#1R.I.P. GOOD#2NOW WHAT? SEQUOIA CAPITAL THE ENTREPRENEURS BEHIND THE ENTREPRENEURS#3#4WALL STREET HOW DID WE GET HERE? ERIC UPIN SEQUOIA CAPITAL THE ENTREPRENEURS BEHIND THE ENTREPRENEURS#5MULTIPLE 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#6MARKET CYCLES ARE LONG Dow Jones Industrials (solid line) 15,000- 10,000- 5,000- 0 Bear Market 1966-1982 1970 1980 Source: Bureau of Labor Statistics, Dow Jones Bull Market 1983-2000 1990 2000 Inflation (dotted line) - 15% - 10 LO 5 2008#7DRIVEN BY PRODUCTIVITY AND CENTRAL BANK 4B 3- 2- 1- Size of global workforce 0 1980 1990 2000 2008 150 125- 100- Indexed global productivity 1996 Source: Federal Reserve, International Labour Organization 2002 2006 10% 8 6- 2- Fed funds rate M 0 1990 1995 2000 2005 Sep 2008#8RESULTING IN FALLING INFLATION AND COST OF DEBT U.S. inflation (annual year/year CPI change) 25%- 15- 5 -5 HB fam Average 1950 1960 1970 1980 1990 2000 2007 Source: Bureau of Labor Statistics, Federal Reserve Yield on 10-year U.S. treasuries 16% 12- Lv. 0 - Average 1960 1970 1980 1990 2000 June 2008#9FUELING A NATION OF CONSUMERS U.S. current account / GDP 2% 0 -2 -4- -6- -8. 1985 Source: Bureau of economic analysis 1990 1995 2000 2005#10FOREIGN $s RECYCLED INTO TREASURIES DEMAND KEEPS LONGER- TERM RATES LOW U.S. BUYS FOREIGN GOODS FOREIGN COUNTRIES USE PROCEEDS TO BUY TREASURIES#11AS A RESULT, DEBT BALLOONED 300% 280% 260% 240% 220% 200% 180% 160% 140% 120% Total Debt as % GDP 10 14 18 22 26 30 34 38 42 46 50 54 58 62 66 70 74 78 82 86 90 94 98 02 Source: Bridgewater#12DEPENDENT ON THE KINDNESS OF STRANGERS 70% 60% 50% 40% 30% 20% 10% 0% Foreign Ownership of US Treasuries % Total Market Capitalization 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 Source: Bridgewater#13LIQUIDITY AND EASING SPREAD TO HOUSING Single family housing starts 2M pous Average 0 1980 1985 1990 1995 2000 2005 2008E Source: Bridgewater, National Association of Home Builders Distribution of U.S. dollar mortgage originations 100%- 80- 60- 40 20- 2002 Government Prime- Jumbo Prime- Conforming Alt-A Subprime 2006#14HOME PRICES GREW SUBSTANTIALLY ABOVE MEAN U.S. real home price index 250- 200- 150- 100- 50- 1900-1929 -1.2% annualized 1930 - 1997 0.7% annualized Source: Robert Shiller 1998-2006 8.0% annualized 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2007#15STRUCTURED 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#16HUGE GROWTH IN DERIVATIVES Outstanding amount of open positions in OTC derivatives markets $525T 350- 175- 0 1995 1998 2001 2004 U.S. GDP 2007 35x U.S. GDP 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#17SIGNIFICANT EXCESS CAPACITY 24% 23% 22% 21% 20% 90 92 Source: Bridgewater 94 World Fixed Investment (% GDP) 96 98 tremendous amount of capacity built up 00 02 04 06 08#18VERY TIGHT CREDIT High yield spreads (basis points) 1,250. 1,000. 