A couple memos are making the rounds today that are worth sharing. Uber-angel
Ron Conway and
Sequoia both delivered portfolio-wide guidance to raise money sooner (if possible), cut expenses ASAP and survive (forget about thrive). The only no-BS color I'll provide is that during the tech bubble, West coast firms felt this pain about 3-4 months earlier than East coast firms. As a result, the East coast companies that internalized the message early were in the best position of all -- getting lean while still having a window of funding options.
Don't let this be one of those "Didn't you get the memo?" moments for you and your board/investors:
Conway Memo: (
via TechCrunch)
——— Forwarded message ———-
From: Ron Conway
Date: Tue, Oct 7, 2008 at 12:12 PM
Subject: IMPORTANT PLEASE READ ASAP …..REGARDING CURRENT MARKET CONDITIONS…Confidential
We have all been absorbed by the turmoil in the financial markets the past few weeks
Unlike the turmoil of 2000 when the “action” was centered right here in Silicon Valley this time is it centered on Wall Street…..but it has rippled to the west coast quickly and we will not be “immune” to its drastic effects.
I was an active investor in 2000 when the “bubble burst” and remember it vividly and want to give you the SAME EXACT advice I gave to my portfolio company CEOs back then.
I have pasted in the emails I sent on April 17th 2000 and May 10th 2000 and every word applies today.
Unfortunately history DOES repeat itself but I hope we can learn from history and prevent the turmoil from occurring again.
The message is simple. Raising capital will be much more difficult now.
You should lower your “burn rate” to raise at least 3-6 months or more of funding via cost reductions, even if it means staff reductions and reduced marketing and G&A expenses. This is the equivalent to “raising an internal round” through cost reductions to buy you more time until you need to raise money again; hopefully when fund raising is more feasible. Letting go of staff is hard and often gut wrenching. A re-evaluation of timelines and re-focus on milestones with the eye of doing more with less will allow you to live many more days, and the name of the game in this environment in some
respects is survival–survival until conditions change.
If you are in a funding cycle, you should raise your funding as soon as possible and raise as much as possible but face the fact that if you can’t raise money now you must cut costs.
While I do not own a large percentage of your company I hope you will consider this thoughtful advice.
I was here in 2000 and want to share what I learned through many years of experience and historical “pattern recognition”!
Here are the two emails from the year 2000 that I referred to above and all the statements apply in today’s market:
To: Angel Investors, L.P. Portfolio CEOs
Date: 04/17/2000 05:24 PM
From: Ron Conway
RE: Market Conditions Effect on Angel Investors, L.P. Portfolio
Companies
The down draft in the stock market sends us some obvious “signals” and we can’t help but mention them.
1. If you are in a funding cycle, you should raise your funding as soon as possible and raise as much as possible.
2. Many companies are ignoring certain VC leads we’ve provided in order to concentrate on the top tier only. While we have preached that in the past, this is no longer the case. Currently, top-tier VC
bandwidth constraints, coupled with the market down draft, make it very important to take meetings with any VCs where you can get their attention. We have been working hard to open up this new bandwidth.
3. You must aggressively examine and pursue M&A opportunities (unless you have over 12 months of cash reserves!) ro insure you have critical mass (including funding, customers, rolodex power, market
share, cash, synergy, etc.).
4. Be realistic on valuations - they will fall so be ready and willing to co-operate.
5. Look for corporate partners to invest so you can raise more money. You should also consider a sale of your company to your corporate partners.
6. If you are entering a funding cycle start raising money sooner rather than later.
7. While it’s safe to say entrepreneurs have had negotiating leverage with the “down draft” in the market, the VC community will start exercising their leverage.
—————————————————————————-
—————————————-
To: Angel Investors, L.P. Portfolio CEOs
Date: 05/10/2000 05:23 PM
From: Ron Conway
RE: Market Conditions Effect on Angel Investors, L.P. Portfolio
Companies
I want to “touch base” again; given the continued uncertainty in the capital markets.
As the market turmoil continues, we must underscore the advice that we have provided since mid April and it boils down to just a few points:
1) The capital market window is shut, including IPOs and VC Funding (VCs are looking at their existing portfolio funding needs - not new opportunities). Basically the market is now looking for PtoP (Path to Profitability) instead of BtoC, BtoB, etc! PtoE will prevail price to sales ratios! You must lower your “burn rate” to raise at least 3-6 months more of funding via cost reductions, even if it means selective staff reductions and reduced marketing and G&A expenses. This is the equivalent to ‘raising
an internal round” through cost reductions to buy you more time until you need to raise money again; hopefully when fund raising is more feasible.
2) If you have $10M or less in the bank you must do #1 above plus look at M&A options for your company; especially if your company is BtoC, content, advertising model, community, commerce, and even BtoB. An M&A transaction will allow you to gain critical mass and to get two sets of funding sources and rolodexes working on your behalf. M&A transactions take over 90 days so you need at least that much cash to fund your company. You must attend our M&A day on May 24th at the San Mateo Marriott at 3:00 PM. We will have investment banks there in addition to entrepreneurs who have
successfully accomplished M&A transactions. We will send you details.
