It’s not the kind of image on which we typically like to end the week, but In the words of a plugged-in tipster:
Know this is a bit off topic, but since the valley tech is such a driver for home sales (and vc dollars are a driver for tech), thought you might be interested in this if you haven’t already seen it.
PowerPoint from Sequoia Capital…just delivered this to their ~100 portfolio companies. Good economic context, and, equally importantly, a telling embedded message (fire as many ppl as it takes to get to break even).
Yep. And our “on topic” take on Tuesday (we’re taking Monday off).
∙ Sequoia Capital on startups and the economic downturn [slideshare.net]
Wow. Very interesting presentation. It’s going to get much worse out there before it gets better.
I like how they end it by recommending drinking. I am happy to have my money in alcohol right now.
Also consider that they’re talking to their book. Naturally, as they want to raise their next fund so that they can “survive” in their private jets, they’re squeezing their start-ups as much as possible.
It was the S.O.S in 2001-2003, and before that in 1991-1993. It’s NOT different this time; it’s never different. If it’s the Great Depression, then these Sequoia jack***es will be out of their cushy jobs too. Boo-hoo.
You can stick a fork in bay area real estate – it is done. I am one of the (formerly) highly paid finance folks in the city and let me tell you the market is collapsing. All the upwardly spiraling $$$ bonuses have ground to a halt. Everyone is worried about their jobs, and lots of people are quietly being shown the door. I know of several venture funds that are getting rid of folks, as well as the investment banks, and corporate law firms. And no one is hiring. I know many people with top credentials who have been unemployed for 6 months or more.
As money gets sucked out of the system, and people grow more fearful, I imagine house prices are going to continue a steep decline in all areas of the Bay. Rents actually seem to be declining on the Peninsula and I just don’t see how something renting for $2,200 a month can sell for $850K. I think nice places in the good areas will be in the $6-700s if not lower in the next two years.
Party is over.
ping pong, the Case-Schiller housing price futures agree with your assessment. (No surprise there)
great presentation. suggest saving your alcohol money and riding your bike more often too.
Mad Max here we come
I lease office space in Palo Alto. We’ve had a parade of VCs looking to downsize their offices – by 95%. They are tossing out partners and laying off their staffs. Those guys are in hunker down mode – they aren’t just imposing it on their investments.
Additionally, today I had two e-mails and one meeting all with very top entrepreneurs – all out of work in the last month.
It is seriously brutal down here, and getting worse and worse every day.
i beg to differ. *gasp*
well, it’s more that i just don’t know that it’s as bad as everyone says it is down here. vc’s have largely been shielded – to date – from the credit crunch and subprime crisis. as is the case in non-isolated environments, the vc world will feel the effects. such is why sequoia called the meeting.
however, my firm is keeping the commitments to offers we’ve given out and are in fact hiring. we see the next few years as an opportunity to distinguish ourselves from others.
as for tossing out partners and laying off their staffs, what’s interesting is despite any kind of market, vc’s will still collect their management fees. (unless LPs have some right of redemption). in that case, the total annual “revenue” to pay “operating expenses” remains unaffected by the market. and you still have the same size fund to deploy. so, i doubt that my firm and many other firms who have completed their fundraising will be laying off and firing due to the economic downturn, knock on wood. it’ll be entirely based on performance.
just my two cents.
Fantastic presentation! Love the data, and the macro picture. Very helpful. What do our resident armchair economists think?
I do have one quibble: in this, as in many presentations, people play with the graphs to make them look more dramatic. Specifically slides 17 and 24, where the x-axis is not at zero, but at a value chosen so the data will take up the entire graph. On slide 24, the “explosion in home ownership” is an increase from 65% to 69%!
There are plenty of genuinely scary stats in there, otherwise… thanks to the anonymous “plugged in” person.
Interesting, but a little too much oversimplification of a complex problem for my taste (the same packaged Mckinsey/bain/bcg stuff). Remember, in times like these, vc’s are in the very worst position of the sectors, because they make money in liquidity events like ipos that will be few and far between. They make cash outlays to companies that may pay off down the road. Now, they need their portfolios companies to actually make money-gasp!-for them to have return on their investments. The companies that have flimsy business ideas and no clear revenue model will wash out with the tide.
These are dark times, but I see the money flowing to more stable assets to manufacturing and yes, real estate which can help counterbalance some of the downside.