750 500- 250 0 1998 2000 2002 2004 2006 2008 Source: Merrill Lynch Investment grade spreads (basis points) 500 400- 300- 200- 100- 0 1998 2000 2002 2004 2006 2008#19JAPAN MAY BE INSTRUCTIVE 40,000 30,000 20,000 10,000- 0 Nikkei Index 1988 - present ww 1990 1995 2000 2005 Oct 2008 Source: Bank of Japan, Yahoo Finance 8%- 6. 2- 0 Japanese discount rate 1990 1995 2000 2005 Jul-08 6% -6- Annual real GDP growth RAHE 1990 1995 Average 2000 2005#20KEY THEMES GLOBAL SECULAR NOT "NORMAL CRISIS", WILL TAKE TIME CREDIT NOT EQUITY DRIVEN SIGNIFICANT RISK TO GDP GROWTH POTENTIAL FOR GREATER REGULATORY REFORMS / SCRUTINY#21OUR TAKE MANAGE WHAT YOU CAN CONTROL SPENDING GROWTH ASSUMPTIONS EARNINGS ASSUMPTIONS FOCUS ON QUALITY LOWER RISK REDUCE DEBT#22MAIN STREET WHERE ARE WE NOW? MICHAEL BECKWITH SEQUOIA CAPITAL THE ENTREPRENEURS BEHIND THE ENTREPRENEURS#23THE U.S.: A NATION OF CONSUMERS $ TRILLIONS TOTAL U.S. GDP THE CHANGING FACE OF THE ECONOMY CONSUMER SPENDING CONSUMER AS % OF TOTAL GDP DISPOSABLE PERSONAL INCOME Source: Bureau of Economic Analysis. 1987 4.7 3.1 66% 3.5 1997 8.3 5.8 70% 6.0 2007 13.8 10.1 73% 10.2#24HOME OWNERSHIP % EXPLOSION IN HOME OWNERSHIP 70 68 67 66 65 84 63 62 T 1985 N 1969 2961 1973 1971 1977 1975 1979 1980 1982 LONG-TERM AVERAGE 1984 1988 1986 1990 1992 1993r 1995 Source: Current Population Survey/Housing Vacancy Survey, Series H-111 Reports, Bureau of the Census, Washington, DC 20233. 1997 z 1999 2002r 2001 2004 2006 Q2'08#25WAGE GROWTH & PERSONAL SAVINGS 11 9 5 (0) 3 1 T при Q1'85 18.70 PERSONAL SAVINGS RATE Q3'89 Q4'91 Q1'94 Q2'96 Q3'98 00.10 REAL WAGE GROWTH FELL Q1'03 Q2'05 PERSONAL SAVINGS RATE EVAPORATED Q3'07 7 5 3 1 -1 -3 'r FALLING REAL WAGES ERODING PCE MA 1971 1974 1977 1980 1983 Source: Bureau of Economic Analysis, Federal Reserve, Haver, Bureau of Labor Statistics, Census Bureau, Factset, Morgan Stanley Research. why Merry -Real Personal Consumption Expenditure (yoy%) Real after-tax wages & salaries (y oy%) 1986 1989 1992 1995 1998 2001 2004 2007#26CONSUMERS BUCKLING UNDER DEBT 15 14 13 12 11 10 Q1'85 HOUSEHOLD DEBT SERVICE RATIO Q2'87 Q3'89 Q4'91 Q1'94 Q2'96 Source: Bureau of Economic Analysis. 86.80 Q4'00 Q1'03 Q206 Q3'07 HOUSEHOLD FINANCIAL OBLIGATION RATIO 20 19 18 17 16 15 Q1'85 Q2'87 Q3'89 Q4'91 Q1'94 Q2'96 DSR DEBT PAYMENTS ON OUTSTANDING MORTGAGES AND CONSUMER DEBT/DISPOSABLE PERSONAL INCOME Q3'98 Q4'00 Q1'03 FOR = ADDS AUTOMOBILE LEASE PAYMENTS, RENTAL PAYMENTS, H/O'S INSURANCE AND PROPERTY TAX PAYMENTS TO THE DSR Q2'05 Q3'07#27MEWS BECAME THE NEW PIGGY BANK 12 10 8 6 4 2 0 MEW CONTINUES TO FADE... Mortgage equity withdrawal, as a % of disposable income, 4-quarter moving average bomo ☐Active Passive Source: Haver, BEA, NAHB, Conference Board, EIA, Morgan Stanley Research. ₁ 1Q91 1Q92 1Q93 1Q94 1Q95 1Q96 1Q97 1Q98 1Q99 1Q00 1Q01 1Q02 1Q03 1Q04 1Q05 1Q06 1Q07 1Q08#28FROM VIRTUOUS TO VISCIOUS CYCLE MORTGAGE RESET DELINQUENCIES/FORECLOSURES PRICES FALL MEWS DECREASE CONSUMER SPEND FALLS JOB MARKET ERODES