Silicon Valley venture capital giant Sequoia has summoned its CEOs to say… beware! Here’s an e-mail someone forwarded me this AM

> Sequoia just held a MANDATORY meeting for all CEOs. Second time in their
> history. Last time it was when the Internet bubble popped. Thought you
> might find the following interesting–notes from one of the CEOs in
> attendance
>
> * *
>
> * *
>
> ****These are someone’s notes from the meeting. Keep this note in your
> in-box and read it every day. I’m serious folks, this is for our
> survival.****
>
>
>
> 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 Partner, Sequoia Capital /(Michael was recruited to
> start Sequoia’s very first hedge fund, coming from Maverick Capital and
> Robertson Stephens.
>
> · 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:_*
>
> * *
>
> · 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
>
> 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.*
>

Here’s the powerpoint:

Bankers of the world unite, you have nothing to lose but your bad investments. Well, at this late hour it looks like some odd plan is coming together that makes Uncle Sam a shareholder in some of America’s biggest and most secure banks.

U.S. Said to Invest in Citigroup, Goldman, Bank of America
Oct. 13 (Bloomberg) — The Bush administration will announce a plan to rescue frozen credit markets that includes spending about half of a total of $250 billion for stakes in nine major banks, according to people briefed on the matter.

The banks are Citigroup Inc., Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp., Goldman Sachs Group Inc., Morgan Stanley, State Street Corp., and Bank of New York Mellon Corp., said the people. One of the people also said Merrill Lynch & Co. will receive an investment.

This is perverse not only because we’re now edging towards communism, but because the government is having to bail out what have been perceived as some of the smartest, best run and least debilitated financial institutions — Wells Fargo, JPM, Goldman. Like the decision to make an unlimited guarantee money market funds a few weeks back — which had the perverse consequence of nearly provoking a flight out of regular bank accounts with FDIC limits up to only $100k — this makes all other financial instituations look bad in comparison and further destabilizes the banking system. Sure the Brits have done something similar, but they have far fewer banks.

No doubt there’ll be a new tournequet applied to this gangrenous band-aid by tomorrow evening, but for now, this looks silly and dangerous.

For businesses, the question remains — can I get a loan to pay my staff or expand my business? — or will banks simply hoard cash as Japanese banks did throughout the 90s?

And the answer, until the Fed and Treasury start simply mailing everyone blank checks, is no loans unless you’re a government-owned bank.

But the day of free money for all grows closer. this suggests we should all be hoarding shotgun shells, seed corn, water purification tablets, jerry cans of gasoline, cartons of cigarettes, boxes of antibiotics… any goods that are more actually usable (and therefore tradeable) versus the previously useful fiction of currency or credit.

Update:Well, I went back to the same article and there are some new disturbing details (see my bold face.)

U.S. Treasury Said to Invest in Nine Major U.S. Banks (Update1)

By Robert Schmidt and Peter Cook

Oct. 13 (Bloomberg) — The Bush administration will announce a plan to rescue frozen credit markets that includes spending about half of a total of $250 billion for stakes in nine major banks, according to people briefed on the matter.

The companies are Citigroup Inc., Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp., Goldman Sachs Group Inc., Morgan Stanley, State Street Corp., and Bank of New York Mellon Corp., the people said. One of the people also said Merrill Lynch & Co. will receive an investment.

The injections represent a new approach for Treasury Secretary Henry Paulson’s attempts to prevent a financial market meltdown from sending the U.S. economy into a prolonged recession. He’s following similar interventions by European leaders and using broad powers Congress gave him earlier this month to save the country’s banking system.

“They’ve decided they need to do something drastic and this is drastic,” said Gerard Cassidy, a bank analyst at RBC Capital Markets in Portland, Maine.

None of banks getting government money was given a choice about it, said one of the people familiar with the plans. All of the banks involved will have to submit to compensation restrictions, said the person.

The government will also guarantee the banks’ newly issued senior unsecured debt, making it easier for them to refinance their liabilities, the person said.

Allocating Money

The Treasury plans to spend $25 billion each for stakes in Citigroup and JPMorgan, people said. Another $25 billion will be divided between Bank of America and Merrill, which agreed last month to be acquired by Bank of America. Goldman and Morgan Stanley will each get $10 billion, while State Street and Bank of New York will get injections of about $3 billion each, people said.

Financial institutions are struggling to regain the confidence of investors, counterparties and clients after bad loans caused more than $635 billion of writedowns across the industry. Falling share prices have made it harder to raise equity while surging borrowing costs have made debt refinancing harder.

Paulson, Federal Reserve Chairman Ben S. Bernanke and FDIC Chairman Sheila Bair scheduled at 8:30 a.m. press conference tomorrow in Washington. Paulson’s initiative follows an announcement in Europe that France, Germany, Spain, the Netherlands and Austria committed $1.8 trillion to guarantee bank loans and take stakes in lenders.

The press conference at Treasury will address “a series of comprehensive actions to strengthen public confidence in our financial institutions and restore functioning of our credit markets,” the department said in a e-mailed statement.

