Insider Insights May 2020 Issue

Insider Insights May 2020: Opportunities in Essential Businesses Abound


Although the effects of the COVID pandemic are not over, over the past month there have been several signs that the picture has been changing for the better. On May 26th, 2020, the New York Stock Exchange trading floor re-opened after two months, after which the Dow Jones jumped 530 points. Non-essential businesses across America have begun to reopen with distancing guidelines in place, and testing has doubled over the past month while nationwide cases continue to slowly decline.

DJIA Year in Review (Source: MarketWatch)

Previously, it was discussed that much of the economic damage was caused by logistics problems and impediments to business operations rather than wider systemic depression. As businesses reopen and restrictions begin to slacken, there appears to be optimism in the economy, evidenced by the Dow Jones having clawed back many of its losses over the prior two months, although more work remains to be done. Nevertheless, the pandemic will continue to operate how businesses operate for the foreseeable future, which will change the venture capital map significantly.

Specific Industries Have Bright Spots Ahead

Individual reactions to the pandemic have varied widely. Although economic data points towards optimism, everyone has a different level of personally acceptable risk, such as immunocompromised individuals. Industries such as tourism, hospitality, and sports are expected to stay depressed longer than others as large-scale events in late 2020 and even early 2021 have been canceled or postponed as state governments still appear reluctant to ease restrictions on large gatherings. Even when those events become available, it will take a considerable amount of time before their entire customer base feels secure enough to attend them again. While the pandemic has caused a lot of pent-up demand, the wide spectrum of attitudes towards personal risk means that that demand will gradually snowball over time, and a large, sudden infusion of economic activity appears unlikely.

Meanwhile, the use of virtualization tools has positively exploded, with stock in videoconferencing platform Zoom climbing 46% from the beginning of March to the end of May despite adverse economic conditions, spurred on by a sudden and unprecedented demand to remain connected when physical access is no longer possible, To maintain relationships with as many customers as possible, distancing options will likely be offered for the foreseeable future even if cases trend downward and the overall pandemic climate grows safer. Accessibility will be the watchword throughout the rest of the year, and any products or services built around facilitating safety and distance will be appealing options. Delivery and medical supply services have also experienced explosive growth. Regardless, it is evident that battles will need to be picked carefully to ensure successful growth in this untried environment.

What a Post-COVID Investment Strategy Looks Like

At this time, companies seeking investment will need more nurturing than they have in the past, even if they may not admit it upfront, and operations will not be in an optimal state as adjustments continue. Even prior to the pandemic, the average exit could have taken up to 5 to 7 years or even longer, and as of now an extra quarter or two should be expected at the very least. As this will certainly require a level of forbearance on your end, your focus should remain on startups with proven, sound business plans as well as the resiliency to weather the adverse conditions. Healthy growth and sustainability will be more important than ever. Meet clients in the middle, being careful not to overextend yourself while also being mindful of special needs. It is inevitable that more funding than usual will be required.

There are always opportunities to be found, but good judgment in clients will be more important than ever, because more hand-holding will be necessary. Companies in early stages should be prioritized, such as those with connected, purposeful teams and a good sense of direction. Late-stage, mature offerings with value propositions that are poised to be especially marketable in the pandemic should also be considered, especially if they can justifiably be considered ‘essential’. Adverse conditions can be expected for the following year at the very least, so both the stage and industry of your clients and where they fit into your long term plan should be considered carefully, as well as the current stage of the pandemic’s recovery.

You Can’t Control the Wind, but You Can Adjust the Sails

Knowing that challenging times are here means that soft skills will be more important than ever. Businesses may be forced to make challenging decisions, such as cutting salaries, closing departments, or laying off employees. Flexibility will be called for, and as much leeway should be given without taking on undue risk or hardship. Personal leadership to colleagues and investors costs nothing but will pay dividends by encouraging their friendship and loyalty. In the event that you are called upon to make those difficult decisions yourself, ensure that you do so with as close to perfect information as possible.

Sustainability will be the key objective over the next year. The pandemic will not last forever, and the country has been through several before and come out stronger. There is a great deal of evidence to suggest that the country is on the mend as of now, but state government reopening and recovery efforts are all gated by time and contingent on the spread of disease being properly contained. There should be no need to take unnecessary risks at this point; except to take a survival mindset for the near future. A “second spike” of the pandemic is still a very real threat as the economy continues to reopen, and the status of a potential vaccine remains up in the air. Being caught off guard could be potentially devastating until the grasp of the disease becomes much more surefooted than it presently is.

Concluding Thoughts

While there are many promising signs that the pandemic is beginning to wane and the country is ready to return to business, there are still too many unknown factors to take unnecessary risks. Only until after the country is fully opened and a vaccine is produced will the economic picture be fully understood. That said, there is a great deal of opportunity in products and services that can be considered “essential”, as some level of concern will remain for years to come, even after the disease is considered fully under control.

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Darius Askaripour
Managing Partner

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