
Sequoia Capital memo to their portfolio founders on Coronavirus - sethbannon
https://medium.com/sequoia-capital/coronavirus-the-black-swan-of-2020-7c72bdeb9753
======
cs702
Very sobering.

If more companies follow Sequoia's advice and quickly decide to cut or
postpone spending in anticipation of a potential slowdown, their vendors and
employees will react by cutting or postponing their own spending, leading yet
others to do the same, fueling a _sudden and self-reinforcing feedback loop of
global contraction in economic activity_. Perhaps the stock market is pricing
such a dire scenario.

Let's hope it doesn't get _that_ bad.

~~~
WanderPanda
Maybe this is needed from time to time, to filter good and bad ideas /
behaviour.

~~~
bigmattystyles
I'm guessing you were being facetious, but in case you were not, certainly,
it's better to let individual companies fail over time at the expense of
localized loss/capital rather than decimate the system just to see who
survives. For one, you might be killing companies with actual promise in their
infancy. Second, when only one among many fails, it may be slower to identify
losers but there are landings for those who suddenly find themselves out of
job. And even when things are good, finding yourself without a job is still
traumatic.

~~~
samsonradu
Well that’s the thing, the economy seems to fall out of balance too often.
It’s either WeWork times or decimating-the-system times. Don’t we need the
middle ground more, where the good companies can stand out?

Is this a political or a central-bank policy issue?

~~~
bigmattystyles
I'm not sure, it's easy to think of the boom times and the awful bust times,
but we've had plenty of 'meh' times, i.e short recessions / contractions
around the globe. I'm not an expert and I always fear I have just enough
knowledge to believe I know what is going on. However, I did buy into the
argument that, at least in the US, slashing interest rates and giving a huge
tax cut during the boom of the last few years was a bad idea. A bad idea
since, there isn't much left to cut or slash when times turn bad or some
external event (like coronavirus) throw a ton of uncertainty into the mix. I
wish you could set up tax rates / fed rate on an automated control feedback
system. It's probably why until recently, the fed had been kept insulated from
politics, but obviously, even if they were not being politicized of late, it's
not that simple.

------
yodon
Feels like a pretty casual email when compared against their 2008 RIP Good
Times presentation[0]

[0][https://www.sequoiacap.com/article/rip-good-
times](https://www.sequoiacap.com/article/rip-good-times)

~~~
creaghpatr
No pictures of knives in dead animals this time at least.

~~~
hackerbee
Although a ham certainly qualifies as a 'dead animal', this was not the image
which came to mind when I read this comment.

~~~
creaghpatr
True, it wasn't _that_ gruesome, but that was my first time scanning the preso
and it kind of jarred me.

------
thinkingkong
Effectively, your model is about to get real world stress tested. Depending on
your vertical, or your target market you're going to see out-sized impacts
either positive or negative. Either way, set a good runway for cash and stay
vigilant.

Personally I think a situation like this is a _fantastic_ exercise and a great
time to be building a company. Not that I would wish it on anyone, but these
kinds of constraints breed an incredible set of solutions. 2008-2010 created a
bunch of interesting companies.

~~~
mistymountains
This reads like a parody.

~~~
icedchai
Yes, let's get real: prepare for layoffs and down rounds.

------
intuitionist
Calling COVID-19 a “black swan” is an abuse of the term, IMO. Zika in 2016,
Ebola in 2014, MERS in 2012, H1N1 in 2009, SARS in 2002, HIV in 1980, H3N2 in
1968, H2N2 in 1957.... A viral disease outbreak, like a stock market crash, is
very hard to time precisely, but everybody knows that it’s a thing that
happens regularly. That’s the exact opposite of a black swan; if it’s
something you didn’t plan for, well, that’s on you.

~~~
sweeneyrod
COVID19 has probably already killed more people than Zika or SARS or MERS and
seems very likely to kill more people than the recent Ebola outbreak (unless
there is some reason to believe it's going to stop spreading very soon). Its
mortality rate is 10x that of swine flu. HIV/AIDS very much was a black swan.

~~~
chipotle_coyote
The mortality rate of “regular” flu is 0.1-0.2%; even the highest mortality
rates reported for COVID-19 are around 2-3%, and historically the initial
mortality rates for epidemics start high because proper testing regimes aren’t
in place. In South Korea, where they’re far and away testing the most
suspected cases (around 10K tests a day, ramping up to 20K), the rate is about
0.4%.

~~~
tristanj
Some nits:

> _the highest mortality rates reported for COVID-19 are around 2-3%_

The CFR reported in Wuhan is 4-5% and some reports from early February
estimated it as high as 18% [0].

