#1PAT GRADY & RAVI GUPTA MAY 2022 SEQUOIA Forecasting & Scenario Planning#2SEQUOIA What is a great business?#3In three words... SEQUOIA CONFIDENTIAL Free Cash Flow#4How does Revenue convert into Free Cash Flow? Income Statement Revenue COGS Gross Profit S&M R&D G&A Operating Income Interest & Taxes Net Income Statement of Cash Flows Net Income Non-Cash Items Changes in Working Capital Cash from Operations Capex Free Cash Flow SEQUOIA CONFIDENTIAL $500 $150 $350 $100 $100 $50 $100 $30 $70 $70 $30 $20 $120 $70 $50 100% 30% 70% 20% 20% 10% 20% 6% 14% 14% 6% 4% 24% 14% 10% 1. Gross Margin 2. Operating Margin 3. Working Capital 4. Capital Intensity#5Atomic Units of Investing SEQUOIA CONFIDENTIAL IN WHAT ASSET ARE YOU INVESTING? Company unit Operating unit Customer unit#6What does it mean to build a Great Business? Story SEQUOIA CONFIDENTIAL Metrics Great Business Financials Valuation The financial reward for building a Great Business#7THE MUST-HAVE: A Path to Free Cash Flow SEQUOIA#8What is the problem? SEQUOIA#9EQUOIA CONFIDENTI 1995 1996 1997 1998 2000 1999 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 $0 $50 $100 VC $B $150 $200 $250 $300 $350 The Tide is going Out#10Risk On versus Risk Off Tide is In: Risk On! Innocent until proven guilty Invest in dreams Reward growth Spend on S&M Eat Sugar (VC $$) Grow Fat (use $$ to solve problems) SEQUOIA CONFIDENTIAL Tide is Out: Risk Off Guilty until proven innocent Invest in reality Reward profitability Invest in R&D Eat Protein (Customer $$) Build Muscle (use brain cells to solve problems)#11The Market has Changed Story RISK ON! SEQUOIA CONFIDENTIAL Metrics Financials RISK OFF Valuation#12The Problem SEQUOIA CONFIDENTIAL Yesterday's market rewarded excess; tomorrow's will not Without a clear path to Free Cash Flow, there is no more money Clear path: story → metrics →→ financials Clear path: customer unit →→ operating unit company unit#13Pascal's Wager Even if we're wrong about the market, it always makes sense to build a great business. SEQUOIA CONFIDENTIAL YOUR BEHAVIOR Build a Great Business Grow at all costs MARKET ENVIRONMENT Tide is Out Tide is In#14What is the solution? SEQUOIA#15SEQUOIA OBJECTIVE: Optimize for long-term market leadership subject to the constraints of reality#16Reality has Changed SEQUOIA CONFIDENTIAL Spending Talent Funding#17Spending Reality SEQUOIA CONFIDENTIAL Enterprise ✓ Revenue Growth ↓ Opex ↓ Capex Consumer 个 Interest Rates: mortgage payments ↑ Inflation: gas prices ✓ Propensity to consume#18Spending Reality SEQUOIA CONFIDENTIAL Enterprise Revenue Growth ✓ ↓ Opex ↓ Capex Consumer 个 Interest Rates: mortgage payments ↑ Inflation: gas prices ✓ Propensity to consume Their Spend is Your Revenue#19Funding Reality VC $B $350 $300 $250 $200 $150 $100 $50 $0 1995 1996 1997 1998 1999 SEQUOIA CONFIDENTIAL AVAILABILITY 2000 2001 2002 2004 2003 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 8x 6x 4x 2x Ox NASDAQ Composite Index TEV / NTM Rev 1/1/1995 1/1/2000 PRICE 1/1/2005 1/1/2010 1/1/2015 1/1/2020#20Reality has Changed Your Plan has Changed SEQUOIA CONFIDENTIAL REALITY Spending Talent Funding PLAN Revenue Cost Profit#21Planning During Uncertain Times SEQUOIA CONFIDENTIAL INPUT OUTPUT OUT OF YOUR CONTROL REV IN YOUR CONTROL COST ↓ PROFIT#22Spending Reality SEQUOIA CONFIDENTIAL DESIRE TO PAY Low High Revenue Plan High ABILITY