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...
MARKET CYCLES ARE LONG


    Dow Jones Industrials (solid line)                                  Inflation (dotted line)

...
DRIVEN BY PRODUCTIVITY AND CENTRAL BANK


     Size of global workforce                          Indexed global productivi...
RESULTING IN FALLING INFLATION AND COST
OF DEBT

 U.S. inflation (annual year/year CPI change)                   Yield on ...
FUELING A NATION OF CONSUMERS


          U.S. current account / GDP

           2%



              0



             -2
...
FOREIGN $s RECYCLED INTO TREASURIES




          DEMAND
           KEEPS                       U.S.
          LONGER-    ...
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                                  Distribution of U...
HOME PRICES GREW SUBSTANTIALLY ABOVE
MEAN

          U.S. real home price index

        250
                             ...
STRUCTURED PRODUCTS AND REGULATORY
CHANGES COMPOUND THESE ISSUES
GROWTH IN SECURITIZATIONS


LEVERAGE ON THOSE STRUCTURES
...
HUGE GROWTH IN DERIVATIVES


               Outstanding amount of open positions in OTC derivatives markets

       $525T
...
SIGNIFICANT EXCESS CAPACITY




Source: Bridgewater
VERY TIGHT CREDIT

 High yield spreads (basis points)                  Investment grade spreads (basis points)

1,250     ...
JAPAN MAY BE INSTRUCTIVE


         Nikkei Index 1988 - present              Japanese discount rate             Annual rea...
KEY THEMES

GLOBAL


SECULAR


NOT “NORMAL CRISIS”, WILL TAKE TIME


CREDIT NOT EQUITY DRIVEN


SIGNIFICANT RISK TO GDP GR...
OUR TAKE

MANAGE WHAT YOU CAN CONTROL
       SPENDING
       GROWTH ASSUMPTIONS
       EARNINGS ASSUMPTIONS


FOCUS ON QUA...
MAIN STREET
WHERE ARE WE NOW?




MICHAEL BECKWITH

                    21
THE U.S.: A NATION OF CONSUMERS


                                       THE CHANGING FACE OF THE ECONOMY



             ...
EXPLOSION IN HOME OWNERSHIP
HOME OWNERSHIP %




                                                                         ...
WAGE GROWTH & PERSONAL SAVINGS
                       PERSONAL SAVINGS RATE                                               ...
CONSUMERS BUCKLING UNDER DEBT

           HOUSEHOLD DEBT SERVICE RATIO    HOUSEHOLD FINANCIAL OBLIGATION RATIO




     DS...
MEWs BECAME THE NEW PIGGY BANK

                                                                MEW CONTINUES TO FADE…



...
FROM VIRTUOUS TO VISCIOUS CYCLE

     MORTGAGE RESET                             UNEMPLOYMENT SPIKES HIGHER




DELINQUENC...
ON THE BRINK OF A RECESSION
    CONSUMER CONFIDENCE AT MULTI-DECADE LOWS




                          ISM IS FALLING FAST...
EARNINGS BEGINNING TO ROLL

                              EARNINGS DOWN 18% ON ESTIMATES MADE 12 MONTHS AGO




Source: Da...
V-SHAPED RECOVERY UNLIKELY


                                                                                             ...
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%


...
ENTERPRISE INDICATORS
                                                                                                    ...
AMAZON.COM & BUY.COM
             Amazon.com Financial Performance '99‐'05                                            Buy....
SALESFORCE.COM & SIEBEL
           Salesforce.com Financial Performance '00‐'05                                      Siebe...
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 c...
NEW REALITIES

$15M RAISE @ $100M POST IS GONE

SERIES B/C WILL BE SMALLER RAISES

CUSTOMER UPTAKE WILL BE SLOWER

CUTS AR...
INCREASED CHALLENGES

M&As WILL DECREASE

PRICES WILL DECREASE

ACQUIRING ENTITIES WILL FAVOR PROFITABLE COMPANIES

IPOs W...
SURVIVAL


 PRESERVE                              GRAB
 CAPITAL                              SHARE




 ✔   MUST-HAVE PROD...
OPS REVIEW


✔   ENGINEERING       DECREASE HEADCOUNT FOR NEXT VERSION?

