First, figure out which one you actually got
A demand letter is someone asking you to pay, on their own, before involving a court at all. It has no case number, no hearing date, and no court seal, because no case exists yet. If that's what you have, you're not being sued, you're being asked to resolve something directly, and you still have a real chance to settle it before it goes further.
Being formally served is different: you'll receive a copy of the plaintiff's claim (form SC-100) along with a notice of a specific hearing date, time, and courthouse. That means a case has already been filed, and you have a real deadline now.
What California actually requires from you as a defendant
Unlike a regular civil lawsuit, small claims court does not require you to file a written answer. There's no formal response document due before the hearing. What you actually need to do is show up, on the date and at the courthouse listed, prepared to explain your side. The same rule that keeps lawyers from arguing on the plaintiff's behalf (Code Civ. Proc. § 116.530) applies to you too, this is you and the judge, not attorneys.
If you think you're owed something too
If the dispute goes both ways, you believe the other person owes you money over the same situation, you're not limited to just defending. Form SC-120 (Defendant's Claim) lets you bring your own claim in the same case, as long as it's related and within the small claims limit. It generally needs to be filed before your hearing date, so this is worth sorting out early rather than the week of.
If you were served with very little notice
Service generally has to happen at least 15 days before the hearing if you live in the same county as the court, or 20 days if you live elsewhere. If you were served later than that, you may be able to ask the court for a postponement to give yourself real time to prepare, don't just assume you have to proceed on short notice.
What happens if you skip it
Not showing up doesn't make the case go away. The plaintiff can win by default, a default judgment entered simply because you weren't there, regardless of how strong or weak their actual case was. If that happens, undoing it later is a much harder process than just showing up would have been.
If you lose, you have an appeal right the plaintiff doesn't
This is a genuinely unusual piece of California small claims law worth knowing: a losing defendant can appeal to the superior court's appellate division and get an entirely new trial. A losing plaintiff generally cannot appeal a small claims judgment at all. If the hearing doesn't go your way, that door isn't automatically closed, ask your free county Small Claims Advisor about the appeal deadline, which is short.