TO PAY Low#23Spending Reality Desire to Pay Unique & Compelling ✓ Gross Margin 80%+ 60-80% <60% ENTERPRISE SEQUOIA CONFIDENTIAL Magic Number $2.00+ Revenue Plan $1.00-2.00 <$1.00 Acquisition & Engagement/Retention Organic as a % 90%+ CONSUMER 50-90% <50% M12 User Retention 40%+ 20-40% <20%#24Spending Reality Ability to Pay SEQUOIA CONFIDENTIAL ENTERPRISE Revenue Plan CONSUMER#25Spending Reality Enterprise Examples Revenue Growth Rate Free Cash Flow FCF Margin GOOD SEQUOIA CONFIDENTIAL Microsoft Revenue Plan 1997 1998 1999 2000 2001 2002 2003 $17.5 $21.4 $24.1 $26.8 $30.3 $34.5 14% $13.6 32% 29% 22% 13% 11% 13% $6.0 $9.7 $11.1 $11.4 $13.0 $14.3 44% 55% 52% 47% 49% 47% $14.2 41% BAD Internet capital Group $60 Billion $200 Million#26Spending Reality Consumer Examples SEQUOIA CONFIDENTIAL Total Revenue Walmart y/y Growth Amazon y/y Growth eBay y/y Growth Expedia y/y Growth Williams Sonoma y/y Growth Revenue Plan 2006 10,711 5,970 2,238 2007 3,728 348,650 378,476 404,254 408,085 421,849 446,509 8.6% 6.8% 0.9% 3.4% 5.8% 14,835 38.5% 7,673 28.5% 2,665 19.1% 2008 3,945 5.8% 2009 19,166 24,509 29.2% 27.9% 8,541 8,727 11.3% 2.2% 2,937 10.2% 2,743 (6.6)% 2010 3,362 3,103 (14.8)% (7.7)% 34,204 39.6% 9,156 4.9% 3,034 10.6% 2011 3,504 12.9% 48,077 40.6% 11,652 27.3% 3,449 13.7% 3,721 6.2% h/t Bryce Kam, SCGE#27Spending Reality 3 Sets of Questions to Ask Yourself 1. Desire to Pay 2. Ability to Pay 3. Benchmarks SEQUOIA CONFIDENTIAL Revenue Plan How strong is our product/market fit? Where is it evident. in our numbers? Who are my customers? Are they going to survive? Is my spot in their budget going to survive? What examples from 2000/2001 or 2008/2009 are relevant to me? What current public companies should I be watching?#28Planning During Uncertain Times SEQUOIA CONFIDENTIAL INPUT OUTPUT OUT OF YOUR CONTROL REV IN YOUR CONTROL COST ↓ PROFIT#29Talent Reality SEQUOIA CONFIDENTIAL Cost Plan BUILD MUSCLE H R&D ● CUT FAT COGS S&M G&A#30Talent Reality 1 Exercise to Do POTENTIAL HIGH MEDIUM SEQUOIA CONFIDENTIAL LOW Cost Plan Rough Diamond Inconsistent Player Talent Risk LOW Future Star Key Player Solid Professional MEDIUM PERFORMANCE Consistent Star Current Star High Professional HIGH#31Planning During Uncertain Times SEQUOIA CONFIDENTIAL INPUT OUTPUT OUT OF YOUR CONTROL REV IN YOUR CONTROL COST ↓ PROFIT#32Funding Reality OBJECTIVE: Fund Our Future "Go FOF Yourself" SEQUOIA CONFIDENTIAL Profit Plan <36 MONTHS >36 MONTHS FULLY FUNDED#33Funding Reality Scenario Planning Matrix IN YOUR CONTROL COST PLAN A Down 0% COST PLAN B Down 25% COST PLAN C Down 50% SEQUOIA CONFIDENTIAL Profit Plan REVENUE SCENARIO A Down 0% 3+ YRS RUNWAY FULLY FUNDED! FULLY FUNDED! OUT OF YOUR CONTROL REVENUE SCENARIO B Down 25% <3 YRS RUNWAY 3+ YRS RUNWAY FULLY FUNDED! REVENUE SCENARIO C Down 50% <3 YRS RUNWAY <3 YRS RUNWAY 3+ YRS RUNWAY#34Summary SEQUOIA CONFIDENTIAL Great Businesses generate Free Cash Flow. If you want to build a great business, you need a clear line of sight to generating FCF. Yesterday's market didn't reward FCF. Tomorrow's will demand it. Even if we're wrong about that, you have little to lose and much to gain if you act accordingly. Your plan is no longer valid because the world has changed. Come up with revenue scenarios and then match your costs to those scenarios to achieve financial freedom. Go FOF yourself!#35SEQUOIA