Web 2.0: Rest in peace

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Sequoia Capital this week held a sobering wake for the second Internet boom.

Call it Economics 101 on Recession 2.0. The premier venture capital firm, which has backed such companies as Apple, Cisco and YouTube, invited about 100 executives from its portfolio companies to give them an overview of what the global economic crisis means for Silicon Valley and their start-up dreams.

‘We were all talking outside before it got started and one of the CEOs said, ‘Gee, I wonder what they are going to talk about at the meeting today?’ So we peeked in and there was a tombstone that said ‘RIP: Good Times’ on it,’ said one executive who asked not to be named because the meeting was confidential.

The main message: Cinch your belts for a much longer and deeper recession than most people think.

‘They gave us a macroeconomic overview of what they see happening and why they don’t think this is just some volatility,’ the executive said.

Sequoia partner Michael Moritz, who led the firm’s early investments in the likes of Google and Yahoo, gave an introduction at the meeting. Earlier this week, Moritz made clear his feelings about how sharp the retrenchment would be for Silicon Valley start-ups that sprang up during the boom. Many will end up ‘spattered on windshields and radiator grills and be forgotten,’ he told the Financial Times.

Sequoia declined to comment about the Tuesday meeting, which was first reported by technology blog GigaOm.

It was not a ‘doom and gloom’ message, the executive said, but a serious one. ‘They basically said: ‘This is a business. This is not an excuse for you and a bunch of your friends to have a pool table and goof around with something you think is neat.’ I didn’t come away thinking that the sky is falling or that I have to move to Canada, just that these guys are taking this seriously.’

Sequoia offered practical advice on how best to ride out the economic storm. It even had an entrepreneur it funded in the first Internet boom speak about how he managed to cut costs and eventually sell his company during the dark days of the dot-com bust. The meeting covered every area of business and how best to cut costs in hopes of surviving as long as possible. Among the recommendations: If you need to conserve cash, lay off as many staff as possible in one fell swoop. If you need to raise money, raise it immediately.

Of course, ex-PayPalers Max Levchin and Keith Rabois of Slide figured that out back in January. They turned to Allen & Co., the uber-connected investment bank, to help raise $50 million from the likes of Fidelity and T. Rowe Price at a heady $500-million valuation, giving the San Francisco Internet start-up plenty of money and time to ride out the economic storm. Another seasoned entrepreneur, Netscape Communications founder Marc Andreessen, in April raised $60 million for a $500-million valuation.

This week’s meeting would have felt familiar to Internet veterans: Sequoia held a similar one with its portfolio companies during the dot-com bust.

‘One good thing they said is that last time the downturn started in Silicon Valley so Silicon Valley was less than well-prepared to handle it,’ the executive said. ‘This time it started in New York. We have more time to prepare for it.’

What’s clear: The party is over, and the shake-out has begun. Silicon Valley likes to say that the best companies thrive in the worst of times. And that’s the reality: Prepared or not, many companies won’t make it.

-- Jessica Guynn