‘Brace for turbulence’: Silicon Valley VC firm Sequoia Capital calls coronavirus the ‘Black Swan of 2020’ that every startup founder needs to prepare for

  • Sequoia Capital, the prestigious VC firm that famously warned startups about the 2008 financial crisis, published a memo on Thursday urging startup founders to prepare for business disruptions.
  • The memo was titled “Coronavirus: The Black Swan of 2020,” a reference to an unpredictable, game-changing event. 
  • “It will take considerable time — perhaps several quarters — before we can be confident that the virus has been contained,” the memo read. 
  • Visit Business Insider’s homepage for more stories.

The world of venture capital is preparing for the worst as the coronavirus outbreak threatens the health of startups.

Sequoia Capital, one of the most influential venture capital firms in the world, sent a memo to its portfolio company founders and chief executives on Thursday, telling them to “brace for turbulence” as the coronavirus and its ripple effects spread across the business landscape.

The memo, which the Silicon Valley firm has since posted online, described the new virus as “the black swan of 2020.” (A black swan describes a unpredictable and rare event that has severe outcomes.)

The firm said it’s already seen companies in the countries most affected by the virus report a decline in business activity, disruptions in their global supply chains, and the slowdown of travel, which could have repercussions for companies that rely on face-to-face meetings to conduct sales and form new business partnerships.

The memo cited several unnamed startups that could miss their quarterly goals because of the disruption.

“It will take considerable time — perhaps several quarters — before we can be confident that the virus has been contained,” the memo read. “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.”

The memo harkens back to another famous Sequoia warning in 2008 when the VC firm famously delivered a sobering presentation to its startup founders entitled “RIP good times.” The presentation, which urged startups to cut costs and preserve capital, came right as the financial crisis wrecked the global economy.

You can read Sequoia’s latest Black Swan memo in full on Medium.

“Business mirrors biology”

The coronavirus causes a respiratory disease known as COVID-19. More than 3,300 people have died and nearly 98,000 others have been infected, about 83% of whom are in China. Cases have been recorded in at least 87 countries.

On Thursday, the Dow Jones industrial average slid 970 points as San Francisco announced its first two cases of coronarvirus.

Partners at Sequoia Capital encouraged their company founders to think through every assumption about their business. They might question if they have enough money in the bank to survive “a few poor quarters if the economy sputters,” the memo read, or reconsider plans to grow their staff in order to conserve capital.

The firm also warned company founders that their customers might retool their spending habits, which could hurt sales. To prepare, companies should consider tightening their marketing budgets.

“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 read. “In downturns, revenue and cash levels always fall faster than expenses. 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 Capital has active investments in more than 380 startups that span the globe from Hong Kong to Houston, according to PitchBook data. In China, it has active investments in 53 companies.

The firm has had a presence in China for 15 years and employs a staff of about 70 local investment professionals, who are focused on four sectors: healthcare, manufacturing, telecommunications and consumer. Sequoia Capital laid off a significant number of investors in China last year, according to a Reuters report.

The firm’s memo also warned that the consequences of the coronavirus could stymie the unfettered access to venture capital that founders have enjoyed in recent years. It challenged them to ask how will their businesses be affected if it becomes more difficult to raise funding “on attractive terms” in 2020 and 2021.

The warning came with a side of optimism:

“Could you turn a challenging situation into an opportunity to set yourself up for enduring success?” it read. “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.”

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