We're seeing a similar CFR reported in Iran. Naturally, the CFR is higher
after the medical system collapses.

> _historically the initial mortality rates for epidemics start high_

That's not always true. Early estimates of the 2003 SARS epidemic placed the
CFR around 2-3%, but a re-analysis of the data several years later placed it
at 9%. On the other hand, early estimates of the 2009 Swine Flu pandemic
placed it at 0.4% CFR [1] , however it fell to below 0.01% [2].

It's difficult to know the real CFR of an epidemic until after it's completed.

> _In South Korea ... the rate is about 0.4%._

Currently, South Korea has 6,088 confirmed cases and 42 deaths [3], which is a
0.6% CFR. However, that CFR assumes 100% of the 5,958 remaining cases will
survive. The CFR in Korea is biased as it includes many people in the initial
stages of the illness.

[0] [https://www.imperial.ac.uk/media/imperial-
college/medicine/s...](https://www.imperial.ac.uk/media/imperial-
college/medicine/sph/ide/gida-fellowships/Imperial-College-2019-nCoV-
severity-10-02-2020.pdf)

[1]
[https://www.sciencedaily.com/releases/2009/05/090511151620.h...](https://www.sciencedaily.com/releases/2009/05/090511151620.htm)

[2] [http://www.cidrap.umn.edu/news-
perspective/2009/12/researche...](http://www.cidrap.umn.edu/news-
perspective/2009/12/researchers-estimate-relatively-low-h1n1-fatality-rate)

[3] Currently reporting 6,088 confirmed cases, 42 deaths, and 88 recovered.
[https://bnonews.com/index.php/2020/02/the-latest-
coronavirus...](https://bnonews.com/index.php/2020/02/the-latest-coronavirus-
cases/)

~~~
joshuamorton
If you exclude hubei, in China, the fatality rate among confirmed cases is
under 1%.

I expect this is due to the confluence of a few factors. Deaths happen faster
than recoveries, more acute cases are easier to detect than the mild ones,
except in places where they're proactively testing (China, Korea)

------
cynusx
In a way I find these calls to their portfolio a bit strange, after all it's
because VC is enabling these companies to run beyond their fundamentals that
they could be in problems during downturns.

Businesses running on tight budgets and well within their revenue are
inherently more resistant to shock. In this case the shock is economy-wide but
you could have shocks that affect only the tiny segment of the industry that
you are in. e.g. new regulation, PR disasters, supply chain disruptions, ...

They're also more efficient from a return on equity perspective. It's just a
better way to build a business with the only exception being that you might
have to raise a lot to compete or to fundamentally deliver your value
proposition.

------
api
If this gets super serious I could see it really tip telework into the
mainstream and be good for essentially anything that helps with that: SaaS,
network virtualization, remote access, file and resource sharing, p2p transfer
and communication tools, and so on.

I'd like to make a side comment that this kind of talk should never be
misheard as celebration of misfortune. It's just that given the misfortune
it's good to ask how it will affect the market. It's no different if the
change is something great like a natural resource windfall, the end of a war,
etc.

------
PeterStuer
I wonder if they are going to finally be willing to pay taxes after they dump
all those people. /s

------
empath75
They're not saying it explictly, but when they talk about cutting costs now,
they mean laying people off.

~~~
btowngar
They _are_ saying it explicitly:

 _Headcount._ 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.

------
justinzollars
In 2003 SARS was a catalyst for Taobao in China. Will Coronavirus be good or
bad for your startups?

~~~
simplyinfinity
Can you elaborate how and why was that?

~~~
justinzollars
The details are in the book, Alibaba: The House That Jack Ma Built

------
bsaul
I may live in a bubble, but i keep asking myself why politics and media are so
alarmed about this virus. There is such a huge gap beyween actual numbers and
precautionary measures that i start to hear people say the only explanation is
that politics are hiding the real numbers.

