Stockpile Cash and Slash Costs: Top VCs Warn Coronavirus is a 'Black Swan' Event
Ben Bergman is the newsroom's senior reporter, covering venture capital. Previously he was a senior business reporter and host at KPCC, a senior producer at Gimlet Media, a producer at NPR's Morning Edition, and produced two investigative documentaries for KCET. He has been a frequent on-air contributor to business coverage on NPR and Marketplace and has written for The New York Times and Columbia Journalism Review. Ben was a 2017-2018 Knight-Bagehot Fellow in Economic and Business Journalism at Columbia Business School. In his free time, he enjoys skiing, playing poker, and cheering on The Seattle Seahawks. Follow him on Twitter.
The most prominent venture capitalist in Los Angeles is sounding the alarm bells over coronavirus, warning it is likely to be a "black swan" event.
"If this is a black swan, you must shore up cash now," said Mark Suster, managing partner at Upfront Ventures. "If it's not a black swan event the worst case scenario is you were overly conservative."
Suster first made the pronouncement in a deck for a presentation he was set to give next week at the SaaStr conference in the Bay Area, the largest annual gathering of software as a service companies. But ironically, organizers decided Thursday to postpone the event so Suster shared the slides on social media and expanded on his views in a telephone interview with dot.LA Friday.
"We've been telling our companies to cut their burn rates, pad their balance sheets and not to be precious about valuation," Suster told dot.LA. "Survival is way more important."
Suster thinks COVID-19 could end being the most significant event of his investing lifetime because of the high degree of uncertainty and its lasting impact of up to 18 months.
"I think this is going to be harder than 9/11," said Suster. "9/11 was a shock to the system, but it was a one time event and then it was done."
Suster emphasizes that no one knows how COVID-19 will turn out, and he does not want to sound alarmist. But if the uncertainty continues he expects investors to stop writing checks, just as they did after the DotCom Bust and the Great Recession. The problem is he has no idea how long investing will be halted.
"That could be one month, three months, or 18 months," he said. For now at least, Suster says Upfront is still trying to proceed as normally as possible.
"We just wired money to a company this morning," he said.
If there is any silver lining it is that investors could be more inclined to put money into venture capital as interest rates go even lower and that venture firms like Upfront are sitting on records amounts of cash they have to put to work.
"It's not like they're not going to turn around and say 'we've decided to send all this money back," Suster said. "They will deploy it. They may choose to go more slowly for a period of time."
At Upfront's Santa Monica office, employees are still coming into the office but the firm implemented a no-handshake policy last week and has gotten rid of communal cheese and meat trays. Suster and his team are still trying to meet with as many founders and investors as possible, but it's getting more difficult.
"The number of people now in other states canceling meetings and saying they've implemented a no in-person meeting policy has shocked me," he said.
Suster is not alone is calling coronavirus a black swan event. Sequoia Capital, one of Silicon's Valley's leading venture capital firms, told investors Thursday that companies should revise sales forecasts, stockpile cash, and cut costs, perhaps by laying off workers.
"This might be a time to evaluate critically whether you can do more with less and raise productivity," the firm wrote. "We suggest you question every assumption about your business."
The firm said some of its companies have already reported sharply falling growth rates between December and February and disruption in the supply chain means hardware, direct-to-consumer, and retailing companies may need to go elsewhere to be able to make their products.
"It will take considerable time — perhaps several quarters — before we can be confident that the virus has been contained," the firm wrote." 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."
Founders & business leaders: We sent this note to Sequoia founders/CEOs to provide guidance on how to ensure the health of their business while dealing with the consequences of the coronavirus. We hope it's helpful to you during these turbulent times. https://t.co/SRuqVGT8vD
— Sequoia (@sequoia) March 5, 2020
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Andrew Peterson<p>Andrew Peterson is the co-founder and former chief executive of Signal Sciences, a web application security platform that he founded in 2014 and <a href="https://dot.la/signal-science-snapped-up-for-775m-in-big-l-a-saas-exit-2647256430.html" target="_self">was acquired in 2020 by Fastly in a $775 million deal</a>. Signal Sciences protects web applications from attacks and data breaches for clients like Duo Security, Under Armor and DoorDash.</p><p>Prior to starting Signal Sciences, Peterson worked at Etsy, helping the online marketplace with international growth as a group project manager. Etsy <a href="https://www.fastcompany.com/3056900/how-three-ex-etsy-employees-turned-their-old-employer-into-a-consumer" target="_blank">reportedly became </a>one of Signal Sciences's first customers. Peterson has also served stints as health information management officer at the Clinton Foundation and as a senior product specialist at Google.</p>
Ara Mahdessian<p>Ara Mahdessian is the co-founder of ServiceTitan, a SaaS product for managing a home services business.</p><p>The inspiration for ServiceTitan, Mahdessian's first company, came from watching his parents start their own businesses in building and plumbing, only to struggle with the logistics behind keeping them running, he <a href="https://www.inc.com/magazine/201906/emily-canal/servicetitan-immigrant-inclusion-diversity-best-workplaces-2019.html" target="_blank">told Inc in 2019</a>. Mahdessian and his co-founder Vahe Kuzoyan met while in college, and worked on several consulting projects before starting ServiceTitan, in hopes of aiding small business owners like their parents.</p>
Evan Spiegel<p>Evan Spiegel is the co-founder and chief executive officer of Snap Inc., the Venice-based company known for its app Snapchat. He's also one of the youngest billionaires in the world, launching Snapchat while still an undergraduate at Stanford. </p><p>SnapChat, the company's app, has recently been taking on rival TikTok <a href="https://dot.la/snap-spotlight-2649022645.html" data-linked-post="2649022645" target="_blank">with a new feature</a> and a program meant to attract creators to its platform. And it is been at the center of a larger national debate on the power of big tech. </p>
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Tim Ellis<p>Tim Ellis is the co-founder and chief executive of Relativity Space, an autonomous rocket factory and launch services leader for satellite constellations. He is the youngest member on the National Space Council Users Advisory Group and serves on the World Economic Forum as a "technology pioneer."</p><p>Before founding Relativity Space, Ellis studied aerospace engineering at the University of Southern California and interned at Masten Space Systems and Blue Origin, where he worked after graduation. He was a propulsion engineer and brought metal 3D printing in-house to the company.</p>
Travis Schneider<p>Travis Schneider is the co-founder and co-chief executive of PatientPop, a practice growth platform for healthcare providers. He founded the company with Luke Kervin in 2014. <br><br>The two have founded three companies together, including ShopNation, a fashion shopping engine that was later acquired by the Meredith Commerce Network.</p>
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