Major VC Sequoia Capital Warns Its Portfolio Investment Startups of Coronavirus ‘Black Swan’ Event
So according to reporting from both Bloomberg News and Recode a tech news publication, Sequoia Capital, one of Silicon Valley’s top venture capital firms and a sometimes fortune teller for the VC industry, sent an a dark email note to its portfolio startup companies founders on March 5th 2020, warning that the risks of the coronavirus outbreak could bring a lengthy global economic slowdown and fundamentally alter the current business environment.
In a memo sent to its portfolio companies that was later published on Medium titled “Coronavirus: The Black Swan of 2020,” it is advising (the founders and CEOs of it’s investment portfolio startup companies) that “companies should consider cutting costs, revising sales forecasts and conserving cash.” The memo was meant to provide guidance on how to ensure the health of their businesses while dealing with potential business consequences of the spreading effects of the coronavirus. The Recode article mentions that they want founders to question how much cash it has before running out of money “to avoid potentially painful future consequences”; to prepare for a challenging fundraising environment, softening sales, and greater needs for customer marketing; and to consider lowering headcount and spending less capital. A black swan is Wall Street parlance for an unforeseen event that carries major risks but also potential huge rewards for companies that make sage moves at the right time.
Its starts off by stating “the coronavirus is the black swan of 2020. Some of you (and some of us) have already been personally impacted by the virus. We know the stress you are under and are here to help. With lives at risk, we hope that conditions improve as quickly as possible. In the interim, we should brace ourselves for turbulence and have a prepared mindset for the scenarios that may play out.”
Founded in 1972 and based in Menlo Park, California, Sequoia Capital has long history as a being a legendary Silicon Valley tech investor VC firm known for placing big investment bets in companies such as Google, Apple Inc, Instagram, GitHub, LinkedIn, Nvidia, Oracle, Square, YouTube, Zoom, Airbnb and food delivery DoorDash Inc. They issued a similar warning memo back in 2008 which was named “RIP Good Times” during the depth of the recession. According to Bloomberg article, that email is still referenced and debated in Valley circles today.
While I continue to believe @sequoia RIP Good Times deck from 2008 was hyperbolic, this memo on #CoronaVirus is well done.
Founders aren’t thinking clearly about potential macro effects that will affect timing for them on operating results & financing. https://t.co/KmqSz1SMo9
— Adam Nash (@adamnash) March 5, 2020
In this Coronavirus warning letter they mentioned that many of their startup investment companies have already reported steep droppings in growth rates during the periods from December, 2019 thru February 2020. It said several are now at risk of missing their first-quarter targets. They mention that because they have a global presence around the world, they are gaining first-hand knowledge of coronavirus’ effects on global business. And as with all crises, there are some businesses and investors that stand to benefit, however, many companies in frontline countries are facing challenges as a result of the virus outbreak, including:
- Drop in business activity –some companies have seen their growth rates drop sharply between December and February. Several companies that were on track are now at risk of missing their Q1–2020 plans as the effects of the virus ripple wider.
- Supply chain disruptions- the unprecedented lockdown in China is directly impacting global supply chains. Hardware, direct-to-consumer, and retailing companies may need to find alternative suppliers. Pure software companies are less exposed to supply chain disruptions, but remain at risk due to cascading economic effects.
- Curtailment of travel and canceled meetings- many companies have banned all “non-essential” travel and some have banned all international travel. While travel companies are directly impacted, all companies that depend on in-person meetings to conduct sales, business development, or partnership discussions are being affected.
As Teddy Schleifer reported in the Recode article, they point out that “we suggest you question every assumption about your business.” they also draw parallels to the economic downturns of the early and late 2000s. It could take several quarters before the virus is contained, the technology investment firm wrote: “It will take even longer for the global economy to recover its footing.” They also describe how they have weathered every business downturn over the last 50 years, they learned a crucial lesson, which is that “nobody ever regrets making fast and decisive adjustments to changing circumstances,” They make references to reacting to changing circumstances is crucial to a companies success “in some ways, business mirrors biology. As Darwin surmised, those who survive ‘are not the strongest or the most intelligent, but the most adaptable to change.”
Stocks have been tumbling on Wall Street as the outbreak intensified, raising concerns about a possible recession. Investment banks like Goldman Sachs have even advised their clients that a recession could be coming. The major point is that startup and business founders cannot afford to underestimate the risk. I have written before about the importance of risk management.
Bloomberg mentioned Suhail Doshi, a founder of Sequoia-backed Mixpanel a software analytics startup described the message in a tweet as “RIP good times meets the coronavirus” and wrote, “Founders about to learn the survival skills of ‘09.” Another Sequoia startup investment company Ironclad Inc, said it will take a closer look at its 2020 strategy after reviewing the memo. The company, which uses software to automate legal processes, doesn’t expect major changes because it has yet to tap the $48 million raised from Sequoia and others last year, said it’s CEO Jason Boehmig.
This may have an affect on companies looking to IPO in 2020, Airbnb, Inc, the popular short term-rental startup, had previously planned to hold one of the biggest public stock listings this year. However, its plans are imperiled by spread of the deadly virus. Airbnb, which is also backed by Sequoia, saw a decline of about 80% in its China business as customers cancel reservations during the outbreak. DoorDash, owner of America’s most popular food delivery app, confidentially filed paperwork with regulators for an initial public offering, the company said a week ago during what was the worst week for stocks since 2008.
As major tech companies such as Microsoft, Amazon, and Twitter are encouraging workers to work remotely from home because of the coronavirus crisis, who knows how long this crisis will go on for and how much it will affect people, businesses and world markets. The Federal Reserve lowered its fund rates to a range of 1%-1.25% in an attempt to add some life to Wall Street. President Donald Trump suggested the the Fed go further while trying to reassure Americans. The emergency cut is the largest the Fed has made since the start of the Great Recession in 2008.
The NYT reported that for the second month in a row, the economy churned out a blockbuster number of jobs, adding 273,000 of them in February, the government recently reported, an impressive showing in an era of slow-and-steady employment growth.
But with the coronavirus outbreak shaking economic confidence, the solid showing may not be a harbinger of continued strength. The Recode reporter Mr. Schleifer concludes “in the world of optimism that is Silicon Valley — real or contrived — the memo stands out for its bluntness and honesty. And if the coronavirus outbreak becomes as iconic as the global financial crisis, this Medium post could be seen as precocious and equally epochal.” However some good opportunities can come out of downturns. The Sequoia group’s founders then reminded people that “many of the most iconic companies were forged and shaped during difficult times,” including Silicon Valley giants Google and PayPal, both of which “soldiered through the aftermath of the dot-com bust.” Sequoia also noted that Airbnb and Square were founded in the midst of the financial downturn in 2007.
I remain mindful that “continuing the cashflow” will minimize the economic effects for businesses and individuals after we’ve managed the health effects of this challenge.