On Thursday, the venerable venture capital firm Sequoia Capital sent a warning about the economic effects of the coronavirus to the founders and CEOs of companies where it's made investments. It also shared that warning with the general public. The company's message was that company leaders should prepare for a long slowdown by conserving cash and cutting expenses wherever possible. It was a disturbing reminder of a similar message the company gave founders in 2008, just before the Great Recession.

The new coronavirus is a human tragedy, especially for the people of China. But it's also an economic event. In both cases, it's hard to know how bad the hit will be. We don't know how many more lives will be lost beyond the 3,400 already dead, and we don't know whether we will see a recession that lasts for years, or merely a temporary slowdown that lasts a few months. That uncertainty caused the Dow Jones Industrial Average to register its biggest ever one-day drop on February 27, and then its biggest ever one-day gain on March 2, only to plunge again over the next couple of days. As I write this, the DJIA is down about 12 percent for the last couple of weeks, which means that about $3 trillion in value has evaporated. 

With that in mind, Sequoia advised founders and CEOs to consider their cash runway -- could their companies survive several poor quarters? It told them to assume that fundraising would be more challenging in the near future while also pointing out that some of today's most successful companies, including Cisco and Google, were born during or right before economic downturns. It suggested leaders prepare for decreasing sales and for existing deals to be canceled. It said they should re-evaluate marketing plans, making sure that dollars spent on marketing are paying for themselves in increased revenues. It suggested company leaders should think carefully about capital spending, making thoughtful decisions about making expansions and improvements in an uncertain environment. And it suggested that founders and CEOs take a hard look at head count. "This might be a time to evaluate critically whether you can do more with less and raise productivity."

"R.I.P. Good Times" all over again.

Sequoia ended its message with a quote from Alfred Lin, who was COO of Zappos in 2008. That year, the VC firm summoned representatives from its portfolio companies to its offices for the now-famous "R.I.P. Good Times" presentation. (The slide deck from that presentation quickly made the rounds throughout the larger business community.) That presentation warned founders and executives about the coming financial crisis and provided advice about how to weather the storm. "We didn't know then, just like we don't know now, how long or how sharp or shallow of a downturn we will face," Lin wrote. "What I can confirm is that the presentation made our team and our business stronger. Zappos emerged from the financial crisis ready to seize on opportunities after our competitors had been battered and bruised."

Of course, there is always the possibility that the warning itself will turn into a self-fulfilling prophecy. Sequoia has funded a wide range of companies including Google, PayPal, Apple, Symantec, Oracle, Zoom, and many, many more. Presumably when Sequoia issues a pronouncement, executives at the companies it's funded pay at least some attention. If all these companies begin cutting their marketing budgets, dropping plans for expansion and improvement, and start laying off employees, then a severe economic downturn will go from being a danger to a downright certainty. On the other hand, as the Sequoia team wrote, "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."

Yesterday, Sequoia partner Roelof Botha appeared on CNBC to explain some of the thinking behind the memo. "I agree that we shouldn't panic right now, but I think you need to have a prepared mind, and that's exactly what we wanted to do for our founders," he said. Sequoia has helped companies at every stage, he added. "We want to leverage that experience to help people prepare for what might be. We hope it doesn't pan out that way, but what might be."

Preparing for the possibility of a prolonged economic downturn means answering some difficult questions. The answers will be different for every organization, and none of them will be easy. But Sequoia is right that now is the time to start asking. 

Published on: Mar 7, 2020
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