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Sequoia Urges Founders To Brace For Tough Times In Coronavirus Fallout

Sequoia Urges Founders To Brace For Tough Times In Coronavirus Fallout

Sequoia Capital advised founders on ensuring adequate runways for their business

The VC likened the coronavirus outbreak situation to the 2008 global financial crisis

Many of the most iconic companies were forged and shaped during difficult times, Sequoia said

With 31 confirmed cases of coronavirus in India, the government has confirmed that the virus has reached community transmission levels. State governments have been asked to form rapid response teams at the district, block and village levels to cater to preventive measures and take action on the ground. In terms of the business impact, several tech giants and startups have asked employees to work from home, while large-scale global events have been cancelled or postponed.

In such times, Sequoia Capital, with a portfolio of over 420 companies in India, has now floated a letter to its founders addressing the challenges in the ecosystem due to the coronavirus outbreak and what can be done to manage businesses better.

While entrepreneurs across the world are busy taking stock of employee health and are putting preventive measures in place, Sequoia is urging founders to look beyond the current situation and aim to ensure sound health of the business in the medium to long term as the fallout from the coronavirus impact is expected to last a few quarters. Besides disruptions in events, the coronavirus epidemic in China has also impacted manufacturing as well as the pharmaceutical markets.

DataLabs by Inc42 has noted that in 2019 Sequoia Capital cemented its place at the top of the venture capitalists with over 2x the deals from 2018. The venture capital firm participated in 53 deals in 2019 and funded 45 startups.

Sequoia Capital noted that coronavirus is “the black swan of 2020” and said that it will take considerable time — perhaps several quarters — before the epidemic has been contained.

“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.”

Highlighting the concerns founders should question about their businesses, Sequoia said:

  • Does your business have enough cash runway, where it can withstand a few poor quarters if the economy sputters? Does the team have a contingency plan? The firm advised founders to ask these questions now to avoid potentially painful future consequences.
  • Noting that private financings softened significantly in 2001 and 2009, founders need to question their plan of action if fundraising on attractive terms proves difficult in 2020 and 2021? Many of the most iconic companies were forged and shaped during difficult times, Sequoia added.
  • What would happen to sales if customers cut down on their expenses? Sequoia asked founders to anticipate the impact this may have on sales as deals that seemed certain may not close. The key is to not be caught flat-footed, it added.
  • Due to the impact on sales, founders may need to control their customer acquisition costs and consider raising the bar on ROI for marketing spend.
  • The firm also advised founders to evaluate critically whether they can do more with less headcount and raise productivity.
  • Until founders have charted a course to financial independence, Sequoia advised them to examine whether the capital spending plans are sensible in a more uncertain environment.

“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. In downturns, revenue and cash levels always fall faster than expenses. In some ways, business mirrors biology,” the VC firm noted.

The firm advised founders that false optimism can easily lead them astray and prevent them from making contingency plans or taking bold action. “Avoid this trap by being clinically realistic and acting decisively as circumstances change. Demonstrate the leadership your team needs during this stressful time,” it added.