I see the money flowing to more stable assets to manufacturing and yes, real estate which can help counterbalance some of the downside.
Wow, I’m glad *you* see it. No one else does. You don’t invest in more manufacturing capacity when the economy is transitioning from bubble to bust, because the bubble economy had overcapacity built in.
And when home ownership rates *have* to decline, meaning there is *too much* housing already built, and layoffs *have* to occur, people aren’t going to put their money into housing. The problem is that everyone knows they ned to get their money *out*.
Those two asset classes *had* been more stable on the way up, but they won’t be on the way down, if what is coming is really as dark as everyone thinks.
The “explosion” in home ownership (65% to 69%) is actually destined to end up a contraction in homeownership. If a depression/deep recession hits adding mass layoffs to the already depressing situation… people will default. Not to mention with real estate prices crumbling it pays for a lot of those “owners” to just walk away.
Last I checked denial is still a river in Egypt, at least to most people in SF. Folks, please wake up. Buyers in this market are going to dry up faster than you can say Dow 7500. A significant amount of wealth in the bay area was destroyed these past 14 days and its not coming back anytime soon.
Someone throw up a graph of what happened to rents and home prices immediately post bubble. This time there will be no low rates and free money to prop up housing prices.
Tipster, I’m glad you *know* what’s coming as you know *so* much more than all of us uninformed that really have *no* idea when things will eventually rebound. What you do know how to do is how to add a lot of asterisks to comments, which is impressive. Just like after the web 1.0 bubble things will rebound. People love living here and the extremely smart and innovative people will spur the next phase of growth (maybe the green movement).
This morning, as I walked past blocks and blocks of boarded up retail stores along Market Street, I came upon a long line of people near Montgomery and Market. Turns out they were lining up in front of a soup kitchen set up near the Muni entrance. While standing there observing the expressionless faces of those in line, I kept hearing “thud” sounds coming from a block or so away. As I walked toward the sounds and looked up, I realized Traders at Schwab were jumping out of the top floor windows and their bodies hitting the pavement was the source of those “thud” sounds. At that moment as I stood in front of the Schwab building, it occurred to me we might be in for a downturn in the near future.
I bet the majority of buyers who purchased a home/condo during 2004-2007 will incur these 3 phases:
1) DENIAL PHASE, occuring now (property is worth 20%-25% less then what they paid) Can’t be!!!
2) REALITY PHASE, years 2009-10 (property is worth 35%-40% less then what they paid) I can’t sell now!!!
3) CAPITULATION, years 2011-12 (property is worth 45%-50% less then what they paid) HOLY S***!!!
People jumping out of windows is not funny at all.
I could use some advice re all of this. Eight months ago I purchased a new condo in the Infinity with an IO loan and 10% down. It is a modest place that cost about $900k. I just found out that I have to move out of the bay area and see two real options. (1) stop paying my loan, enjoy free rent for a few months and move away leaving the property to be foreclosed or (2) rent the property, try to cover my losses and either have it forclosed/short sell/or sell for a profit before my my interest rates jump in about 4.5 years.
Thoughts? And FYI, I could have bought it with cash, but wanted to keep the ability to walk away with minimal losses.
http://www.federalreserve.gov/releases/h6/Current/
The Fed is pumping money into the system. The interesting info is in Table 2, which tracks weekly money supply. The M1 13-week rolling average is that it is growing at an 11.5% annual rate, but the 4-week rolling average is even higher, a stunning 4% over just 4 weeks, or an annual rate of 52%. I would imagine that this is a combination of people withdrawing cash to stuff under their mattresses and banks building up their currency reserves to ensure they have cash on hand to meet customer demand, probably mostly the latter. It is hard to imagine $100B in actual cash being withdrawn in 2 weeks.
The M2 is growing at a much slower rate, 7% on an annual basis. This reflects the fact that even though currency in circulation is increasing very quickly, savings are growing more slowly. This should still be more than enough to ward off deflationary concerns, but it bears watching in the weeks ahead.
One thing that seems clear is that the velocity of money is way down, as banks hoard cash and consumers cut back on spending. It seems that we got through the dreaded Lehman CDS settlement date has come and gone without the collapse of the financial system. I am sure the lawyers will be busy for years sorting out the competing claims.