RECESSION 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 Wy% 0 -5 -10 -15 -20 -25 -30 -35 UNEMPLOYMENT SPIKES HIGHER 1992 1994 1996 Boston Chicago Mortgage Delinquency rate US unemployment rate (RA) Denver Case-Shiller composite-10 home price index: by region (12-month change as of July 2008) 1998 2000 2002 2004 2006 2008 Los Vegas L.A. 4.33 Miami 6.1 O San Diego NY II San Francisco 8.0 7.5 Source: Federal Reserve, Haver, Bureau of Labor Statistics, Census Bureau, Factset, Morgan Stanley Research, Case-Shiller & DB Global Market Research. 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 y/y% 0 -5 -15 Washington D.C. -20 -10 -25 -30 -35#29ON THE BRINK OF A RECESSION CONSUMER CONFIDENCE AT MULTI-DECADE LOWS Conference Board Consumer Confidence Index 140 120 100 80 60 40 75 70 65 60 55 Dec-74, 43.2 50 45 40 35 30 ISM Manufacturing Oct-82, 54.3 May-80, 50.1 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 C Nov-70, 39.7 Feb-92, 47.3 Jan-75, 30.7 ISM IS FALLING FAST ISM Manufacturing & Non-Manufacturing Index Mar-03, 61.4 Feb-91, 39.4 May-82, 35.5 May-80, 29.4 Oct-01, 40.8 Sep-08 €59.8 ISM Non- Manufacturing 25 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 Aug-08 50.6 0.12 Source: Haver, NAHB, Conference Board, NFIB, Morgan Stanley Research, DoL & DB Global Markets Research. 0.1 0.08 0.00 0.04 0.02 0 -0.02 -0.04 -0.06 Thousand 4000 3600 3200 2800 2400 2000 1600 Sep Sep-T3 00 -Continued unemployment insurance claims (4 wk MA, Is) → Unemployment rate (rs) Sep-75 01 Am Sep-17 02 Sep-79 03 Sep-81 Sep-83- Sep-85- NBER recession 04 GDP IS POISED TO TURN NEGATIVE Real GDP and GDP growth (YOY SA) Sep-87- 05 Sep-89- Sep-91 €6-das 06 GDpg 07 Sep-95 Sep-97 08 Sep-99 % -GDPg 8 7 6 5 4 3 2 Sep-01- Sep-03- Sep-05- Sep-07#30EARNINGS BEGINNING TO ROLL 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% EARNINGS DOWN 18% ON ESTIMATES MADE 12 MONTHS AGO 1/31/87, -18.5% S&P 500 Rolling Earnings Surprise % 12mo Forward Estimates vs. Actuals Under-estimate Earnings 1985 1987 1989 1991 my Source: Datastream, Robert Shiller, Factset and Morgan Stanley Research. Over-estimate Earnings 12/31/91, -25.0% Grey shading represents US 1993 1995 1997 1999 2001 2003 2005 2007 9/30/08 -18.6% 12/31/01, -25.2%#31Y/Y V-SHAPED RECOVERY UNLIKELY 50% 30% 10% -10% -30% -50 -70% CYOO CY01 OY02 CY03 CY04 S&P 500 IT MEDIA TELECOM SVCS Financials Consumer Discretionary Media Information Technology Telecom Services S&P 500 CY05 CY06 CY07 CYOBE CY09E Current S&P 500 Consensus Actual and Expected Operating Earnings Growth (Weighted-Avg. %/Y/Y) CYOO CY01 CY02 CY03 CY04 CY05 CY06 CY07 CY08E CY09E 5% -10% 18% 25% 11% 5% 23% -37% -46% 109% 0% -24% 33% 11% 28% 2% 9% -10% -16% 41% -1% -6% 34% 12% 33% 28% 27% 15% 11% 11% 28% -63% 0% 46% 43% 20% 12% 21% 10% 17% 6% -24% -8% 0% -8% 14% 17% 5% -1% 10% 17% -17% 5% 18% 20% 15% 16% -4% 1% 23%#32ADVERTISING MARKETS ARE CRACKING Y/Y 20% 15% 10% 5% 