James’s Musings

thoughts, photography, and geeky stuff
from an unrelentingly curious Silicon Valley entrepreneur

Don’t Look Now: The World *ISN’T* Ending!

by James G. Beldock on October 18, 2008

When I’m not pro­cras­ti­nat­ing by writ­ing blog posts, I’m the CEO of a Silicon Valley tech­nol­o­gy com­pa­ny. For the past few weeks, while the cred­it cri­sis wrought hav­oc on Wall Street and some of my col­leagues were forced to face the re­al­i­ty that the al­ready ane­mic IPO mar­ket, chan­nel­ing Punxsutawney Phil, was like­ly to go back in­to its hole for an­oth­er six weeks year, we had most­ly re­mained unas­sault­ed by the cri­sis. Sure, those run­ning con­sumer-fo­cused busi­ness­es were al­ready feel­ing the im­pact of plum­met­ing con­sumer con­fi­dence, but fun­da­men­tal­ly we were con­fi­dent that our ven­ture cap­i­tal in­vestors were smart enough not to act like lem­mings and as­sume that, just be­cause the pub­lic mar­kets are in trou­ble, so was their port­fo­lio. After all, Silicon Valley fo­cus­es on the long term, right? It’s smarter, more cre­ative, per­haps even icon­o­clas­tic . . . right??

Not so. Enter Sequoia Capital’s “RIP Good Times” pre­sen­ta­tion. Within a day, eight peo­ple had for­ward­ed it to me, along with notes tak­en by a briefly-anony­mous Sequoia port­fo­lio CEO. Shortly there­after came the Benchmark Letter, which an­oth­er in­vestor and our cor­po­rate coun­sel both for­ward­ed to me. And the Ron Conway email. The ar­gu­ment is that rev­enues and earn­ings will fall off the ta­ble (thus per­haps jus­ti­fy­ing the fact that today’s S&P 500 is trad­ing at a pret­ty low av­er­age P/E of 10.5), thus ne­ces­si­tat­ing tec­ton­ic read­just­ments to spend­ing.

And there it was: in one great, co­or­di­nat­ed move­ment, Silicon Valley pan­icked. It was as if the Valley re­mem­bered 2000-2001 and couldn’t sleep. A friend of mine, at a Seqoia com­pa­ny, worked the week­end and ex­e­cut­ed a 40% lay­off ear­lier this week. Hi5 cut staff, Zillow and Adbrite did the same, and the list goes on and on. One day every­thing is fine; the next, the world is end­ing. Trader men­tal­i­ty hit Sand Hill Road. With the zeal of the con­vert­ed, a parox­ysm of cost-cut­ting swept Valley CEOs.

This “stam­pede for the ex­its” men­tal­i­ty of sup­pos­ed­ly long-term in­vestors here in the Valley makes ze­ro sense. One of my Directors cor­rect­ly point­ed out that Moritz et al. at Sequoia were un­doubt­ed­ly “fir­ing for ef­fect,” and I’m sure they were, but tell that to the em­ploy­ees laid off by my friend’s Sequoia-backed com­pa­ny. The prob­lem with mak­ing rapid ad­just­ments to ear­ly stage com­pa­nies is that the ad­just­ments them­selves ef­fect the busi­ness. There’s a Heisenberg Uncertainty Principle in star­tups: trim­ming too fast or too pre­cip­i­tous­ly will in­jure the com­pa­ny far more deeply than it would a larg­er, es­tab­lished com­pa­ny. Why? Because start-ups in par­tic­u­lar re­ly on their em­ploy­ees to go the ex­tra mile, think the im­pos­si­ble is pos­si­ble, burn the mid­night oil, and in­vent the in­ge­nious. They al­so re­ly on their em­ploy­ees know­ing they’re in­volved in some­thing spe­cial, rel­ish­ing their cre­ative en­vi­ron­ment, and col­lab­o­rat­ing with their col­leagues. (For which, of course, they need to have col­leagues…!) Take all that away, and a start-up is just a thin­ly-staffed, un­der-cap­i­tal­ized com­pa­ny with no track record or proven mar­ket.

There’s an­oth­er, more pro­found risk, how­ev­er: re­act too strong­ly and Heisenberg will as­sure your star­tup miss­es the mar­ket op­por­tu­ni­ty it’s not ex­pect­ing. The prob­lem with over-op­ti­miz­ing, par­tic­u­lar­ly in ven­ture-backed com­pa­nies, is that they will miss the un­ex­pect­ed, cre­ative op­por­tu­ni­ty, ei­ther be­cause they are so busy deal­ing with the ram­i­fi­ca­tions of pre­cip­i­tous cost-cut­ting or be­cause they will be so un­der-staffed and so hy­per-fo­cused on cash flow that they will have nei­ther the en­er­gy nor the cre­ative spir­it to do some­thing dar­ing when the op­por­tu­ni­ty presents it­self.

Does this mean we should be spend­ing prof­li­gate­ly and ig­nor­ing the broad­er dy­nam­ics of the econ­o­my? Of course not. No CEO in his or her right mind would do so. But the fact re­mains that what makes Silicon Valley great is cer­tain­ly not its abil­i­ty to play the part of prover­bial “tail” to the eco­nom­ic dog which wags it. Every one of us should take a care­ful look at our spend­ing, our sales fore­casts, and make sen­si­ble busi­ness de­ci­sions based on what we see. (In our case, we see changes com­ing and are ad­just­ing for them. We’re cut­ting where we need to, in­vest­ing where we can af­ford to, and oth­er­wise treat­ing the shake-up as an op­por­tu­ni­ty to test every sin­gle one of our as­sump­tions. And, yes, if one of those as­sump­tions changes and we see a prob­lem, then we’re go­ing to cut spend­ing.) But lay off 40% of staff just be­cause some­one gave a pre­sen­ta­tion?

Fortunately, voic­es of san­i­ty have be­gun to speak up. My friend and col­league Pascal Levensohn (full dis­clo­sure: al­so now an in­vestor and Board mem­ber in my com­pa­ny) wrote an ex­cel­lent post to­day putting con­text around the Sequoia pre­sen­ta­tion. And none oth­er than the Sage of Omaha him­self is go­ing long on US eq­ui­ties. All of us run­ning busi­ness­es un­der the­se eco­nom­ic cir­cum­stances are well-served to cre­ate a back-up plan (the “sur­vival plan”), take a whack at ex­pens­es wherever and when­ev­er pos­si­ble (hey, shouldn’t we be do­ing that all the time any­way?), test every sin­gle as­sump­tion in our mod­els, and per­haps think long and hard be­fore hir­ing ad­di­tion­al staff. But then we should go back to work, build amaz­ing busi­ness­es, and re­mem­ber that Silicon Valley is about the fu­ture and we’re in charge of cre­at­ing it.

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