Sequoia Capital just issued a dire warning to its portfolio companies. “Coronavirus is the black swan of 2020.”
And, the memo went on to say,
1. 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?”
2. Be forewarned that sales might just fall apart. “Deals that seemed certain may not close. The key is to not be caught flat-footed.”
3. 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.”
4. Examine “headcount.” “Evaluate critically whether you can do more with less and raise productivity.”
5. Take a look at capital spending. “Examine whether your capital spending plans are sensible in a more uncertain environment.”
Remember the “Fall” of 2008?
The last time Sequoia issued a similar warning was during the financial crash of 2008 when it again warned of a black swan event, that time violating all of its own best advice for presentations with a long and tedious 56-slide warning deck.
I lived through that horrendous great recession and in our startup, we decided to do just the opposite. Instead of pulling back and conserving cash, we increased our marketing spend instead. The result? We captured 12 new customer that we had no business winning. Why? Because our competitors listened to Sequoia.
Does it take courage? Of course it does. But as Sequoia itself points out in their top billboard on their website, “We help the daring build legendary companies.” Maybe only when there is no market risk do they help the daring.
Sequoia’s warning is all about their own investments – they are loath of course to put the billions they have invested in promising companies – and particularly those in the cybersecurity markets – at risk.
Covering their bets, Sequoia also pointed out however that “Many of the most iconic companies were forged and shaped during difficult times. We partnered with Cisco shortly after Black Monday in 1987.”
I also lived through the 2001 post-911 dumpster fire that consumed almost all of the 92-odd competitors in our market at the time. What did we do to survive? We increased our market spend and launched a new line of product that resulted in companies like Georgia-Pacific, Toyota, HP, Wachovia, Circuit City, and a dozen others jump on board. That business recession lasted a year and a half. Enough time for lots of companies to completely “rein in customer acquisition spending” and then quietly run out of cash anyway. We did not. Instead, we grew our top line, increased our valuation and managed a successful exit through acquisition.
How much panic is truly warranted?
The coronavirus is a flu. We have the flu every year. While this coronavirus threat is very serious, here are the actual facts:
Since late December when we first became aware of the virus, there have been more than 100,000 people infected with COVID-19 and more than 3,000 people have died from the disease, most of whom were elderly or at high risk due to compromised immune systems or both.
For a little context, as of mid-February, 14,000 people have died and 250,000 people have been hospitalized for the regular flu during the 2019-2020 flu season, according to the CDC. That is almost 5x the number that has died from COVID-19 so far.
In the U.S. only 17 people have died and only 249 have been hospitalized.
Think about that.
Last Wednesday, the World Health Organization (WHO) outlined important differences between the flu and the coronavirus. “First, COVID-19 does not transmit as efficiently as influenza. With influenza, people who are infected but not yet sick are major drivers of transmission, which does not appear to be the case for COVID-19.”
The second major difference is that COVID-19 causes more severe disease than seasonal influenza. “While many people globally have built up immunity to seasonal flu strains, COVID-19 is a new virus to which no one has immunity. That means more people are susceptible to infection, and some will suffer severe disease.”
Third, we have vaccines and therapeutics for seasonal flu, but at the moment there is no vaccine and no specific treatment for COVID-19.
And fourth, and maybe more importantly, the WHO says that, “we don’t even talk about containment for seasonal flu – it’s just not possible. But it is possible for COVID-19.”
While the 2008 financial crisis black swan swam around for several years, killing off tons of companies and stifling venture capital investment, innovation and business growth while destroying the housing market, our own National Institute of Allergy and Infectious Diseases conservatively estimates that it could take as long as 12 to 18 months to develop a vaccine for the new virus, thus establishing a worse-case time-line for the potential impact of this disruptor.
So, the net is maybe a wobbly global economy for a year with disruptions in global supply chains and some business events will be cancelled, colleges and universities closed to on-campus participation, many people will be ordered to work from home and some specific market economies will suffer a hit for a few months. When we look back in our rear-views, we may discover lessons in best practices that we weren’t willing to acknowledge as well.
Many will as they should, see these disruptions as significant opportunities and for those who dare big and like to make dents in the universe, they will present as broad inroads for differentiation.
After all, it is Sequoia itself who claims to embrace “The Dent Makers”.
So, the question is: Are you going to be on the menu, are you going to eat at the table?