By Wayne Embree, Rev1 Ventures
While the country has just entered a recession, it’s not too early to do whatever we can to understand the immediate as well as longer-term effects on the economy at large and how this will specifically affect start-ups.
The immediate effect is a capital retreat. Investors are re-evaluating their strategies and priorities. Experience favors supporting higher performing portfolio companies and channeling new investments toward later-stage companies. However, to paraphrase a quote from Bernie LaCroute, partner emeritus, Kleiner Perkins, “This is when the good ones come out.”
Here are five good reasons for funding a business in this market and strategies for venture capitalists who have the dry powder and vision to NOT remain on the sidelines, in spite of the current economic crisis.
- Great companies launch in down markets. There is no historical model to predict the path this recession or recovery will take, but entrepreneurs and venture capitalists can look to the many examples of companies that were founded in recessions and became household names. From technology, to consumer brands, to unimagined new services, the list is long and includes Apple, Bloomberg, Microsoft, Patagonia, UPS and Walmart to name a few. Whether the success of these firms was in-spite-of the economic environment, or because of it, we know that start-ups that are created in or survive recessions can become really important sizable companies that create markets and change economies.
- Covid-19 assaults inertia. Recessions force customers to reevaluate business operations. Corporate priorities and partnerships change. Anyone who has anything to do with entrepreneurship and young companies knows that inertia, not competition, is often the greatest threat to gaining the early adopters and new customers that accelerate young companies to scale. The sledgehammer of covid-19 has forced inertia to loosen its grip. Many aspects of doing business will be forever changed—in ways that are predictable and ways that are not.
- Reexamine prior due diligence through the post-covid-19 lens. Review deals that you may have passed on before this pandemic. With social distancing, work-from-home, and accelerating online education and telemedicine, just to name two, market sectors without significant product features previously been as “nice-to-have” may now be cost-justified necessities. For example, Updox, a health IT company in Rev1’s portfolio, saw video chat usage on its secure physician communications line soar from 220 to 45,000 telehealth visits per day. The company signed on 10,000 clinical users in the space of three weeks.
- Companies will more intensely than ever evaluate new products and services that can legitimately save them money. Corporations are facing enormous problems they couldn’t have predicted and don’t know how to solve. In all but a few industries, revenue is down. Supply chains are broken. Customers are not buying or are changing their buying behavior. In this environment, founding teams with first-hand industry experience have an edge. Tech businesses that demonstrate clear value propositions, especially those that reduce costs, will get attention where there wasn’t attention before.
- Recessions can favor investors. CB Insights estimates that seed-stage financing could take a 20 percent hit this year. That doesn’t imply that there are fewer high-quality early stage deals. It suggests that less competition for investors with the resources and appetitive to scour the pipeline of investable start-ups which, with fewer dollars chasing more deals, could become more inviting and robust. New investments in new opportunities, especially those demonstrating clear customer value in this environment, are also a bold way to compensate for potential losses as each investor will likely have some portfolio companies that will not survive this market. As entrepreneurs tune into today’s risk-adjusted realities, investors will seek more favorable terms, more coachable entrepreneurs, and more realistic valuations.
This deep and abrupt economic downturn is like nothing we have seen before, a free-fall caused not by shifting economic conditions but by shutdowns due to a pandemic without a vaccine or effective treatments. No one knows how long current conditions will last or what an economic recovery will look like.
We know that with investment from pragmatic venture capitalists, plenty of determined entrepreneurs have launched iconic businesses during previous recessions. In the decade following the Great Recession, venture capital investment increased nearly 700 percent, from $20 billion to $136 billion, and produced start-ups Instagram, WhatsApp, Venmo, Uber, Pinterest and Cloudera.
To replicate the success of the last 10 years, follow the disruption. Where have attitudes and needs shifted? Work-from-home, online education and telemedicine. Where are classic business processes disrupted? Physical distribution, supply chain management, and human resources.
Any time an economy is turned on its head, the situation is ripe for new ideas and new solutions. In the last recession, venture capitalists invested in great ideas that became great companies. We did it before. We can do it again.
Wayne Embree is executive vice president of venture acceleration and investments at Rev1 Ventures, where he works with entrepreneurs on how to build effective and competitive businesses. He also focused on helping spinout companies from research-based institutions, such as Ohio State University, Nationwide Children’s and OhioHealth. He can be reached at Wayne@rev1ventures.com.