, I just forwarded it on so can not say. Tech companies always need smart productive engineers. Product development never stops.

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

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)

Positive cash flow gets you "infinite runway" and allows you to survive through a downturn. In a down economy just being able to say that you are viable means you are more likely to get new business.

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.

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.

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'

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.

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.

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

Google is the exception, not the rule.

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.

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.

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.

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.

Why should the risk strategy of a company be any different from a personal risk strategy? If anything companies can afford to be riskier.

In theory it shouldn't. That's why I try to be as risk neutral as possible and why I'm doing a startup.

The problem with some of these over capitalized startups is they throw themselves in to risking seeking situations.

Well, you're right that companies should always focus on profitability. The part left open for debate is their time frame for profitability - that should grow and contract with their ability to find capital. Maybe I'm reading your posts wrong, but it sounds like you're saying to always strive for short term profitability, even if it costs you growth in the long term.

Exactly. Your first two sentences were much more eloquently put than mine.

I never said anything about short term profitability directly, but I should have clarified.

Some companies - and yes I know this sounds ridiculous - don't focus on short-term or long-term profitability. They are built to be acquired. Or they only focus on the top line (sales) while almost entirely ignoring the bottom line (net income, cash flow).

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.

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.

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.

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:


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

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.

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.


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.

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. :/

That's some strong Kool-Aid.

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.

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