The note is reminiscent of a presentation made by Sequoia in 2008 titled "R.I.P Good Times", where it shared tips of surviving the economic downturn with its portfolio companies.
Venture Capital firm Sequoia Capital has written a note to its founders and CEOs suggesting them to question every assumption about their businesses, including even the headcount, in the wake of the rapid spread of the Covid-19 across the world.
In a note titled “Coronavirus: The Black Swan of 2020”, Sequoia puts it upfront that because of its presence in many regions around the world, it is gaining first-hand knowledge of coronavirus’ effects on global business while adding that many companies in frontline countries are facing challenges as a result of the virus outbreak, including drop in business activity, supply chain disruptions, and curtailment of travel and cancelled meetings. “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,” Sequoia said.
The note is reminiscent of a presentation made by Sequoia in 2008 titled “R.I.P Good Times”, where it shared tips of surviving the economic downturn with its portfolio companies. As Covid-19 continues to spread, Sequoia quotes the English naturalist Charles Darwin who said those who survive “are not the strongest or the most intelligent, but the most adaptable to change” to highlight the fact that business mirrors biology.
The VC giant wants its firms to question assumptions like cash runway, fundraising, sales forecasts, marketing, headcount and capital spending. “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,” Sequoia writes in the note.
At the same time, it wants its businesses to consider a situation where fundraising becomes difficult in the coming years. Sequoia does sound reassuring as it explains that 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,” it said.
The VC firm has asked its businesses to anticipate revised spending habits from their customers. Deals that seemed certain may not close and the key is to not be caught flat-footed, it indicated. Sequoia also indicated it would be prudent to consider raising the bar on ROI (return on investment) for marketing spend with greater economic and fundraising uncertainty.
Of all the business assumptions that Sequoia suggests should be questioned, the one about headcount is the least worded and yet has been talked about on social media. “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,” the note stated.
Sequoia may be sounding the alarm but its actions suggest it is still finding places to deploy funds having just invested $8 million in the artificial intelligence platform Salesken. In India, Sequoia has invested in firms like OlaCabs, Zomato, Ujjivan, Prataap Snacks and BankBazaar.