Highlights From Sequoia Capital’s Letter To Founders And CEOs

Private equity behemoth Sequoia Capital sent a letter to companies it invested in, noting they may want to “brace” for coronavirus-induced “turbulence” ahead.

‘The Black Swan Of 2020’

The coronavirus has now infected more than 100,000 people across the world and showing no sign of slowing down. This represents “the black swan of 2020” that could play out in one of several ways, according to the letter. While the number one priority is the health and safety of workers, owners and CEOs still have an obligation to ensure the viability of their business.

Companies are typically facing headwinds from a drop in business activity, disruptions to supply chains, and inability to conduct business as non-essential travel has been banned. These trends could play out over the next few quarters and it will take “even longer” for the global economy to return back to how it was before the outbreak.

‘Question Every Assumption’

Business owners need to “question every assumption” about their operations, including:

1. Could the company survive a few quarters of poor performance and still be able to pay all the bills? Now would be a good time to solidify any contingency plans to avoid “potentially painful” future consequences.
2. Could the company survive through 2021 if raising new rounds of capital at “attractive terms” is no longer the norm?
3. What deals, if any, could be canceled by customers and what can be done to prevent any surprises?
4. Could the company count on marketing and other initiatives to support otherwise lost sales?
5. Can the company “do more with less” in terms of employees and resources?
6. Are current capital spending plans appropriate amid an “uncertain environment”?

Experience Counts

The letter continued and noted the firm has managed to emerge from every business downturn over the past five decades. The most important lesson from all of this experience is that “nobody ever regrets making fast and decisive adjustments to changing circumstances.”

Business owners that are able to survive over the decades fully understand that revenue and cash flow always fall faster than expenses in uncertain times. Business is much like biology in terms of those who survive “are not the strongest or the most intelligent, but the most adaptable to change.”

Experience also emphasizes the need to avoid “false optimism” as this can cloud judgment in terms of making contingency plans, according to the letter.

“Avoid this trap by being clinically realistic and acting decisively as circumstances change,” the letter stated. “Demonstrate the leadership your team needs during this stressful times.”