Sequoia Capital memo to their portfolio founders on Coronavirus(medium.com)
medium.com
Sequoia Capital memo to their portfolio founders on Coronavirus
https://medium.com/sequoia-capital/coronavirus-the-black-swan-of-2020-7c72bdeb9753
58 comments
Journeyman executives often make decisions that are pro-cyclical.
Maybe this is needed from time to time, to filter good and bad ideas / behaviour.
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.
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?
Is this a political or a central-bank policy issue?
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.
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
[0]https://www.sequoiacap.com/article/rip-good-times
No pictures of knives in dead animals this time at least.
Although a ham certainly qualifies as a 'dead animal', this was not the image which came to mind when I read this comment.
True, it wasn't that gruesome, but that was my first time scanning the preso and it kind of jarred me.
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.
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.
This reads like a parody.
Yes, let's get real: prepare for layoffs and down rounds.
Not to me. Many of the best companies are founded or hit their stride in weak economic times. If a startup needs a booming economy to keep growing it may not be that good of a business.
That said, I am not wishing layoffs on anyone. But if you don't accept bad times along with good times you are not really a market capitalist.
That said, I am not wishing layoffs on anyone. But if you don't accept bad times along with good times you are not really a market capitalist.
Agreed. Constraints force innovation. On the whole, Coronavirus is an unfavorable turn of events for the global economy but many companies will be stronger for it.
Prime time for a drone delivery startup
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.
A black swan is a rare event. It's appropriate for COVID-19, as its death toll is either already higher than some of the outbreaks you listed, or is expected to surpass them in the near future. Bill Gates called COVID-19 a once-in-a-century pandemic (https://www.nejm.org/doi/full/10.1056/NEJMp2003762)
Death tolls:
Within a year, COVID-19 will probably have killed more than 2M, so more than each of H1N1, H3N2, H2N2, see this chart https://twitter.com/zorinaq/status/1233876986025480192 which I pulled from https://institutefordiseasemodeling.github.io/nCoV-public/an...
Compared to HIV, which is by far the deadliest outbreak in your list with 30 million killed, it would take a while for COVID-19 to kill as much. However some experts say the virus might become endemic, staying around the planet for the foreseeable future, never completely eradicated. If that's the case, then over time it is possible it could end up killing 30M. After all it is more severe than the seasonal flu, and the latter has killed tens of millions over the last century.
Death tolls:
• less than 11k: Zika, Ebola, MERS, SARS
• 575k for H1N1 (2009)
• 1M for H3N2 (1968)
• 2M for H2N2 (1957)
• 32M for HIV
Within a year, COVID-19 will probably have killed more than 2M, so more than each of H1N1, H3N2, H2N2, see this chart https://twitter.com/zorinaq/status/1233876986025480192 which I pulled from https://institutefordiseasemodeling.github.io/nCoV-public/an...
Compared to HIV, which is by far the deadliest outbreak in your list with 30 million killed, it would take a while for COVID-19 to kill as much. However some experts say the virus might become endemic, staying around the planet for the foreseeable future, never completely eradicated. If that's the case, then over time it is possible it could end up killing 30M. After all it is more severe than the seasonal flu, and the latter has killed tens of millions over the last century.
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.
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%.
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...
[1] https://www.sciencedaily.com/releases/2009/05/090511151620.h...
[2] http://www.cidrap.umn.edu/news-perspective/2009/12/researche...
[3] Currently reporting 6,088 confirmed cases, 42 deaths, and 88 recovered. https://bnonews.com/index.php/2020/02/the-latest-coronavirus...
> 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...
[1] https://www.sciencedaily.com/releases/2009/05/090511151620.h...
[2] http://www.cidrap.umn.edu/news-perspective/2009/12/researche...
[3] Currently reporting 6,088 confirmed cases, 42 deaths, and 88 recovered. https://bnonews.com/index.php/2020/02/the-latest-coronavirus...
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)
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)
Yes sorry I meant 10x.
HIV/AIDS is very different in that it takes a long time to kill. It doesn't lead to the breakdown of infrastructure because you suddenly have a million people showing up at the hospital at the same time.
That property is also what helps it spread so much despite not being very contagious. It's very hard to catch HIV. Making out with a someone positive is unlikely to transmit. Heterosexual vaginal sex is also unlikely to transmit (especially for the man who is at much lower risk). With SARS-CoV-2 all it takes is touching the same surface.
This is what makes HIV manageable and not a black swan to global market, while the Wuhan coronavirus is.
That property is also what helps it spread so much despite not being very contagious. It's very hard to catch HIV. Making out with a someone positive is unlikely to transmit. Heterosexual vaginal sex is also unlikely to transmit (especially for the man who is at much lower risk). With SARS-CoV-2 all it takes is touching the same surface.
This is what makes HIV manageable and not a black swan to global market, while the Wuhan coronavirus is.
HIV was a major black swan to Africa.
