Originating from China, the novel coronavirus has infected 415,114 people and resulted in 18,559 global deaths by late March 2020. The crisis is undoubtedly one of the largest pandemics the world has endured.
However, there are many positive changes it has brought to society. For example, despite the heavy costs associated with the outbreak, the crisis has encouraged the Chinese government to be more transparent and has demonstrated the value of freedom of speech to the rest of the public.
For Venture Capitalists, the crisis does not necessarily mean completely stopping investment activities or worrying about the survival of portfolio companies. It can also unfold new opportunities that might not have seemed that obvious before.
Overall, as many economists have stated, the crisis will not affect the macroeconomy in the long run, as seen from other disasters before. At a business level, the crisis may have already created some opportunities as people's habits, needs, and preferences are temporarily being impacted and revised. These changes have encouraged people to try out new products and services and have enabled companies to grow their user base more rapidly and with lower CAC. In the VC world, this means there are companies out there that can become strong candidates for investments.
1. Coronavirus will not change the fundamentals
The crisis does not change three things: the demand, the supply, and the tools/technology we use, or simply put, the efficiency of turning resources into products.
The economic crisis does not change our basic needs, the food we require, energy we use, or the sleep we need.
Some people may argue that there will be a higher demand for online education. However, that would not be driven that much by the changes caused by the coronavirus but rather by the benefits of moving those activities online, such as saving time and/or money, and accessibility of classes and materials. Before the outbreak of the coronavirus, the demand was already growing as people were able to see the benefits.
Figure. Global Education Venture Capital (2014-2018)
The crisis does not change the supply of natural resources. The available solar energy, water, and minerals, for the most part, remains the same. The supply of the workforce will remain roughly the same assuming that the deaths caused by the virus will not have a significant impact on the labor market.
Finally, the crisis does not change the tools or technologies that we use to turn resources into products. No physical tools will be invented due to the crisis. No new GAN model architecture will be created because of the coronavirus as well.
With all of these remaining the same, I think it is reasonable to believe that not that many entirely new investable domains will be invented during this crisis. The demand might temporarily be shifted due to the implemented lock-down policies, and everything likely will come back to the normal situation after the crisis. The factors that affect our decisions, such as cost, time, and experience, will not be dramatically changed after the crisis, given that the general demand, supply, and the tools do not change significantly.
2. Coronavirus is a catalyst that will facilitate the growth of some companies while exacerbating the issues with other companies
Even if coronavirus will not change the fundamentals, it will temporarily affect our way of living and our habits. With these temporary changes, people may be incentivized to try out new products and services that they did not have the chance to taste before. These changes will reshape the market by growing its size and redistributing its market share.
The market size will grow, but mildly. Some of these new users will stay with these products/services after the crisis, as these users find their problems solved by these products/services. However, some may stop using those products as frequently once they can return to a more normalized routine.
The growth of the market size will come from those unclosed gaps or unmet demand. These gaps can come from the supply side - startups that have a good product but have not been marketed well. The gaps can also come from the demand side - populations that do not have enough access to the products/services on the market. For example, the elderly people in China do not use food deliveries a lot as they may consider the food to be not clean or simply because they have never downloaded the app. During this crisis, many of these elderly people are forced to spend more time on the Internet and try out new products/services. They started to download food delivery apps and use the service more.
Again, I do not think these unclosed gaps widely exist, as I believe most demand should have already been met by the available technologies. If a demand has not been met for long, it is unlikely that the long-unmet demand will be filled during the crisis, as the virus does not bring us new technologies.
The market share will be redistributed as people are forced/incentivized to find alternative solutions and products.
The market share will be redistributed as people are forced/incentivized to find alternative solutions and products. This is how the coronavirus is facilitating the growth and dying of companies, and this is how the crisis is presenting opportunities to VCs.
This “market share redistribution” will not only happen within the same category but also between categories of solutions that are solving the same problem. For example, people will switch from one video game to another. People will also switch from reading to watching videos when they want to kill time.
Therefore, the crisis creates opportunities for alternative (or new) solution providers to steal market share from their direct and indirect competitors.
However, as we have discussed in the first part, these changes might be reversed as the crisis does not change the fundamental decision factors.
Table: Top activities Chinese consumers have at home during the crisis (Source: Kartar) and the decision-making drivers behind (Source: Plug and Play Ventures)
From the table above, we should feel safe to believe that: theoretically, all the activity levels should come back to the pre-crisis level as all the decision factors have not been changed by the crisis.
However, when the activity level comes back to the normal level, the market competitive landscape might already look different, as companies steal market share from each other.
