Sequoia Capital warns of coronavirus 'black swan' as venture investors fret

By Brenda Goh and Jane Lanhee Lee

SHANGHAI/SAN FRANCISCO (Reuters) - Sequoia Capital, one of the world's top venture capital firms, sent a note to the founders and CEOs of its companies on Friday describing the coronavirus as "the black swan of 2020" and urging them to brace for coming economic shocks.

The note, which it also published publicly https://medium.com/sequoia-capital/coronavirus-the-black-swan-of-2020-7c72bdeb9753, said the companies should consider cutting expenses, reexamine their spending plans, review their staff numbers and prepare for a changing fundraising and sales environment.

Several venture capitalists who spoke to Reuters in recent days said they were already seeing a shift in the funding environment, with travel restrictions and quarantines disrupting crucial meetings and investors growing more cautious.

That is especially the case in Asia, where the virus crisis began in January: venture capital investments in China are down 67% year to date versus last year, according to data from researcher Pitchbook.

"People are taking more time to look at things," said Chua Kee Lock, CEO of Vertex Holdings, a subsidiary of Singapore state investor Temasek Holdings [TEM.UL]. For companies seeking funding, "instead of giving people 3-4 months, you may need to give more time, 5-6 months, depends on how long this lasts."

The virus has hit the U.S. tech world in dramatic fashion over the past week, with an outbreak near the tech hub of Seattle killing 10 people. Major companies including Amazon, Google and Facebook have cancelled travel and urged some employees to work from home.

Sequoia also said some companies had already seen growth rates drop sharply between December and February, with several on track to miss first quarter targets due to the impact of the coronavirus.

"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," said the note, which was signed off by 'Team Sequoia.'

"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.'"

Sequoia, an early investor in global tech behemoths such as Google Inc <GOOG.L> and Apple Inc <AAPL.O>, has been known for its prescience in the past.

In 2008 it sent a power point presentation to its founders titled "RIP Good Times" during the global financial crisis of that year which has since become part of Silicon Valley lore.

Paul Holland, a partner at Foundation Capital, noted that with 2008 being the last major crisis, "we have a whole generation of entrepreneurs who've never experienced anything like this before." He said he was also warning portfolio companies to have contingency plans, "particularly any of our companies that have a physical element of their business.”

"Any disaster or shock to public confidence distracts and worries people, including those with checkbooks, and this is no exception," Matthew Ocko, co-founder of the Venture capital firm DCVC, said in an email. "Good startups will continue to be funded, but there may be delays and friction."

In China, restrictions on movements are taking a big toll. "Working from home for investors has slowed down investment decisions because when they conduct due diligence, they need to go onto the streets to talk to consumers, or startups' offices to have face-to-face talks with employees," said Sun Jian, managing director at China Renaissance's Huaxing Growth Capital Fund.

The coronavirus, first detected in China's Hubei province in December, has killed more than 3,300 people globally. Reported cases of infection have topped 98,000 most of them in mainland China. But the number of new infections overseas now exceeds new cases in China, with Italy, South Korea and Iran, in particular, seeing worrying spreads of the virus.

In the United States, new cases have emerged in California's Silicon Valley and New York city in addition to Seattle, heightening concerns for tech firms.

(Reporting by Brenda Goh in Shanghai, Jane Lee in San Francisco; Yingzhi Yang in Beijing, Aradhana Aravindan in Singapore and ; Editing by Simon Cameron-Moore and Jacqueline Wong)