We are still developing many new funding sources for our portfolio companies that are in funding cycle.
Sequoia Memo: (
via Slyce of Carnet and others)
Today, Sequoia Capital hosted a mandatory CEO All-Hands Meeting on Sand Hill Road (where else?). There were about 100 CEO’s in attendance and let me tell you, the mood was somber. I’m not one to perpetuate doom and gloom or bad news, but let me underscore this for you: We are in a serious economic downturn and this is just the beginning. Immediate, decisive and swift action is required, along with frugal, day-to-day management of expenses and our business is required.
Speakers:
Mike Moritz, General Partner, Sequoia Capital (he moderated the speakers).
・ Eric Upin, Partner, Sequoia Capital (Eric ran the $26-Billion Stanford Endowment Fund and knows a few things about Economics and investing.)
・ Michael Beckwith, Partner, Sequoia Capital (Michael was recruited to start Sequoia’s very first hedge fund, coming from Maverick Capital and Robertson Stephens. I know him from my BEA days.)
・ Doug Leone, General Partner, Sequoia Capital
Slide projected on the huge conference room screen as people assembled inside the conference center to take their seats: a gravestone with the inscription: RIP, Good Times.
Mike Moritz:
· The only time Sequoia’s assembled all CEO’s like this was during the dot.com crash.
· We are in drastic times. Drastic times mean drastic measures must be taken to survive. Forget about getting ahead, we’re talking survive. Get this point into your heads.
· For those of you that are not cash-flow positive, get there now. Raising capital is nearly impossible if you’re too far off of cash flow positive.
· There will be consequences for those who hesitate. Act now.
Eric Upin:
· It’s always darkest before it’s pitch black.
· Survival of this storm means drastic measures must be taken now, so you will have the opportunity to capitalize on this down turn in the future.
· We are in the beginning of a long cycle, what we call a “Secular Bear Market.” This could be a 15 year problem. [many slides on historical charts of previous recessions, averaging 17 year cycles.]
· The credit market [versus the Equity markets] are the issue and will take time to recover.
· Inflection point: Make changes, slash expenses, cut deep and keep marching. You can’t be a general if you turn back.
· This is a global issue and not a ‘normal’ time.
· There is significant risk to growth and your personal wealth.
· Advice:
o Manage what you can control. You can’t control the economy, but you can control everything else.
§ Cut spending. Cut fat. Preserve Capital.
§ Don’t trust your models and spreadsheets. All assumptions prior to today are wrong.
§ Focus on quality.
§ Reduce risk.
Michael Beckwith:
· Note: Michael had a lot of slides that were charts, data points and comparisons.
· A “V” shaped recovery is unlikely [√]
· Cuts in spending will accelerate in Q4/Q1. Look at eBay—this is just the beginning.
Doug Leone:
· This is a different animal and will take years to recover.
· Getting another round if you’re not profitable will be rough.
· Do everything possible to get to cash flow positive. Now.
· Nail your Sales and Marketing message.
· Pound your competitors shortcomings. They’re hurting and they will be quiet. Take the offensive.
· In a downturn, aggressive PR and Communications strategy is key.
· M&A will decrease dramatically and only lean companies, with proven sales models will be acquired.
· Spectrum discussion:
o Capital Preservation ß----------------------------------à Grab Market
o Everyone should be far to the left (capital preservation)
· Requirements of our companies:
o You must have a proven product
o You must cut expenses. Now and deep.
o Your product should reduce expenses and drive revenue
o Honestly assess your solution vs. your competitors.
o Cash is king [have you gotten this message yet?]
o You must get to profitability as soon as possible to weather this storm and be self-sustaining.
· Operations review:
o Engineering: Since you already have a product, strongly consider reducing the number of engineers that you have.
o Product: What features are absolutely essential? Choose carefully and focus.
o Marketing: Measure everything and cut what is not working. You don’t need large Product Marketing, Product Management teams.
o Sales & Business Development: What is your return on this investment? The Valley has gotten fat with Sales people: Big bases, big variables. Cut base salaries on sales people, highly leverage them with upside (increase variable) and make people pay for themselves via increased sales productivity. Don’t add sales people until you’ve achieved your goals with sales productivity. Be disciplined.
o Pipeline: Scrub the shit out of it and be honest with yourself.
o Finance: Defer payments, what is essential? Kill cash burn.
· Death Spiral (Nobody moves fast enough in times like these, so get going and research later.)
o The death spiral sucks you in, you’re in it before you know it and then you die.
o Survival of the quickest.
o Cutting deeper is the formula for survival.
o You should have at least one year’s worth of cash on hand.
o Tactics:
§ Assess your situation. Drop your assumptions, start with a blank page and start zero-based budgeting.
§ Adapt quickly
§ Make your cuts
§ Review all salaries
§ Change sales comp
§ Bolster your balance sheet—if you can add $5M to your coffers, take it and save it.
§ Spend like it’s your last dollar.
· Get Real or Go Home. Labels: bubble, burn, doug leone, eric upin, michael beckwith, mike moritz, ron conway, sequoia, wildcardwednesday
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