0% -5% -10% Q1'07 Source: TNS U.S. Advertising Expenditure Estimates Q2'07 Q307 Q4'07 Q1'08 INTERNET Q2'08 TV TOTAL MARKET RADIO#33RETAIL/ECOMMERCE DETERIORATING Y/Y 25% 20% 15% 10% 5% 0% Q3'06 Source: US Census Bureau. Q4'06 Q1'07 Q2'07 Q3'07 Q4'07 Q108 TOTAL US ●COMMERCE TOTAL US RETAIL SALES Q2'08#34Y/Y MOBILE IS NOT IMMUNE 16% 10% -6% -10% Q1'07 Q2'07 Source: TNS U.S. Advertising Expenditure Estimates Q3'07 T Q4'07 Q1'08 Q2'08 Subscribers Q3'08 Handsets#35TECH SPENDING DEPENDS ON ECONOMY Y-Y Change in S&P 500 Earnings, Technology Spending (1996-2008E) 30% 20% 10% 0% -10% -20% -30% t Jun-95 Dec-95 Jun-96 Dec-96 Jun-97 Dec-97 Jun-98 Dec-98 Jun-99 Dec-99 Jun-00 Dec-00 Jun-01 Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 S&P 500 EPS Growth 90-սոՐ Source: Bernstein Strategy Group; First Call Drop in earnings in Dec 07 was partly due to financial services industry write offs Dec-06 Jun-07 Dec-07 Jun 08E Tech Spending Growth#36ENTERPRISE INDICATORS PC UNITS SOLD (Y/Y) 20% 15% 10% 5% 0% -5% T W. EUR U.S. Q3'06 Q4'06 Q1'07 Q2'07 Q3'07 Q4'07 Q1'08 Q2'08 Source: Gartner Personal Computer Quarterly Statistics Worldwide Database, 5/08. JPMorgan estimates for 2008-2009 "IT spending is being more scrutinized now than at any point in the 2003 through 2007 time frame ... customers are showing more caution." - EMC, JUL 2008 39 "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#37AMAZON.COM & BUY.COM $ Mil Amazon.com Financial Performance '99-'05 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 t 1999 Revenue 144 2000 Opex 2001 2002 2003 2004 2005 Revenue Growth •Strong business model •Focus on core value proposition 80% 60% 40% 20% 0% -20% -40% EBIT Margin Mil s $900 $800 $700 $600 $500 $400 $300 $200 $100 $0 Buy.com Financial Performance '99-'05 Mkit 1999 Revenue 2000 2001 Opex 2002 2003 2004 2005 Revenue Growth •Profitable growth •Trim fat during lean times 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% -60% EBIT Margin#38SALESFORCE.COM & SIEBEL $ Mil Salesforce.com Financial Performance '00-'05 $350 $300 $250 $200 $150 $100 $50 $0 J 2000 Revenue 2001 Opex 2002 2003 2004 Revenue Growth 2005 350% •Tailor sales message to environment •Take advantage of competitors' weakness 300% 250% 200% 150% 100% 50% 0% -50% -100% -150% EBIT Margin $ Mil $2,500 $2,000 $1,500 $1,000 $500 $0 Siebel Financial Performance '00-'05 2000 Revenue 2001 Opex 2002 2003 2004 Revenue Growth Understand your true customers •Value of quick ROI and low cost 2005 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% EBIT Margin#39YOUR STREET WHERE DO WE GO FROM HERE? DOUG LEONE SEQUOIA CAPITAL THE ENTREPRENEURS BEHIND THE ENTREPRENEURS#40UPS AND DOWNS ALWAYS OCCUR FIFTY CENTS Xtre T NOVEMBER 19, 1973 THE OIL SQUEEZE FEISAL: The Hand On The Valve NOVEMBER 2, 1947 $2.00 TIME THE CRASH After a wild week on Wall Street, the world is different BusinessWeek THE FALL OF A DOT-COM EAR#41IT IS DIFFERENT