For me, i keep thinking they’re just covering their ass, but did i miss
something ?

~~~
jariel
No, the reaction is reasonable so far.

1) We know it's a fairly dangerous virus 2) We know it spreads easy enough 3)
We know enough people get 'really sick' and require highly specialized medical
intervention, enough that without controls it will totally overwhelm medical
facilities. 4) We know that in order to stop the spread, you basically have to
quarantine cities, shut down factories, have everyone everywhere wearing masks
- have a look at Wuhan, it's like a ghost city. 5) The city went from a small
number of cases to thousands quickly 6) Italy, Iran and S. Korea have seen
small numbrers of cases explode and medical facilities are being overwhelmed
in some spots. 7) Small numbers of cases in any country could easy grow into
what we see in other countries. 8) The precautions taken in the West are
mostly refusing travel from some areas, checking the health of others,
focusing hard on those testing positive, ramping up testing abilities, getting
the medical system prepared for the worst, trying to keep people from
panicking.

Corona is pretty scary - if it 'gets out' in America it's going to cause
serious social upheaval and damage. It will be scary, especially because many
people have no health insurance.

A long term existential question will arise if America isn't able to treat
those without coverage - it's basically untenable. If people start to die in
any numbers in America because they don't have coverage, it will imply a major
upheaval of healthcare in the country to the point wherein I think some kind
of socialized medicine will have to happen.

~~~
dboreham
At this point isn't it fairly certain it has "got out" (random cases reported
all over the place -- a cruise ship, but not _that_ cruise ship, etc)?
Hopefully the fact that we don't see rampant illness, overflowing hospitals
and large numbers of dying patients reflects some aspect of the disease
(perhaps it doesn't spread as well in US society due to non-use of public
transit, or genetic factors in the population, or environmental factors such
as UV exposure), rather than success in containment?

As far as the healthcare system goes: people get treated without coverage
already, and we seem to have plenty of hospital capacity. The bizarro
healthcare economy does seem to present a big risk however in terms of
discouraging people from seeking medical treatment in the early stages for
fear of receiving large bills that they can't afford (this happens even if you
do have insurance).

------
batchfile
That RIP goodtimes presentation is eerie to look at right now.

~~~
mattrp
I was a cofounder when rip good times came out. We were not a sequoia company
but in hindsight we were really appreciative they published their advice
publicly. Our team happened to be at a quarterly offsite when it came out. I
remember we fiercely debated whether or not to believe it but we eventually
came out of the offsite taking action - we cut founder salaries significantly,
cut other non essential priorities, adjusted our forecasts and expectations
and had an all hands meeting where we informed our employees that we’d
extended our runway by another year and the cuts we’d made were to preserve
their roles. Things turned out nearly exactly as sequoia predicted - we had
just enough cash to grow the business, keep everyone on board, and get to an
exit without raising another round. I’m hopeful coronavirus won’t be as bad
across the board but I would strongly think about my alternatives before
betting against sequoia.

------
totalZero
This wouldn't be described as a "black swan" if Donald hadn't pushed us into a
rally that wasn't backed by real earnings growth. We are not in a "black
swan," we are in the Trump bubble. Eventually people will open their eyes and
identify this. Rate cuts to protect the price of stocks in an election year.
Denial of obvious facts. Repeated messaging about how strong the economy is. A
press conference focused more on the stock selloff than the viral outbreak.
This isn't some kind of tail event. The real tail event is the three-year
rally that untethered asset prices from corporate earnings. That is the gas
leak in our basement; the coronavirus outbreak is but a spark.

------
DataDrivenMD
TL;DR - If you are a hard-working entrepreneur, let this be a reminder that
we're prepared to abandon you when the global economy is in recession. We
expect you'll pay it forward by treating your hard-working employees the same
way. If you follow our lead, your company may survive long enough to raise
money from our firm in the future. This thought leadership blog post is an
example of our founder-friendly approach, and demonstrates how we add value to
our portfolio companies.

Objectively speaking the advice is prudent. Still, someone should tell their
marketing team that this piece is seriously off-brand. It signals to
entrepreneurs that the firm's messaging around the notion that "People Build
Companies" is not to be taken seriously.

------
nnq
Unpopular opinion: _people could stop trying to speculate everyt-f-thing and
amplifying the negative consequences of everything! Stop trying to "prepare"
for stuff or, worse, to speculate as to take advantage of stuff happening!_

Just accept that there will be a temporary extra increase in mortality, and
move one, _carry on all life and economic activity as if nothing much
happened, because it didn 't!_ Promptly silence the panic mongers. "Live and
let die", so to say, until solutions (vaccine, drugs) come to market.

Paraphrasing what a wise American once said in a sad September day: _go about
you business! go shopping! (ok, maybe do more of it online, but whatever...)_

In this particular case, even the orange guy has a better/healthier attitude
towards this and more sense than VCs and the stock markets!

~~~
s_gourichon
"and (the parent comment author) promptly disappears in a puff of logic." Ref:
[https://tvtropes.org/pmwiki/pmwiki.php/Quotes/PuffOfLogic](https://tvtropes.org/pmwiki/pmwiki.php/Quotes/PuffOfLogic)