✔   PRODUCT           WHAT FEATURES ARE ABSOLUTEL...
DEATH SPIRAL
SURVIVAL OF THE QUICKEST

                       DEATH SPIRAL
 EXPENSES




                                      COMPANY ...
NO ONE MOVES FAST ENOUGH




        OP EX % Y/Y   CY01   CY02   CY03   CY04
        CSCO           -3%   -10%    -1%    9...
CHOICES




WHAT DECISIONS DO         WHAT DECISIONS DO YOU
                    vs.
YOU PLAN TO MAKE?         WISH YOU HAD...
THE SOLUTION

PERFORM SITUATION ANALYSIS

ADAPT QUICKLY

USE A ZERO-BASED BUDGETING APPROACH

MAKE CUTS

REVIEW SALARIES

...
GET REAL   OR   GO HOME
Q&A




      54
Sequoia RIP Presentation
Sequoia RIP Presentation
Sequoia RIP Presentation
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Sequoia RIP Presentation

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Presentation given October 8, 2010 in emergency meeting held by Sequoia Capital for its portfolio companies.

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Sequoia RIP Presentation

  1. 1. R.I.P. GOOD TIMES
  2. 2. NOW WHAT? 1
  3. 3. WALL STREET HOW DID WE GET HERE? ERIC UPIN 3
  4. 4. 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
  5. 5. MARKET CYCLES ARE LONG Dow Jones Industrials (solid line) Inflation (dotted line) 15,000 Bear Market Bull Market 15% 1966-1982 1983-2000 10,000 10 5,000 5 0 1970 1980 1990 2000 2008 Source: Bureau of Labor Statistics, Dow Jones
  6. 6. DRIVEN BY PRODUCTIVITY AND CENTRAL BANK Size of global workforce Indexed global productivity Fed funds rate 4B 150 10% 8 3 6 2 125 4 1 2 0 100 0 1980 1990 2000 2008 1996 2002 2006 1990 1995 2000 2005 Sep 2008 Source: Federal Reserve, International Labour Organization
  7. 7. RESULTING IN FALLING INFLATION AND COST OF DEBT U.S. inflation (annual year/year CPI change) Yield on 10-year U.S. treasuries 25% 16% 12 15 8 Average 5 Average 4 -5 0 1950 1960 1970 1980 1990 2000 2007 1960 1970 1980 1990 2000 June 2008 Source: Bureau of Labor Statistics, Federal Reserve
  8. 8. 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
  9. 9. FOREIGN $s RECYCLED INTO TREASURIES DEMAND KEEPS U.S. LONGER- BUYS TERM FOREIGN RATES GOODS LOW FOREIGN COUNTRIES USE PROCEEDS TO BUY TREASURIES
  10. 10. AS A RESULT, DEBT BALLOONED Source: Bridgewater
  11. 11. DEPENDENT ON THE KINDNESS OF STRANGERS Source: Bridgewater
  12. 12. LIQUIDITY AND EASING SPREAD TO HOUSING Single family housing starts Distribution of U.S. dollar mortgage originations 2M 100% Government Prime- Jumbo 80 Prime- 60 Conforming Average 1 40 Alt-A 20 Subprime 0 0 2002 2006 1980 1985 1990 1995 2000 2005 2008E Source: Bridgewater, National Association of Home Builders
  13. 13. HOME PRICES GREW SUBSTANTIALLY ABOVE MEAN U.S. real home price index 250 1998-2006 8.0% annualized 200 1930 - 1997 0.7% annualized 150 1900-1929 -1.2% annualized 100 50 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2007 Source: Robert Shiller
