The Black Swan of 2020 “Coronavirus”

The Black Swan of 2020 “Coronavirus”

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.“
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