Coronavirus — The Black Swan of 2020

The global spread of the coronavirus is making the world more anxious by the day. And those deepening worries are reflected in the fluctuating stock market. Sequoia Capital, one of the world’s top venture capital firms, sent a note to the founders and CEOs in its portfolio last week warning that coronavirus could usher in a prolonged global economic slowdown, fundamentally altering the business environment and urging them to brace for coming economic shocks.

In sounding the alarm, the firm called the coronavirus the “Black Swan of 2020.” “Black swans” are rare, unexpected events that cause a massive impact and heavily influence global activity. It’s worth recalling that the phrase "black swan" gained currency a decade ago during the 2008 recession and aftermath, providing a compelling way of thinking about the simultaneous crises in banking and housing.

Why it matters?

Sequoia has been a fixture of Silicon Valley for decades, helping fund generations of companies, including Apple, Google, Instagram and DoorDash. Back in 2008, as the financial crisis was starting to have a negative effect on the economy, the VC firm sent a similar, ominous presentation, titled “R.I.P. Good Times” to the founders and CEOs in its portfolio with the intention of preparing them for what was to come so that their companies could survive. The presentation is still referenced in Valley circles today.

Sequoia's memo this year provides guidance on how to run a startup so it can survive the business and economic challenges posed by the spreading effects of the coronavirus. Sequoia's advice to their portfolio companies is as follows:

Get ready, cut expenses, preserve cash. Think through how much cash you have. "Do you really have as much runway as you think? Could you withstand a few poor quarters if the economy sputters?"

The money is going to dry up. Don't count on raising money. "Private financings could soften significantly," Sequoia warned, before adding an optimistic note. "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."

Prepare to survive tough sales. Be forewarned that sales might just fall apart. "Deals that seemed certain may not close. The key is to not be caught flat-footed."

Cut advertising and marketing expenses. Take a hard look at your marketing spend. "You might find that your customer lifetime values have declined, in turn suggesting the need to rein in customer acquisition spending."

Be prudent with capital spending. Take a look at capital spending. "Examine whether your capital spending plans are sensible in a more uncertain environment.“

Unfortunately, because of Sequoia’s presence in many regions around the world, we are gaining first-hand knowledge of coronavirus’ effects on global business. As with all crises, there are some businesses 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.

It will take considerable time — perhaps several quarters — before we can be confident that the virus has been contained. It will take even longer for the global economy to recover its footing. Some of you may experience softening demand; some of you may face supply challenges. While The Fed and other central banks can cut interest rates, monetary policy may prove a blunt tool in alleviating the economic ramifications of a global health crisis.

• 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.

#covid19 #coronavirus #globalcrisis