  14. 14. 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
  15. 15. HUGE GROWTH IN DERIVATIVES Outstanding amount of open positions in OTC derivatives markets $525T 350 35x U.S. GDP 175 U.S. GDP 0 1995 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
  16. 16. SIGNIFICANT EXCESS CAPACITY Source: Bridgewater
  17. 17. VERY TIGHT CREDIT High yield spreads (basis points) Investment grade spreads (basis points) 1,250 500 1,000 400 750 300 500 200 250 100 0 0 1998 2000 2002 2004 2006 2008 1998 2000 2002 2004 2006 2008 Source: Merrill Lynch
  18. 18. JAPAN MAY BE INSTRUCTIVE Nikkei Index 1988 - present Japanese discount rate Annual real GDP growth 40,000 8% 6% 30,000 6 3 Average 20,000 4 0 10,000 2 -3 0 0 -6 1990 1995 2000 2005 Oct 2008 1990 1995 2000 2005 Jul-08 1990 1995 2000 2005 Source: Bank of Japan, Yahoo Finance
  19. 19. 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
  20. 20. OUR TAKE MANAGE WHAT YOU CAN CONTROL SPENDING GROWTH ASSUMPTIONS EARNINGS ASSUMPTIONS FOCUS ON QUALITY LOWER RISK REDUCE DEBT
  21. 21. MAIN STREET WHERE ARE WE NOW? MICHAEL BECKWITH 21
  22. 22. THE U.S.: A NATION OF CONSUMERS THE CHANGING FACE OF THE ECONOMY $ TRILLIONS 1987 1997 2007 TOTAL U.S. GDP 4.7 8.3 13.8 CONSUMER SPENDING 3.1 5.8 10.1 CONSUMER AS % OF TOTAL GDP 66% 70% 73% DISPOSABLE PERSONAL INCOME 3.5 6.0 10.2 Source: Bureau of Economic Analysis.
  23. 23. 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.
  24. 24. 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.
  25. 25. 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.
  26. 26. MEWs BECAME THE NEW PIGGY BANK MEW CONTINUES TO FADE… Source: Haver, BEA, NAHB, Conference Board, EIA, Morgan Stanley Research.
  27. 27. 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.
  28. 28. 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.
  29. 29. EARNINGS BEGINNING TO ROLL EARNINGS DOWN 18% ON ESTIMATES MADE 12 MONTHS AGO Source: Datastream, Robert Shiller, Factset and Morgan Stanley Research.
  30. 30. 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 CY09E Financials 5% -10% 18% 25% 11% 5% 23% -37% -46% 109% Consumer Discretionary 0% -24% 33% 11% 28% 2% 9% -10% -16% 41% Media -1% -6% 34% 12% 33% 28% 27% 15% 11% 11% Information Technology 28% -63% 0% 46% 43% 20% 12% 21% 10% 17% Telecom Services 6% -24% -8% 0% -8% 14% 17% 5% -1% 10% S&P 500 17% -17% 5% 18% 20% 15% 16% -4% 1% 23%
  31. 31. ADVERTISING MARKETS ARE CRACKING Y/Y Source: TNS U.S. Advertising Expenditure Estimates
  32. 32. RETAIL/ECOMMERCE DETERIORATING Y/Y Source: US Census Bureau.
  33. 33. MOBILE IS NOT IMMUNE Y/Y Source: TNS U.S. Advertising Expenditure Estimates
  34. 34. 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 Jun-07 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 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
