In 2008, in the middle of the most recent economic recession, prominent Silicon Valley venture capital firm Sequoia Capital advised its portfolio companies about how bad things were, in a presentation called "R.I.P. Good Times." Now the firm is sounding the alarm again, telling founders and CEOs of its portfolio companies to prepare for worsening conditions.
The move comes as the coronavirus continues to roil U.S. and foreign financial markets, causing public companies to take steps to minimize impact to their employees and businesses. The memo shows private companies could be affected, too.
"With lives at risk, we hope that conditions improve as quickly as possible," the firm said in the memo. "In the interim, we should brace ourselves for turbulence and have a prepared mindset for the scenarios that may play out."
The firm advised companies to ask key questions as COVID-19 keeps playing out, including whether they need to cut back on head count and be more thrifty with marketing expenditures.
Founded in 1972 and based in Menlo Park, California, Sequoia is among the world's most successful venture capital firms, having invested in GitHub, Google, LinkedIn, Nvidia, Oracle, Square, YouTube and Zoom.
The memo is not nearly as sweeping or broad as the original R.I.P. Good Times memo about various economic factors, but is much more targeted and specific in recommendations on what start-ups should do. In particular, it outlines questions like "Where could you trim expenses without fundamentally hurting the business?" and suggests taking a close look at head count and customer acquisition costs.
Here's the full memo:
Dear Founders & CEOs,
Coronavirus is the black swan of 2020. Some of you (and some of us) have already been personally impacted by the virus. We know the stress you are under and are here to help. With lives at risk, we hope that conditions improve as quickly as possible. In the interim, we should brace ourselves for turbulence and have a prepared mindset for the scenarios that may play out.
All of you have been inundated by suggestions for precautions to take around COVID-19 to protect the health and welfare of you, your employees, and your families. Like many, we have studied the available information and would be happy to share our point of view — please let us know if that is of interest. This note is about something else: ensuring the health of your business while dealing with potential business consequences of the spreading effects of the virus.
Unfortunately, because of Sequoia's presence in many regions around the world, we are gaining first-hand knowledge of coronavirus' effects on global business. As with all crises, there are some businesses that stand to benefit. However, many companies in frontline countries are facing challenges as a result of the virus outbreak, including:
It will take considerable time — perhaps several quarters — before we can be confident that the virus has been contained. It will take even longer for the global economy to recover its footing. 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.
We suggest you question every assumption about your business, including:
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. In some ways, business mirrors biology. As Darwin surmised, those who survive "are not the strongest or the most intelligent, but the most adaptable to change."
A distinctive feature of enduring companies is the way their leaders react to moments like these. Your employees are all aware of COVID-19 and are wondering how you will react and what it means for them. False optimism can easily lead you astray and prevent you from making contingency plans or taking bold action. Avoid this trap by being clinically realistic and acting decisively as circumstances change. Demonstrate the leadership your team needs during this stressful time.
Here is some perspective from our partner Alfred Lin, who lived through another black swan moment as an operating executive:
"I was serving as the COO/CFO of Zappos when I was summoned to Sequoia's office for the infamous R.I.P. Good Times presentation in 2008, prior to the financial crisis. 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. 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."
Stay healthy, keep your company healthy, and put a dent in the world.