Sequoia Capital's "R.I.P. Good Times" document

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					R.I.P.

GOOD TIMES

NOW WHAT?

1

WALL STREET
HOW DID WE GET HERE?

ERIC UPIN
3

MULTIPLE PROBLEMS
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

MARKET CYCLES ARE LONG

Dow Jones Industrials (solid line) 15,000

Inflation (dotted line)

Bear Market 1966-1982

Bull Market 1983-2000

15%

10,000

10

5,000

5

0

1970

1980

1990

2000

2008

Source: Bureau of Labor Statistics, Dow Jones

DRIVEN BY PRODUCTIVITY AND CENTRAL BANK

Size of global workforce 4B 150

Indexed global productivity 10%

Fed funds rate

8 3 6 2 125 4 1

2

0 1980

1990

2000

2008

100 1996

2002

2006

0 1990

1995

2000

2005 Sep 2008

Source: Federal Reserve, International Labour Organization

RESULTING IN FALLING INFLATION AND COST OF DEBT
U.S. inflation (annual year/year CPI change) 25% Yield on 10-year U.S. treasuries
16%

12

15

8

Average 5 Average
4

-5 1950 1960 1970 1980 1990 2000 2007

0 1960 1970 1980 1990 2000 June 2008

Source: Bureau of Labor Statistics, Federal Reserve

FUELING A NATION OF CONSUMERS
U.S. current account / GDP 2%

0

-2

-4

-6

-8 1985 1990 1995 2000 2005

Source: Bureau of economic analysis

FOREIGN $s RECYCLED INTO TREASURIES

DEMAND KEEPS LONGERTERM RATES LOW

U.S. BUYS FOREIGN GOODS

FOREIGN COUNTRIES USE PROCEEDS TO BUY TREASURIES

AS A RESULT, DEBT BALLOONED

Source: Bridgewater

DEPENDENT ON THE KINDNESS OF STRANGERS

Source: Bridgewater

LIQUIDITY AND EASING SPREAD TO HOUSING

Single family housing starts
2M

Distribution of U.S. dollar mortgage originations 100%
Government

PrimeJumbo 80 PrimeConforming

Average
1

60

40 Alt-A 20 Subprime 0 1980 1985 1990 1995 2000 2005 2008E 0 2002 2006

Source: Bridgewater, National Association of Home Builders

HOME PRICES GREW SUBSTANTIALLY ABOVE MEAN
U.S. real home price index 250

1998-2006 8.0% annualized
200

1930 - 1997 0.7% annualized 1900-1929 -1.2% annualized

150

100

50 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2007
Source: Robert Shiller

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 in OTC derivatives markets $525T

350

35x U.S. GDP
175

0 1995

U.S. GDP

1998

2001

2004

2007

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

SIGNIFICANT EXCESS CAPACITY

Source: Bridgewater

VERY TIGHT CREDIT
High yield spreads (basis points) 1,250 Investment grade spreads (basis points) 500

1,000

400

750

300

500

200

250

100

0 1998

2000

2002

2004

2006

2008

0 1998

2000

2002 2004

2006

2008

Source: Merrill Lynch

JAPAN MAY BE INSTRUCTIVE
Annual real GDP growth
6%

Nikkei Index 1988 - present 40,000 8%

Japanese discount rate

30,000

6

3 Average

20,000

4

0

10,000

2

-3

0
1990 1995 2000 2005 Oct 2008

0
1990 1995 2000 2005 Jul-08

-6 1990 1995 2000 2005

Source: Bank of Japan, Yahoo Finance

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
21

THE U.S.: A NATION OF CONSUMERS

THE CHANGING FACE OF THE ECONOMY

$ TRILLIONS

1987

1997

2007

TOTAL U.S. GDP CONSUMER SPENDING CONSUMER AS % OF TOTAL GDP DISPOSABLE PERSONAL INCOME

4.7 3.1 66% 3.5

8.3 5.8 70% 6.0

13.8 10.1 73% 10.2

Source: Bureau of Economic Analysis.