  35. 35. ENTERPRISE INDICATORS “IT spending is being more scrutinized now than at any point in the 2003 through 2007 timeframe … customers are showing more caution.” - EMC, JUL 2008 PC UNITS SOLD (Y/Y) “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
  36. 36. AMAZON.COM & BUY.COM Amazon.com Financial Performance '99‐'05 Buy.com Financial Performance '99‐'05 $9,000 80% $900 40% $8,000 $800 30% 60% 20% $7,000 $700 10% $6,000 40% $600 0% $5,000 $500 $ Mil $ Mil 20% ‐10% $4,000 $400 ‐20% $3,000 0% $300 ‐30% $2,000 $200 ‐40% ‐20% $1,000 $100 ‐50% $0 ‐40% $0 ‐60% 1999 2000 2001 2002 2003 2004 2005 1999 2000 2001 2002 2003 2004 2005 Revenue Opex Revenue Growth EBIT Margin Revenue Opex Revenue Growth EBIT Margin •Strong business model •Profitable growth •Focus on core value proposition •Trim fat during lean times
  37. 37. SALESFORCE.COM & SIEBEL Salesforce.com Financial Performance '00‐'05 Siebel Financial Performance '00‐'05 $350 350% $2,500 25% 300% 20% $300 250% $2,000 15% $250 200% 10% 150% $1,500 5% $200 $ Mil $ Mil 100% 0% $150 50% $1,000 ‐5% $100 0% ‐10% ‐50% $500 ‐15% $50 ‐100% ‐20% $0 ‐150% $0 ‐25% 2000 2001 2002 2003 2004 2005 2000 2001 2002 2003 2004 2005 Revenue Opex Revenue Growth EBIT Margin Revenue Opex Revenue Growth EBIT Margin •Tailor sales message to environment •Understand your true customers •Take advantage of competitors’ weakness •Value of quick ROI and low cost
  38. 38. YOUR STREET WHERE DO WE GO FROM HERE? DOUG LEONE 38
  39. 39. UPS AND DOWNS ALWAYS OCCUR
  40. 40. IT IS DIFFERENT THIS TIME
  41. 41. RECOVERY WILL BE LONG $ TIME
  42. 42. 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."
  43. 43. 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
  44. 44. INCREASED CHALLENGES M&As WILL DECREASE PRICES WILL DECREASE ACQUIRING ENTITIES WILL FAVOR PROFITABLE COMPANIES IPOs WILL CONTINUE TO DECREASE AND WILL TAKE LONGER
  45. 45. SURVIVAL PRESERVE GRAB CAPITAL SHARE ✔ MUST-HAVE PRODUCT ✔ ESTABLISHED REVENUE MODEL ✔ UNDERSTANDING OF MARKET UPTAKE ✔ CUSTOMERS’ ABILITIES TO PAY ✔ ASSESSMENT VS. COMPETITORS ✔ CASH IS KING ✔ NEED FOR PROFITABILITY
  46. 46. OPS REVIEW ✔ ENGINEERING DECREASE HEADCOUNT FOR NEXT VERSION? ✔ PRODUCT WHAT FEATURES ARE ABSOLUTELY ESSENTIAL? ✔ MARKETING MEASURING & CUTTING WHAT’S NOT WORKING? ✔ SALES & BUS DEV GETTING RETURN ON EXPENSE INCREASE? ✔ PIPELINE REAL PROBABILITIES OF CLOSING DEALS? ✔ FINANCE CASHBURN WHERE CAN PAYMENTS BE DEFERRED? G&A WHAT DEPARTMENTS ARE ESSENTIAL?
  47. 47. DEATH SPIRAL
  48. 48. SURVIVAL OF THE QUICKEST DEATH SPIRAL EXPENSES COMPANY A COMPANY B 10/08 TIME
  49. 49. NO ONE MOVES FAST ENOUGH OP EX % Y/Y CY01 CY02 CY03 CY04 CSCO -3% -10% -1% 9% EMC 9% -22% -4% 31% ADBE -2% -1% 12% 18% YHOO -3% 14% 33% 57% AMZN -15% -4% 10% 24% Average -3% -5% 10% 28%
  50. 50. CHOICES WHAT DECISIONS DO WHAT DECISIONS DO YOU vs. YOU PLAN TO MAKE? WISH YOU HAD MADE?
  51. 51. 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
  52. 52. GET REAL OR GO HOME
  53. 53. Q&A 54

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