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."
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