Sequoia Capitals Advice on Avoiding the Death Spiral

Great article on The Force of Good Blog. Sequoia Capital a popular VC firm held a mandatory CEO all hands on meeting where they discussed tips to use in possible economic downturn.  I am personally against this hardcore of a position by such a notable and influential VC firm.  They are basically promoting profitability, slower growth and survival which in my opinion all seem counter to the core purpose of VC funded company. Sequoia also states quite clearly that this is just the start of a 15-year cycle, which I can’t for the life of me understand why wasn’t recognized last week or even month.  The biggest problem I have with this is its suddenness and drasticness which I am willing to bet will soften once its realized that all of this has been blown out of proportion and unfounded.  Only time will tell though…

The speakers and some of their key points were:

Mike Moritz, General Partner, Sequoia Capital –

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.

Eric Upin, Partner, Sequoia Capital –

Make changes, slash expenses, cut deep and keep marching. You can’t be a general if you turn back.

Manage what you can control. You can’t control the economy, but you can control everything else.

Michael Partner, Sequoia Capital -

A “V” shaped recovery is unlikely

Cuts in spending will accelerate in Q4/Q1. Look at eBay-this is just the beginning.

Doug Leone, General Partner, Sequoia Capital -

Do everything possible to get to cash flow positive. Now.

M&A will decrease dramatically and only lean companies, with proven sales models will be acquired.

The topic of the night was Capital Preservation and what companies can do to survive. This is what they were asking from their companies but it will work for everyone.

Company:

1. You must cut expenses. Now and deep.
2. Your product should reduce expenses and drive revenue
3. Honestly assess your solution vs. your competitors.
4. Cash is king [have you gotten this message yet?]
5. You must get to profitability as soon as possible to weather this
   storm and be self-sustaining.

Operations:

1. Engineering: Since you already have a product, strongly consider
   reducing the number of engineers that you have.
2. Product: What features are absolutely essential? Choose carefully
   and focus.
3. Marketing: Measure everything and cut what is not working. You don’t
   need large Product Marketing, Product Management teams.
4. 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.
5. Pipeline: Scrub the shit out of it and be honest with yourself.
6. Finance: Defer payments, what is essential? Kill cash burn.

Death Spiral:

1. The death spiral sucks you in, you’re in it before you know it and then you die.
2. Survival of the quickest.
3. Cutting deeper is the formula for survival.
4. You should have at least one year’s worth of cash on hand.

Tactics:

1. Assess your situation. Drop your assumptions, start with a blank
   page and start zero-based budgeting.
2. Adapt quickly
3. Make your cuts
4. Review all salaries
5. Change sales comp
6. Bolster your balance sheet-if you can add $5M to your coffers, take
   it and save it.
7. Spend like it’s your last dollar

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