“RIP Good Times” was the title of a memo that one of the world’s leading VC firms, Sequoia Capital, circulated to its founders. That was during the height of the 2008 financial crisis, which saw the birth of companies like PayPal and Square. Today, the coronavirus outbreak has become what Sequoia dubbed as the “black swan of 2020”, with another memo being released to its founders to tell them that besides staying healthy, they must ensure that their company is the same.
It’s now very clear that the world has been very much dependent on China’s economy, especially the country’s supply chain. One small kink can send a company’s sales going haywire—in the U.S., 75% of companies are already disrupted, with major production delays, delivery delays, logistics delays… the list goes on. For instance, auto manufacturers are especially hard-hit at a time where they are already struggling.
Another major shock was when the stock markets took a huge plunge, resulting in many asking: are we nearing a recession? That’s despite this Bloomberg article saying that the U.S. will avoid a recession in 2020—that’s only if there wasn’t the coronavirus outbreak. Yet, fueled by the recent oil price fallout and coronavirus, Norway is now kicking off the recession season.
What about the U.S.? Bloomberg predicts that there is a 53% chance the country’s recession will come, using its own data model. For the Euro-zone, where there are more than tens of thousands of cases, it’s “unavoidable”, according to HSBC.
Essentially, consumers are now stuck in between preparing for a recession and being optimistic about the market. For startups, however, there’s no such thing as “let’s pray and hope it holds out”—it’s hunkering down, defenses up, and being tougher than a nail.
Right now, the most important thing is cash, and Sequoia’s recommendation is to relook the company financials. Think of it as an immune system against macroeconomic conditions: the more cash you have, the stronger this immune system is. Unfortunately, the coronavirus outbreak has the potential to wipe out companies with small “immune systems”, hence Sequoia saying that it can be the black swan of 2020.
Consumers are going to spend less generally, but more money will be poured into certain sections. Look at Maslow’s Hierarchy of Needs. Most people are now fighting for survival, and a global health crisis knocks most people looking for anything else down to the bottom. Consumer spending is now more niche than before, and travel advisories-cum-bans with supply chain disruptions mean that there’s less foreign expenditure. Remote working also exposes fewer people to retail and local businesses. If the company does not stand to gain anything from the coronavirus outbreak, sales will simply plummet.
Supply chain dependencies will be revealed and demolished. Many global brands are over-reliant on Chinese supply chains. One small kink and daily operations come to an abrupt halt, which results in delays, loss of potential income, and a drop in productivity.
Governments will support businesses with economic stimuli, but fundraising anywhere else may be virtually impossible. Predictions after predictions, startups are even expected to rely on their cash flow for a few quarters without thinking of fundraising somewhere this year. If you burn money like WeWork, good luck.
Restructuring. Layoff season is here for a reason. Do you really need ten people on the marketing team? Do you need to have internship programmes that don’t convert? Downsize without shame—unfortunately, it has to be this way.
Stay in your lane or innovate. Several companies pounced on the opportunity to pivot the company during this crisis, developing products, software, and services to help consumers, healthcare professionals and governmental officials. If you can’t innovate, then stay in your lane and focus on what works.
Keep an eye out for other macroeconomic conditions. Although the coronavirus outbreak is still the biggest culprit, the recent oil price fall was an indication that the markets can still be influenced by artificial means. Here’s a simple breakdown: OPEC used to control the total oil supply. Russia is unhappy the US shale companies are gaining on Russian oil companies. Russia wants to stop cutting supply to stabilize prices—which means Russia wants out from OPEC. Saudi says, “sure, then we’ll go for a price war.”
Sequoia Capital is often thought to be a soothsayer and their predictions may be right. However, one thing’s for sure, you don’t need to be flush with cash to survive this crisis. Like PayPal and Square, a company can be born during the crisis or adapting during the crisis. Rather than talk about cash, it’s all about the cash flow instead. The problem is, most startups are bleeding heavily, and the coronavirus outbreak may just take these startups out.
It’s a “hell model” test.
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