Chief executive officers of major U.S. banks met with Paulson to discuss the options for helping markets. Stocks in the U.S. earlier today rallied the most in seven decades, pushing the Standard & Poor’s 500 Index up 11.6 percent.

One other unintended consequence of this top-down approach — restricting salaries will mean all the smart folks flee banking.

Let’s not forget what started this mess… housing. Bad loans to improvident people repackaged into silly instruments sold to greedy bankers playing with other people’s money. (Now your money.) Here’s a fun blog that details how far out of whack the housing market is even as it “adjusts.” (Thank you Jesse.)

By Horsesass.org, home of the following two ads.

In London, Goldman Sachs is down 20% ($81) and Morgan Stanley is down 30% ($8.70). Both are now well below the lows of the panics of the 17th and 27th, before the bailout package and before either had access to the Fed’s lending window.

In other words, “let me out God, and I promise I’ll never buy investment banking shares again.”

The print version of the New York Times had a great graph of the way the market has sold off in the last hour of trading Tuesday, Wednesday and Thursday. Nobody can bear the overnight risk.

Odds are the entire trading day is like those panic hours.

A brave (or reckless) buyer at 3.30 PM might be nicely rewarded Tuesday morning… if the world survives the long weekend.

UpdateTurns out I was wrong about Monday being a bank/trading holiday. But the prognosticating was decent.

The Nikkei is down 11%.

Today US stock traders, bank account holders, corporate treasurers, money market fund managers will spend their minutes and hours thinking about the fact that at the close of business, they’ll be facing 72 hours of pitch-black handcuffed misery waiting for the markets to open Tuesday.

Many folks will choose to cash out at any price rather than face the claustrophobic uncertainty of those 72 hours.

In every bear market, there comes a moment when reasonable people say “Enough is enough. Let us take a stand. Prices are now 20% lower than they were a month ago. The market is cheap. We will buy and show that we are wise.”

These reasonable people are called suckers. They mistake “cheaper” for “cheap.” They’re trading the market looking in the rear view mirror. Watching the sunny day behind them, they don’t notice the tornado just ahead.

I write this because stocks are up in overnight trading because IBM’s Q3 results were good and IBM projects strong numbers going forward.

I.B.M. said its third-quarter net income rose 22 percent, to $2.05 a share, which was 3 cents higher than analysts’ consensus estimate, as compiled by Thomson Reuters. …

I.B.M. went beyond saying it did well last quarter. It also reaffirmed its previous guidance for its profits for the entire year, despite the weakening economic outlook in the United States and elsewhere.

The company expects to earn $8.75 a share for 2008, a 22 percent increase over 2007.

Just what the suckers need to hear.

“Valuations look attractive,” said Espen Furnes, an Oslo- based fund manager at Storebrand Asset Management, which has the equivalent of $48 billion. “It’s time for a rebound, the stock market has just fallen too rapidly. IBM’s numbers show that it’s not all doom and gloom out there.”

No, Oslo based Espen Fumes IBM’s numbers show that Q3 was OK and IBM economists and treasurers haven’t absorbed (or can’t yet admit to themselves) that things have changed.

See Espen, it’s like the seasons. Plants that grow in the summer doesn’t grow in the winter. Animals that eat those plants either hibernate, migrate or die. Espen doesn’t know it yet, but it’s now officially winter. Winter, Espen, is a silly time to plant seeds or buy swimming suits. And its a silly time to buy stocks. Even if the market does rally 10% in the coming week — and it easily could — the downside risk is still far greater than the upside.

We still do not know — and IBM forecasters certainly do not know —

Plenty of folks bought Lehman Brothers at $20 a share in August because “Hey, it’s trading at a 60% discount to its price in May, this is crazy cheap!” They discovered crazy cheap can, in hindsight, be crazy expensive when shares are headed in a matter of days to $0.17.

Well, at least one market is booming. Usage in news articles of the phrase “since the Great Depression” (as in “worst credit crisis” or “deepest fall” or “fastest decline” or “most serious crisis”) is up 20 fold in the last six weeks.

Google news returns 32,487 uses of the phrase today, up from 1534 mentions in September.

In general search, Google now returns 2,320,000 results for the phrase “since the great depression” versus 588,000 mentions in September.

I want the best, I want the brightest.

Or there’s this…

Sitting in DCA waiting for my delayed plane back to RDU, I picked up a copy of yesterday’s Wall Street Journal. I was struck by a few things:

* Of the 18 stories the paper’s first six pages, only three weren’t detailing some new aspect of the financial maelstorm. One of these was the paper’s traditionally off-beat/ironic front page stories, this time titled “Abandoned Houses Used to Shelter Troops Often Prove Deadly in Iraq.”

* The commercial paper market has contracted 10% since July, to $1.6 trillion.

* “AT&T, which had $8.5 billion in commercial paper outstanding at the end of June, said that for a two-day period around Sept. 18, just after the bankruptcy-court filing of Lehman Brothers, it only issued overnight commercial paper. Currently, the telecommunications company says it has access to a range of maturities as long as 30 days.”

* “Fed data indicate that more than 80% of U.S. commercial paper outstanding in early October was due to mature in one to four days. In normal times, that proportion is between 40% and 50%.”

