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R.I.P.
GOOD
TIMES
NOW WHAT?


            1
Sequoia Capital - Economic Crisis and Venture Capital
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)                                  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
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
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
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                       U.S.
          LONGER-                     BUYS
           TERM                     FOREIGN
           RATES                     GOODS
            LOW




                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                                  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
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
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




                                                                                                                 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
SIGNIFICANT EXCESS CAPACITY




Source: Bridgewater
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
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
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                                      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.
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     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%
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


                                                                                                                                                                                                                                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
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
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
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
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.quot;


“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.quot;


quot;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.quot;
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                              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
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?
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   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%
CHOICES




WHAT DECISIONS DO         WHAT DECISIONS DO YOU
                    vs.
YOU PLAN TO MAKE?         WISH YOU HAD MADE?
Sequoia Capital - Economic Crisis and Venture Capital
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
Sequoia Capital - Economic Crisis and Venture Capital

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Sequoia Capital - Economic Crisis and Venture Capital

  • 4. WALL STREET HOW DID WE GET HERE? ERIC UPIN 3
  • 5. 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
  • 6. 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
  • 7. 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
  • 8. 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
  • 9. 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
  • 10. FOREIGN $s RECYCLED INTO TREASURIES DEMAND KEEPS U.S. LONGER- BUYS TERM FOREIGN RATES GOODS LOW FOREIGN COUNTRIES USE PROCEEDS TO BUY TREASURIES
  • 11. AS A RESULT, DEBT BALLOONED Source: Bridgewater
  • 12. DEPENDENT ON THE KINDNESS OF STRANGERS Source: Bridgewater
  • 13. 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
  • 14. 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
  • 15. 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
  • 16. 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
  • 18. 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
  • 19. 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
  • 20. 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
  • 21. OUR TAKE MANAGE WHAT YOU CAN CONTROL SPENDING GROWTH ASSUMPTIONS EARNINGS ASSUMPTIONS FOCUS ON QUALITY LOWER RISK REDUCE DEBT
  • 22. MAIN STREET WHERE ARE WE NOW? MICHAEL BECKWITH 21
  • 23. 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.
  • 24. 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.
  • 25. 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.
  • 26. 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.
  • 27. MEWs BECAME THE NEW PIGGY BANK MEW CONTINUES TO FADE… Source: Haver, BEA, NAHB, Conference Board, EIA, Morgan Stanley Research.
  • 28. 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.
  • 29. 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.
  • 30. EARNINGS BEGINNING TO ROLL EARNINGS DOWN 18% ON ESTIMATES MADE 12 MONTHS AGO Source: Datastream, Robert Shiller, Factset and Morgan Stanley Research.
  • 31. 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%
  • 32. ADVERTISING MARKETS ARE CRACKING Y/Y Source: TNS U.S. Advertising Expenditure Estimates
  • 33. RETAIL/ECOMMERCE DETERIORATING Y/Y Source: US Census Bureau.
  • 34. MOBILE IS NOT IMMUNE Y/Y Source: TNS U.S. Advertising Expenditure Estimates
  • 35. 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
  • 36. 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
  • 37. 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
  • 38. 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
  • 39. YOUR STREET WHERE DO WE GO FROM HERE? DOUG LEONE 38
  • 40. UPS AND DOWNS ALWAYS OCCUR
  • 41. IT IS DIFFERENT THIS TIME
  • 42. RECOVERY WILL BE LONG $ TIME
  • 43. 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.quot; “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.quot; quot;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.quot;
  • 44. 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
  • 45. INCREASED CHALLENGES M&As WILL DECREASE PRICES WILL DECREASE ACQUIRING ENTITIES WILL FAVOR PROFITABLE COMPANIES IPOs WILL CONTINUE TO DECREASE AND WILL TAKE LONGER
  • 46. 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
  • 47. 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?
  • 49. SURVIVAL OF THE QUICKEST DEATH SPIRAL EXPENSES COMPANY A COMPANY B 10/08 TIME
  • 50. 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%
  • 51. CHOICES WHAT DECISIONS DO WHAT DECISIONS DO YOU vs. YOU PLAN TO MAKE? WISH YOU HAD MADE?
  • 53. 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
  • 54. GET REAL OR GO HOME
  • 55. Q&A 54