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A black swan event is defined as one that can't be predicted and causes maximum damage.

Photo: Costfoto/Barcroft Media via Getty Images
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Sequoia warns startups: Coronavirus is 2020's 'black swan'

In an interview, Sequoia partner Alfred Lin says it's time for founders and CEOs to worry not just about the health of employees, but of entire companies.

Sequoia, one of Silicon Valley's top venture firms, issued a stark warning about coronavirus to entrepreneurs on Thursday: "We suggest you question every assumption about your business." Founders are listening.

In sounding the alarm, the firm called the coronavirus the "black swan" of 2020, referring to the idea popularized by Nassim Nicholas Taleb of a surprise event that causes a massive impact and is only rationalized in hindsight as something that could have been expected.

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Sequoia, which has backed companies like Google, Square and Airbnb, said it has already seen companies face slowing business growth and supply chain problems and cautioned that coronavirus could create an extended global downturn. It backs companies around the globe, from China to India to Israel, but sent the warning to U.S. portfolio companies first on Thursday, before posting it publicly.

"Many of our portfolio companies' founders and CEOs are getting prepared to try help with the health and safety of their employees, and we want them to also know they should focus on the health and safety of their companies," Sequoia partner Alfred Lin told Protocol.

That includes re-evaluating how much cash the startup is burning through and sales forecasts, and being ready for venture fundraising to "soften significantly." Sequoia even urged founders to reconsider their headcount and "evaluate critically whether you can do more with less and raise productivity," stopping just short of calling for layoffs.

"I think we've been in a boom market, and most of the contingency plans have been to figure out what to do on the upside: If we raise more money, what would we do? If we exceed our revenue targets, what else should we invest in?" Lin said. "Here it's a reminder that you should have contingency plans for the upside and the downside and we wanted people to make sure they have the downside scenarios in place."

It's a stark warning, but one that Sequoia-backed founder Dylan Field wasn't surprised to receive. "If you're part of the startup ecosystem, you can see the spread of the virus, and understand exponential math, then you can see it's going to be significant," he said.

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Coronavirus has been top of mind for Field and his business, Figma, which makes collaborative design software. So far, his business hasn't seen any dips in growth like Sequoia cautioned and it has millions in the bank after it raised $40 million from investors last year. "That honestly has been worrying us less. The health of the business hasn't been impacted yet," he said.

What has been worrying him is making sure his employees remain healthy. Figma has banned visitors to the office, told people to work from home if they need to and also switched all interviews to video. While Field hasn't down-scaled his hiring plans, he thinks it may be harder to reach their targets because of the video interviews and candidates not wanting to change roles in a period of instability.

It's not the first time Sequoia has forewarned startups. In 2008, the firm infamously created a presentation called "R.I.P. Good Times" that alerted entrepreneurs of a coming market downturn — the final slide telling startups to "get real or go home." This year's warning was notably absent of bad clip art and clocked in as one Medium post instead of a 50+ slide deck, but it did end up quoting Charles Darwin: "Those who survive 'are not the strongest or the most intelligent, but the most adaptable to change.'"

Sequoia's Lin said it's a different situation than the 2008 presentation, but it's still a message to founders to be prepared. "People should know it's about being prepared, not being alarmist," he said. "We wanted companies to think about these things proactively."

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To Modern Basket founder Hayley Leibson, who does not run a Sequoia-backed company, seeing the firm's memo was a good reminder that founders have to be able to navigate through uncertainty and do more with less if they need to. While much of Silicon Valley is focused on high-growth, money-burning companies, she said it may be time for the era of the cockroach company, or the ones who can survive anything, to return. "Founders right now should focus on being a cockroach and not a unicorn," she said.
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