I know my company is still hiring, I posted a job request for an IT guy in Irvine this week and I am also looking for a contract programmer. One of my Full Time reqs for next year got converted to a contractor and we are being asked to look aggressively for revenue and also for cost savings, but those are things we should do in any economic situation. It is unusual that my boss mentioned this in a staff meeting. The stock has gotten hammered this week, but it seems like everything has, even usually safe stuff like utilities.
Funny, I didn’t see any soup kitchens in LA when their market finally gave in and tanked a few months ago.
What I did see was their loans reset and people needed to sell in an environment in which fewer people could, or would, buy.
I’m pretty sure it doesn’t take people jumping out of windows to make that happen. For instance, just cut off the supply of in-the-money stock options and a lot of people in the bay area will start having trouble coming up with 20-30% down on anything Jumbo.
Goog is in the 300s. DNA has fallen into the 70s from the 90s. Companies have cut back hiring. If that situation is still around when the loans start resetting in 2009, it’s going to be pretty tough.
But lines on the street? Not necessary.
Advice for Mike? List the property for sale at $900k, and see if anyone bites.
The other two options would be a last resort.
NVJ — how close are you to your company’s “real time” financials? Things have changed dramatically in two weeks (it’s astonishing). Our order flow has dropped *drastically*, but I think much of that is emotional (and given the last ~two weeks, prudent).
The pain in tech has not started yet, but it depends on how the company makes money. Many unlevered tech companies who think they are safe will find their customers were levered, or that their product is optional. And startups who think they have funding for 18 more months may find VC redemptions changing that. Many variables, obviously.
On the other hand, our collection agency says their business is great! 🙁
Clearly NVJs boss isn’t listening to those dopes over at Sequoia. What do those guys know! Duh.
Sounds like many of you are in tech. Just to give you a different industry perspective: I work in medical devices, and although no company or industry is completely immune in an economic downturn, medical, for the most part, tends to be “safer” than most. Well, this is the first time in the 6+ years that I’ve been with my company that we may not make our numbers. There has been some reorganization at the executive level at our offices in the US (BA) and in Europe, and a few Directors have been quietly let go. Other than that, there have been no mass layoffs (yet). In the meantime, the company has implemented a hiring freeze, and we have been told to cut our expenses.
Interestingly enough, my husband’s options trading firm actually made record profits over the last two weeks. From what I understand, market turbance can bring greater opportunities in options trading. I don’t know anything about their business, but I imagine that their traders must be highly skilled and seasoned, have high risk tolerance, and/or just plain lucky – – probably all of the above.
“Interestingly enough, my husband’s options trading firm actually made record profits over the last two weeks.”
What’s best for Main St. is a stable economic system that allows people to plan and make wise investments.
What’s best for traders is an unstable economic system that drives values up and down and up and down so that there are ample opportunities to buy low and sell high. As long as a trader can predict which way things are going to go and can find a fool to take the other side of their trade life should be good in bull or bear market. Life should be especially good for the traders now that Uncle Sam has decided to enter the markets with a bunch of printed up money and the intention of entering into the stupidest trades it can find.
whatever, the newbies in all the financial and tech industries came in and drove everything up up up. Now they need to bail… so sorry we were here before you and we are not going anywhere and we are not in it for the ‘investment’. This is our home.
You may have seen that mother’s cookies just declared bk — no time to comply with the WARN act. It was owned, incidentally, by a PE firm specializing in LBO’s (Catterton).
I have some grim news for my 3 year old 🙂
I predict that Restoration Hardware or Outback steakhouse (both owned by Catterton) will declare bankruptcy within weeks if credit flow is not improved.
If I’m right, I expect someone to mail me some mother’s cookies — I’ve already raided my local supermarket 🙂
Hey dub dub, have you been to the Outback in Marin City recently? Neither has anyone else.
The only hot property in the Bay Area is on Angel Island.
FSBO — hahaha! As long as we don’t lose In-N-Out, I’ll be fine 😉
Hey Mike… my immediate thought is that you should be a “motivated” seller given the fact that you have the cash cushion. Between the sales commission and any fall in price, for sure it’s likely to be a 50k to 100k hit. This might make sense especially if you’re going to be looking to buy again in the near future. What you lose here, you may save on the next place.
On the other hand, any idea how much your place will rent for and how much your monthly negative cash flow will be?
If people jumping out of windows wasn’t funny enough, we now have fire jokes. Hilarious.
Mike – Infinity is suggesting to new buyers to negotiating the sale price at 20% discount. Your 10% down payment is gone.
WALK AWAY….