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"hard to time precisely, but everybody knows that it’s a thing that happens regularly. " ... " That’s the exact opposite of a black swan;"
No - big things that happen every so often that you cannot time are exactly what Black Swans are.
None of those pandemics you mention rose to the level of disrupting business globally, what we are seeing is unprecedented.
'Pandemics' do not disrupt the world regularly.
2008 crash, 9/11, 1998 Asia crash, Iraq War I, 1987 crash, Opec oil crisis - nobody saw them coming.
'Black Swans' happen every so often but we never know what form they are going to take.
The big 'black swans' were, 2008 crisis, 9/11, Asia crash 1998, possibly Iraq war I, 1987 digital crash, Opec Oil crises, etc.
No - big things that happen every so often that you cannot time are exactly what Black Swans are.
None of those pandemics you mention rose to the level of disrupting business globally, what we are seeing is unprecedented.
'Pandemics' do not disrupt the world regularly.
2008 crash, 9/11, 1998 Asia crash, Iraq War I, 1987 crash, Opec oil crisis - nobody saw them coming.
'Black Swans' happen every so often but we never know what form they are going to take.
The big 'black swans' were, 2008 crisis, 9/11, Asia crash 1998, possibly Iraq war I, 1987 digital crash, Opec Oil crises, etc.
By your definition it seems a meteor strike of consequence would not be a black swan event because we know they have happened and we know they will continue to happen.
I guess to make it useful we have calibrate the meaning to actually mean something useful that we can understand.
I guess to make it useful we have calibrate the meaning to actually mean something useful that we can understand.
I count four pandemics in my list that would have occurred in the lifetime of many of Sequoia’s GPs. That’s a base rate many orders of magnitude higher than significant meteor strikes.
Black swans, by definition, are things that we could not have predicted. That where the power lies -- they change everything.
Rare events like viral outbreaks are probably not in this category. That doesn't mean they aren't impactful or relevant, but OP is right - they're not a black swan, in the definition created by Taleb.
Rare events like viral outbreaks are probably not in this category. That doesn't mean they aren't impactful or relevant, but OP is right - they're not a black swan, in the definition created by Taleb.
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.
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.
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.
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.
[deleted]
I wonder if they are going to finally be willing to pay taxes after they dump all those people. /s
They're not saying it explictly, but when they talk about cutting costs now, they mean laying people off.
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.
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.
In 2003 SARS was a catalyst for Taobao in China. Will Coronavirus be good or bad for your startups?
Can you elaborate how and why was that?
The details are in the book, Alibaba: The House That Jack Ma Built
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 ?
For me, i keep thinking they’re just covering their ass, but did i miss something ?
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.
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.
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).
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).
It's the potential for exponential growth that has people concerned: look at growth rate of new cases in Korea, Italy, and Iran in last two weeks. US is harder to judge due to lack of testing, may be experiencing the same case rate growth.
Numbers in China were bad and it the equivalent of martial law for weeks to slow new cases to a trickle. It's not clear they are out of the woods and may see additional flare ups as they relax restrictions.
It's precisely because precautionary measure are being taken (I have seen notices of cancellation and lists of mandatory precautionary measures for more than a dozen events just in last two days).
Numbers in China were bad and it the equivalent of martial law for weeks to slow new cases to a trickle. It's not clear they are out of the woods and may see additional flare ups as they relax restrictions.
It's precisely because precautionary measure are being taken (I have seen notices of cancellation and lists of mandatory precautionary measures for more than a dozen events just in last two days).
Is 3.4% mortality per WHO not high enough or does it not warrant the precautionary measures?
If at all, there need to be more precautionary measures, not less.
Poorer, densely populated countries in Asia and Africa are especially vulnerable since they will not be able to isolate populations or treat in ICUs or build 1000 bed hospitals in 10 days, and at 3.4% we're going to see millions of dead.
I really really hope I'm wrong, but what if I'm not.
If at all, there need to be more precautionary measures, not less.
Poorer, densely populated countries in Asia and Africa are especially vulnerable since they will not be able to isolate populations or treat in ICUs or build 1000 bed hospitals in 10 days, and at 3.4% we're going to see millions of dead.
I really really hope I'm wrong, but what if I'm not.
The market and economy haven't actually improved since 2008, the Federal Reserve has been pumping money in. The inflation estimates no longer include food or gas. Average home price is $350k now vs $250 in 2008 and we have a major homeless epidemic. Which once someone in that population is sick, they'll all be sick and they are concentrated in major cities. And Covid-19 illustrates just how fake and how little we've really recovered. It is really highlighting the problems that aren't getting resolved. Basically exposing all the sharp rocks under the boat that we're about to crash on.
That RIP goodtimes presentation is eerie to look at right now.
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.
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.
robk(1)
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.
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.
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!
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!
"and (the parent comment author) promptly disappears in a puff of logic." Ref: https://tvtropes.org/pmwiki/pmwiki.php/Quotes/PuffOfLogic
Because you clearly know better.
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.