Sequoia Capital sees a black swan for economy, portfolio cos in coronavirus crisis

In late 2008, when the world was smack in the middle of a recession set off by a subprime mortgage crisis in the US and Western Europe, Sequoia Capital drew an ominous picture of the future for its portfolio companies in a gravely titled presentation titled ‘RIP Good Times’. The storied Silicon Valley firm, which may be considered something of a bellwether for the global venture capital industry, has now sounded out a similar warning for its portfolio in a new note in the wake of the ongoing coronavirus outbreak.

While ‘RIP Good Times’ was a secret presentation that somehow leaked out into the public domain, this time Sequoia has chosen to put down its thoughts in a public memo via Medium. 

In the March 6 memo, titled ‘Coronavirus: The Black Swan of 2020’ the venture capital firm has alerted founders and CEOs of its portfolio companies on how the outbreak could trigger a prolonged economic slump that would adversely impact the startup and venture capital industry.

It would take considerable time, perhaps several quarters, to contain the virus, and even longer for the global economy to recover its footing, it said. 

Companies in frontline countries, it added, face challenges, such as a drop in business activity, global supply chain disruptions, curtailment of travel and cancelled meetings.

“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,” it said in the memo.

The firm, which has a large portfolio in India, said its portfolio CEOs must question every assumption about their business. It advised its portfolio companies to take stock of their cash runway, evaluate their ability to survive a few poor quarters, make contingency plans and trim expenses to avoid painful future consequences.

“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,” the memo said on cash runways at portfolio companies.

The note overall anticipates an interim period hardship that will possibly see future funding rounds become harder and a softening of valuations to close as startups struggle to meet performance milestones set by investors. 

India’s venture capital market, in which Sequoia is by far the largest investor in terms of capital deployed, has lately experienced a windfall in terms of new funds raised for this market both by global and homegrown firms. Early stage investors are estimated to be sitting on $7 billion in yet-to-be deployed capital, according to a recent report by Bain & Company in collaboration with the Indian Private Equity & Venture Capital Association (IVCA). 

If the coronavirus scare gains ground, as Sequoia predicts, investors may choose to reserve that dry powder a bit longer than expected.