What Startups Can Learn from Sequoia Capital’s Doomsday Plans.

some scary words from the Sequoia Capital folks...but important lessons to learn are in here as well:

http://gigaom.com/2008/10/09/what-startups-can-learn-from-sequoias-doomsday-warning/

What Startups Can Learn from Sequoia Capital’s Doomsday Plans.
Om Malik, Thursday, October 9, 2008 at 11:27 AM PT Comments (0)

Last evening I had reported about a special meeting held by Sequoia Capital for its portfolio companies, warning them about a fiscal hurricane that was going to hit them, and they better figure out ways to survive what could be a big downturn.
There were some gaps in the details about that meeting, but I have been able to piece together the minutes of that meeting and what they had essentially said. Since these are second sourced details, I cannot say they are a hundred percent accurate, and as a result please use a degree of skepticism. Nevertheless, I still feel confident enough to share these details.

These were the four speakers:
Mike Moritz, General Partner, Sequoia Capital who moderated the speakers. The speakers were Eric Upin, Partner, Sequoia Capital who till recently ran the ran the $26-Billion Stanford Endowment Fund; Michael Partner, Sequoia Capital, who Sequoia’s very first hedge fund and worked at Maverick Capital and Robertson Stephens. The last speaker was as I mentioned, Doug Leone, General Partner, Sequoia Capital.

Details of what they had to say are below the fold.

Moritz Musings
Mike Mortiz kicked off the proceedings by saying that there are drastic times and that means drastic measures must be taken to survive. His message to companies was don’t worry about getting ahead instead … “we’re talking survive. Get this point into your heads.” He warned that companies need to be cash flow positive, and if they are not, then they need to get there now, because raising capital without being cash flow positive is going to be tough. He was warning that there will be a price to pay for those who hesitate to act.

Upin Says
Upin, who know a thing or two about money and markets told the room thatWe are in the beginning of a long cycle, what we call a “Secular Bear Market.” This could be a 15 year problem.” This comment was accompanied by many slides that showed historical charts of previous recessions, averaging 17 year cycles. He pointed out that issue here is not equity markets but the credit market and that will take a long time to recover. He was ominous in warning the startups that this is a global issue, not a normal time and this is a significant risk not just to growth but to personal wealth.
He advised startups make drastic changes, cut expenses and cut deep but still keep marching. “Make changes, slash expenses, cut deep and keep marching. “You can’t be a general if you turn back,” he is supposed to have said. The point he hammered in was that since you can’t manage the economy, manage everything else including your business.

He had some interesting advise for starts.
* Cut spending. Cut fat. Preserve Capital.

* Throw out the models, spreadsheets, because all assumptions will be wrong.

* Focus on quality.

* Reduce risk.

Michael Beckwith
Michael Beckwith’s presentation had lots of charts and data and he pointed out that the V-shaped recovery is unlikely. He also said that the cuts in spending will accelerate in Q4 and Q1 2009, and pointed to eBay as an example.

Leone’s lessons
Doug Leone, told the group that this (downturn) was a different animal and would take “years to recover.” He was clear in pointing out that:
* unprofitable companies would have tough time raising cash, so get cash flow positive as soon as possible.

* Go on the offensive and pound on your competitors’ shortcomings.

* Be aggressive with your messaging and be out there. In a downturn, aggressive PR and Communications strategy is key.

* Decline in M&A will mean that only lean companies with sales models that work will get bought.

* On a scale between Capital Preservation and grabbing market share, he advised that everyone should be only preserving capital.

Leone other tips for companies, especially the Sequoia portfolio companies were something like this:
* Start with zero-based budgeting.

* Cutting deeper is the formule to surive, and this is an era of survival of the quickest.

* Make sure you have one year of cash.

* If you have a product, it should reduce expenses and boost sales. If the product is ready, cut the number of enginggers.

* Focus on building the absoliutely essential features in your product.

* Be brutal wahen it comes to marketing — anything that isn’t working, cut it.

* Kill cash burn for cash is king,

* Cut base salaries on sales people and leverage them with upside.

* Most importantly, be true to yourself.