EXPLOSION IN HOME OWNERSHIP

HOME OWNERSHIP %

LONG-TERM AVERAGE

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
UNEMPLOYMENT SPIKES HIGHER

DELINQUENCIES/FORECLOSURES

PRICES FALL

MEWS DECREASE

CONSUMER SPEND FALLS

JOB MARKET ERODES

RECESSION
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 Financials 5% -10% 18% 25% 11% 5% 23% -37% -46% Consumer Discretionary Media Information Technology Telecom Services S&P 500 0% -1% 28% 6% 17% -24% -6% -63% -24% -17% 33% 34% 0% -8% 5% 11% 12% 46% 0% 18% 28% 33% 43% -8% 20% 2% 28% 20% 14% 15% 9% 27% 12% 17% 16% -10% 15% 21% 5% -4% -16% 11% 10% -1% 1%

CY09E 109% 41% 11% 17% 10% 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)
30%

20%

10%

0%

-10%

-20%

-30% Jun 08E Jun-95 Jun-96 Jun-97 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Jun-07 Dec-07

S&P 500 EPS Growth

Tech Spending Growth

Source: Bernstein Strategy Group; First Call Drop in earnings in Dec 07 was partly due to financial services industry write offs

ENTERPRISE INDICATORS
“IT spending is being more scrutinized now than at any point in the 2003 through 2007 timeframe … customers are showing more caution.”
PC UNITS SOLD (Y/Y)

- 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
Amazon.com Financial Performance '99‐'05
$9,000 $8,000 60% $7,000 $6,000 $5,000 20% $4,000 $3,000 $2,000 ‐20% $1,000 $0 1999 Revenue 2000 Opex 2001 2002 2003 2004 2005 EBIT Margin ‐40% $100 $0 1999 Revenue 2000 2001 2002 2003 2004 2005 EBIT Margin 0% 40% $700 $600 $500 ‐10% $400 ‐20% $300 $200 ‐30% ‐40% ‐50% ‐60% 80% $900 $800

Buy.com Financial Performance '99‐'05
40% 30% 20% 10% 0%

$ Mil

Revenue Growth

$ Mil

Opex

Revenue Growth

•Strong business model •Focus on core value proposition

•Profitable growth •Trim fat during lean times

SALESFORCE.COM & SIEBEL
Salesforce.com Financial Performance '00‐'05
$350 350% 300% $300 250% $250 200% 150% 100% $150 50% 0% ‐50% $50 ‐100% $0 2000 Revenue 2001 Opex 2002 2003 2004 2005 EBIT Margin ‐150% $0 2000 Revenue 2001 Opex 2002 2003 2004 2005 EBIT Margin ‐20% ‐25% $500 $ Mil $1,500 $2,000 15% 10% 5% 0% $1,000 ‐5% ‐10% ‐15% $2,500

Siebel Financial Performance '00‐'05
25% 20%

$200 $ Mil $100

Revenue Growth

Revenue Growth

•Tailor sales message to environment •Take advantage of competitors’ weakness

•Understand your true customers •Value of quick ROI and low cost

YOUR STREET
WHERE DO WE GO FROM HERE?

DOUG LEONE
38

UPS AND DOWNS ALWAYS OCCUR

IT IS DIFFERENT THIS TIME

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

✔ ✔ ✔ ✔ ✔ ✔ ✔

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 WHAT’S 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
DEATH SPIRAL

EXPENSES

COMPANY A COMPANY B

10/08

TIME

NO ONE MOVES FAST ENOUGH

OP EX % Y/Y CSCO EMC ADBE YHOO AMZN Average

CY01 -3% 9% -2% -3% -15% -3%

CY02 -10% -22% -1% 14% -4% -5%

CY03 -1% -4% 12% 33% 10% 10%

CY04 9% 31% 18% 57% 24% 28%

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 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

Q&A

54


				
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