3. Opportunities for VCs come from the early-stage companies with new solutions
Finally, for VCs, the key question comes to:
Which companies will be able to retain the most customers they have acquired during the crisis? Or which companies have been facilitated most and saved the most marketing budget during the crisis?
From my perspective, these companies will be the ones that are in their early stage and do offer a new solution that solves a problem/works better than current solutions.
If these companies have existed for long, the market should have already fairly evaluated their value, and the demand should have already been met - these companies should have already found their market share. As the value of these companies will not be changed by the crisis, they will not be able to retain the temporary users and maintain the market share.
However, for new companies with new solutions, the situation will be different. This is a great chance for these new companies to be first evaluated by the market. The companies can have their product be evaluated without spending much marketing expenses. If their value has been accepted by the market, the users will not leave even after the crisis.
For example, we talked to a company called Payflow, which is a Barcelona-based B2B2C FinTech startup offering a salary-in-advance solution in Southern Europe. At this moment, many people might be suffering from a lack of financial stability, and this situation offers a great window for Payflow to steal market share from the traditional microloan providers. Compared to the microloan companies, Payflow can offer short term financing at significantly lower costs than alternatives by partnering with employers, offering this financing solution to their employees, and getting repaid directly from the employers who deduct the repayment from the employees’ checks.
For another example, we recently met a company called Benepass. The company develops an employee-benefit-themed credit card product and issues cards to SME employees through the employers. By using this card, both employees and employers can save money without any upfront cost from day one by deducting more from the taxable payroll income. For example, by recognizing employees’ commute transactions automatically and deduct from their payroll as benefits, employers can save 7.65% FICA tax (mandatory Federal Insurance Contributions Act tax for employers) and employees can save 30-40% of the deducted amount depending on their individual tax rate.
The current bad situation enables companies such as Payflow to demonstrate their value by helping people at the tough time. After the crisis, will people go back to microloan providers? Probably not, as they already see the value of Payflow.
Table. Changes on the consumer side during the crisis
Many people might have seen the trends on the spending side, while not many of us have thought about the earning side. As people suffer from earning from jobs that need physical presences, people will turn to two options: (1) taking more online jobs to earn more money; (2) seeking more short-term financing options.
For the spending side, it should be fair to expect people to come back from the virtual space to the physical space after the crisis. For the earning side, however, I suspect the changes may not be fully reversed.
For example, once you lose your current job and find another job, would you go back even if the previous company invites you? Wouldn’t you be scared of the fragility of the previous jobs at least in the short term? Or probably you suddenly realize that you enjoy the new job more?
On the spending side, the same logic applies. For the video streaming space, are there new companies that can produce better contents? For the online education industry, are there new companies that use new business models to solve unsolved problems? For the food delivery or couriers, are there new companies offering new types of services/products?
Similarly, these trends can also be observed in the business space.
Table. Changes on the business side during the crisis
Under the same logic, we can expect to see the following happen: (1) Some existing companies （e.g. Zoom) get more users during the outbreak but might lose many of them after the crisis - as the value of these products should have been fairly evaluated by companies, which should have made the rational decisions before the crisis, and the decisions should not change a lot as the fundamentals do not change. (2) Some new companies (e.g. let’s call it Xoom, which offers a video conference product with a higher quality than Zoom) also get more new users during the crisis, which might come from Zoom’s existing users, and these users may not go back to Zoom after the crisis, as these users have evaluated and accepted the value of the new company.
In short, the crisis will not create anything new but help to promote new ideas and new value. It is like a free $1,000,000 Google Adwords coupon for startups.
To sum up, for VCs, the opportunities presented by the crisis will come from the new solutions - be it a new financing solution or a new type of job - as these solutions will be tried out by many people at a low marketing expense. The value should have not been tested by the market before (otherwise the company should have already got a fair market share and will not gain more just because of the crisis). Once the value of these new startups has been accepted by the market, the customers will not leave and go back to the old solutions. To be more specific, given the long sales cycle in the traditional B2B or deep tech space, B2C (or B2B2C) companies with new solutions (or copycat solutions in new markets) might be more likely to seize the opportunities from the crisis and become good investment leads for VCs.
Some domains that worth consideration include:
Earning (B2C): personal financing solutions, freelancer marketplaces, online skill training
Earning (B2B): company financing solutions, revenue-driving solutions, cost-saving solutions
Spending (B2B/B2C): early-stage companies with new solutions. For example, many of us switched from Zoom to Google Hangout during the crisis as they find Google Hangout works much better than Zoom for most cases. It is very likely these users will stick to Google Hangout after the crisis. Despite that Google Hangout is not a startup, if there’s any company offering something (e.g. Xoom) similar to Google Hangout, the crisis will be a great opportunity for these companies to grow customers, who would be unlikely to leave after the crisis.