Sequoia warns founders not to underestimate coronavirus impact

The venture capital firm – a global player but one with a strong presence in China, India and Southeast Asia – identified declining business activity, supply chain disruptions, restricted travel, and canceled meetings as the key challenges. “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,” Sequoia said, adding that monetary policy may have little moderating impact.

Founders and CEOs are asked to consider six key areas: whether they have enough money to keep going and how they could trim expenses without crippling growth prospects; the impact on fundraising of a likely slowdown in capital flows and a tightening of terms; the impact of changing consumer spending habits on sales forecasts; the need to rein in spending on customer acquisition; whether productivity can be increased by reducing headcount; and potential alterations to capital expenditure plans, which could mean holding back temporarily or pushing forward to take advantage of existing circumstances.

Sequoia stressed that how leaders react to crises can be crucial in ensuring their businesses endure. “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,” it said.

The venture capital firm has exposure to dozens of businesses in Asia across consumer, healthcare, industrial technology, and technology, media and telecom (TMT). Its China affiliate is currently deploying seed, venture and growth funds of $150 million, $550 million and $1.8 billion, respectively. Meanwhile, Sequoia India recently told investors it plans to raise up to $1.35 billion for venture and growth strategies for deployment in India and Southeast Asia. The firm already has an India seed fund.

Without specifying where the companies are based, Sequoia said that several businesses in its portfolio are at risk of missing their first-quarter targets. Even though pure software companies are less vulnerable to supply chain disruptions than hardware, direct-to-consumer, and retail players, they could still get hit by cascading economic effects. And all companies that depend on in-person meetings to conduct sales, business development, or partnership discussions are being affected.

“Having weathered every business downturn for nearly 50 years, we’ve learned an important lesson — nobody ever regrets making fast and decisive adjustments to changing circumstances,” Sequoia added. “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.’”

According to AVCJ Research, PE investment in Asia came to approximately $8.8 billion in each of January and February, down from $20.9 billion in November 2019 and $19.4 billion the following month. Growth capital investment in the first two months of the year has fallen 72% on the last two months of 2019, with the number of transactions announced down 21%. Over the same period, buyouts are down 29% by deal value and largely unchanged by deal volume, while VC is down 23% and 22%.

In China specifically, growth investment fell from $17.4 billion across 87 deals in November and December to $2.7 billion and 55 deals in January and February. Venture capital investors announced 170 transactions worth $2.4 billion in the last two months of 2019 and then 136 worth $600 million in the first two months of 2020.

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• Topics
• Greater China
• Venture
• Early-stage
• Expansion
• Technology
• Asia
• Sequoia Capital
• TMT