THIS TIME How Sarah Palin Took On Big Oil- And (Sort of) Won The Extreme TB Epidemic: Photos By James Nachtwey ME The New Hard Times OCTOBER 13, Robert Redford Remembers Paul Newman FREE SOUP E No, this isn't Depression 2.0. How history can help us avoid it BY NIALL FERGUSON The Leadership Deficit BY MICHAEL GRUNWALD The Virtues of Thrift BY NANCY GIBBS www.IL#42RECOVERY WILL BE LONG SA TIME#43CHANGES IN FINANCING ENVIRONMENT FORTUNE 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.' "I "9 "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.' "I "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."#44NEW 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#45INCREASED CHALLENGES M&As WILL DECREASE PRICES WILL DECREASE ACQUIRING ENTITIES WILL FAVOR PROFITABLE COMPANIES IPOS WILL CONTINUE TO DECREASE AND WILL TAKE LONGER#46SURVIVAL PRESERVE CAPITAL ✓ MUST-HAVE PRODUCT ✓ ESTABLISHED REVENUE MODEL ✓ UNDERSTANDING OF MARKET UPTAKE ✔ CUSTOMERS' ABILITIES TO PAY ✔ASSESSMENT VS. COMPETITORS ✔CASH IS KING ✓ NEED FOR PROFITABILITY GRAB SHARE#47OPS REVIEW ✓ ENGINEERING ✓ PRODUCT ✔MARKETING ✓ SALES & BUS DEV ✔ PIPELINE ✓ FINANCE CASHBURN G&A DECREASE HEADCOUNT FOR NEXT VERSION? WHAT FEATURES ARE ABSOLUTELY ESSENTIAL? MEASURING & CUTTING WHAT'S NOT WORKING? GETTING RETURN ON EXPENSE INCREASE? REAL PROBABILITIES OF CLOSING DEALS? WHERE CAN PAYMENTS BE DEFERRED? WHAT DEPARTMENTS ARE ESSENTIAL?#48DEATH SPIRAL#49SURVIVAL OF THE QUICKEST EXPENSES 10/08 - DEATH SPIRAL TIME COMPANY A COMPANY B#50NO ONE MOVES FAST ENOUGH CISCO SYSTEMS EMC OP EX % Y/Y CSCO EMC ADBE YHOO AMZN Average A Adobe CY01 -3% 9% -2% -3% -15% -3% YAHOO! CY02 -10% -22% -1% 14% -4% -5% CY03 -1% -4% 12% 33% 10% 10% CY04 9% 31% 18% 57% 24% 28% amazon.com#51CHOICES WHAT DECISIONS DO YOU PLAN TO MAKE? VS. WHAT DECISIONS DO YOU WISH YOU HAD MADE?#52Douglas Leone Sent: To: Subject: Is this awful or what? What is sequoia's take ? My attitude is batten down the hatches it is going to be a rough ride... Any co without at least a yr of cash minimum in the bank is in trouble.... in my opinion Thoughts ?? Monday, October 6, 2008 7:37 PM Douglas Leone; Michael Moritz mkt conditions... Here is what I sent to all my cos in april of 2000 and am dusting it off to resend again now !! To: Date: RE: Portfolio CEOS 04/17/2000 05:24 PM Market Conditions Effect on 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. 3. 2. You must aggressively examine and pursue M&A opportunities (unless you have over 12 months of cash reserves!) to insure you have critical mass (including funding, customers, rolodex power, market share, cash, synergy, etc.). Be realistic on valuations they will fall so be ready and willing to co-operate. 4. 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. F#53THE 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#54GET REAL OR GO HOME#55Q & A SEQUOIA CAPITAL THE ENTREPRENEURS BEHIND THE ENTREPRENEURS#56