* “In limited action Tuesday the [Icelandic] krona traded well below the peg, swinging between 180.49 131.01 kronur per euro before closing at 150.16 kronur, down 22.234 kronur, or 12.9%.”

* “At the end of July, Japan held Treasury securities valued at $593 billion, slightly more than $519 billion of such securities held by China, according to Treasury Department data.”

* “About 75.5 million U.S. households own the homes they live in. After a housing slump that has pushed values down 30% in some areas, roughly 12 million households, or 16%, owe more than their homes are worth, according to Moody’s Economy.com. The comparable figures were roughly 4% under water in 2006 and 6% last year, says the firm’s chief economist, Mark Zandi, who adds that “it is very possible that there will ultimately be more homeowners under water in this period than any time in our history.” Among people who bought within the past five years, it’s worse: 29% are under water on their mortgages, according to an estimate by real-estate Web site Zillow.com.

* “Among mortgages on one- to four-family homes, 9.16% were a month or more overdue or were in foreclosure in the second quarter, according to the Mortgage Bankers Association. That compared with 6.52% a year before and was the highest level since the association began such surveys 39 years ago.”

* “Falling values have contributed to a sharp pullback in mortgage lending. In the third quarter, mortgage lending fell to the lowest level in eight years — down 44% in a year — says the publication Inside Mortgage Finance.”

* “In contrast with the 12 million home borrowers estimated to be under water, 64 million have equity in their homes. These include 24 million households who own their homes free and clear, and 40 million whose homes remain worth more than is owed on them.”

* “The Federal Reserve said total consumer borrowing contracted at a 3.7% seasonally adjusted annual rate during August to $2.577 trillion. Consumer credit, which includes most consumer loans except for real estate, had increased 2.4% in July.”

* “In the Fed’s latest data, total consumer credit declined 0.3% in August from July, or about $7.9 billion, marking the largest decline ever in dollar terms. Nonrevolving credit — such as loans for cars, vacations and education — declined at an annual rate of 5.4% to $1.61 trillion. Revolving credit — largely credit-card borrowing — declined at a 0.8% annual rate to $969 billion. Except for a sudden 4.3% annualized decline in January 1998, which partially offset a strong month before it, consumer borrowing hasn’t seen sustained declines since the period around the 1990-91 recession. At the worst point during that recession, in December 1990, consumer credit declined at an annual rate of 8%.”

* “The outlook has dimmed so quickly that economists are having a hard time keeping their projections current.”

* “Consider guitar strings. D’Addario & Co., based in Farmingdale, N.Y., is a major producer, selling strings both in retail stores across the U.S. and overseas, as well as to factories, mostly in Asia, which make guitars sold by U.S. retailers. James D’Addario, the company’s chief executive, said string exports to Asian factories surged 40% earlier this year, in part, he believes, to ramp up for the Christmas season, which had been expected to be strong for guitars. A big part of that demand is due to the latest version of the Guitar Hero videogame. But as U.S. consumers, nervous about their jobs and savings accounts, slash spending, the chances of strong holiday sales have dimmed. “I’m expecting there’ll be warehouses full of guitars at the end of this year,” said Mr. D’Addario.”

* “The events in New York have slammed the budgets of neighboring states. In Connecticut, home to many Wall Street employees, the state budget hole has more than doubled in a month to $300 million, the governor’s office announced in late September. New Jersey Gov. Jon Corzine is convening lawmakers to sift through ideas for stimulating the state’s economy and to close a $1.7 billion budget shortfall. In Wall Street’s home state, Mr. Paterson has called for lawmakers to return to the capitol for a special session Nov. 18 to close a deepening budget deficit, projected at $1.2 billion for the current year. The state’s 2008-2009 budget totals $120.9 billion.”

* “New York’s budget relies on the financial sector for 20% of overall state revenue. Wall Street bonuses and capital-gains tax revenue from the sale of stock or other assets have kept coffers flush. But the state’s budget division now projects a 43% decline in bonuses and a 35% drop in capital gains.”

* Finally, some comic relief from a VP candidate: “The [television] pundit was saying, ‘The only reason she’d be going there is ’cause they’re scared, so they gotta go there and shore up votes,'” she said. “I so wanted to reach into that TV and say, ‘No, I’m going to Nebraska because I want to go to Nebraska.'”

* “No bank is solvent in a run. No bank is solvent on a mark-to-market basis when there is little or no resale market for most loans at anything but firesale prices.”

Timothy Aeppel, the guy who penned the “consider guitar strings” line, deserves a Pulitzer in the one-line-summary-of-a-global-crisis award category.

Last week I turned for advice to my wisest friend, the guy in Geneva who lends VCs money at exhorbitant rates and who is usually two years ahead of the pack. Where is money safe amid the global tumult? He replied:

I am a busy making sure all the hatches are battened down
properly. My only thought at the moment is that innovation continues irrespective of
the macro-climate (maybe that is me whistling just to keep my spirits up….) Will report in when I have something half useful to say.

He’s made this point before by phone; when capital and commodities become unmoored, human capital is one of the only stable and reliably tradable goods left.