Sequoia Capital, a top Silicon Valley venture capital firm, issued a "black swan" warning on Thursday about the Covid-19 outbreak.
In a memo to Sequoia founders, employees, and CEOs of its portfolio companies, it provided "guidance on how to ensure the health of their business while dealing with potential business consequences of the spreading effects of the coronavirus."
The last time Sequoia sent out a warning like this, it was titled "RIP. Good Times," and sent to its portfolio companies with some tips for surviving the 2008 financial crisis.
Sequoia calls Covid-19 "the black swan of 2020." It predicts a severe economic shock will strike the global economy, advising firms in its portfolio to prepare for the worst; "We suggest you question every assumption about your business."
"Having weathered every business downturn for nearly fifty years, we've learned an important lesson — nobody ever regrets making fast and decisive adjustments to changing circumstances," the memo said. "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.'"
Sequoia's portfolio of companies extends across the world. It said, "we are gaining first-hand knowledge of coronavirus' effects on global business." Here are some of the challenges the venture capital firm has already seen as a result of the virus outbreak:
- 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.
Sequoia suggests that every company in its portfolio must prepare for economic disruptions. It offered several ways to do that:
Cash runway. Do you really have as much runway as you think? Could you withstand a few poor quarters if the economy sputters? Have you made contingency plans? Where could you trim expenses without fundamentally hurting the business? Ask these questions now to avoid potentially painful future consequences.
- Fundraising. Private financings could soften significantly, as happened in 2001 and 2009. What would you do if fundraising on attractive terms proves difficult in 2020 and 2021? Could you turn a challenging situation into an opportunity to set yourself up for enduring success? Many of the most iconic companies were forged and shaped during difficult times. We partnered with Cisco shortly after Black Monday in 1987. Google and PayPal soldiered through the aftermath of the dot-com bust. More recently, Airbnb, Square, and Stripe were founded in the midst of the Global Financial Crisis. Constraints focus the mind and provide fertile ground for creativity.
- Sales forecasts. Even if you don't see any direct or immediate exposure for your company, anticipate that your customers may revise their spending habits. Deals that seemed certain may not close. The key is to not be caught flat-footed.
- Marketing. With softening sales, you might find that your customer lifetime values have declined, in turn suggesting the need to rein in customer acquisition spending to maintain consistent returns on marketing spending. With greater economic and fundraising uncertainty, you might even want to consider raising the bar on ROI for marketing spend.
- Headcount. Given all of the above stress points on your finances, this might be a time to evaluate critically whether you can do more with less and raise productivity.
- Capital spending. Until you have charted a course to financial independence, examine whether your capital spending plans are sensible in a more uncertain environment. Perhaps there is no reason to change plans and, for all you know, changing circumstances may even present opportunities to accelerate. But these are decisions that should be deliberate.
Sequoia is the latest financial behemoth to urge doomsday preparations.
None of this should be surprising to ZeroHedge readers considering the WeWork implosion in the fall of 2019 was the likely top. Then shortly after, Silicon Valley VC firms held an emergency meeting of unicorn companies in October, specifying how the IPO market was shutting. By early 2020, the VC bubble cracked, and a readjustment in company valuations has been seen. Since the virus outbreak, credit and IPO markets have gone cold, outlining that no matter how much central banks print, they're powerless in the face of a global health crisis (unable print vaccines and helpless to do anything that will help restart global supply chains or consumption). Sequoia is right, and the "black swan" is here. Prepare Now.