The rapid spread of COVID-19 has already impacted 175+ countries around the world, and although the full long-term consequences of this pandemic are still to be determined, there is an increasingly realistic possibility that it could lead to a prolonged global economic recession.
However, despite the obviously negative impact that this pandemic has had on the broader economy, capital markets, and the technology industry in particular, it is not all bad news for startup founders. We believe that now is actually a great time for technology entrepreneurs to lay the foundations for a new generation of category-leading businesses. In fact, many of the most successful technology companies today were started or built during challenging times.
Part of the reason is that challenging times bring new problems that need to be solved, leading to the creation of new market opportunities and the accelerated growth of some existing ones. This certainly holds true for the current COVID-19 pandemic, which for the first time in modern history has caused the majority of people in affected countries to socially isolate themselves, resulting in the accelerated adoption of technologies needed to survive in such a world, such as those enabling or related to remote working, telemedicine, e-commerce, digital payments, and robot-powered delivery. Even after this pandemic has passed, it is likely that many of these resulting changes to society will persist and that many of the organizations and people who started using these technologies for the first time will continue using them. Hence, the startup founders that can quickly adapt to this challenging time and solve the new problems that have arisen will likely find themselves building the next generation of category-leading businesses.
Furthermore, challenging times are typically accompanied by less VC funding, which forces technology entrepreneurs to build strong, self-sustaining businesses early on. During times of prosperity, an over-abundance of available venture capital often compels startups to raise and deploy as much funding as possible too quickly in pursuit of growth at all costs. This typically results in the building of fragile, unsustainable businesses that are highly dependent on VC funding for survival and that have huge liquidation preferences hanging over their capital structures. During challenging times, however, startup founders are rewarded instead for developing sustainable businesses with strong fundamentals that are able to grow efficiently with attractive unit economics. This certainly holds true for the current COVID-19 pandemic. VC funding has tightened, forcing many startup founders to become hyper-focused on reaching profitability. This will likely lead to many of them building strong, self-sustaining businesses that will be exceptionally well-positioned to thrive and become category leaders in the future.
In addition, challenging times also lead to less competition. This is due to less venture capital available to fund new and existing startups, as well as less appetite for risky new initiatives within larger companies. Too much competition in a given market usually leads to market fragmentation, followed by price wars, compressed margins for all players, and dispersion of the best talent among too many companies. In contrast, challenging times usually lead to market consolidation, followed by increased pricing power, stronger financial performance, and higher concentration of the best talent among surviving companies. This certainly seems to be holding true so far for the current COVID-19 pandemic. Many companies have already shut down or been acquired, reducing the number of players in most markets. It is likely that by the time this pandemic finally ends and the global economy begins to recover, most markets will have significantly consolidated. In this post-COVID-19 world, the startups that are able to survive and grow will likely find themselves with greater pricing power than before and an even higher proportion of the best talent in the industry, enabling them to become even more successful than they would have been in a pre-COVID-19 world.
Lastly, many entrepreneurs may find that they have an easier time coming up with innovative ideas during this period, since psychological research shows solitude and social isolation play an important role in the creative process. Many of mankind’s greatest scientific and artistic minds achieved at their highest level while in isolation; for example, during outbreaks of the plague (which brought their own versions of social distancing), Shakespeare wrote many of his most revered plays and poems,and Isaac Newton developed his theory of gravity. Similarly, today’s social distancing measures may give modern entrepreneurs a rare chance to disconnect and formulate their grandest ideas.
For all of the reasons above, we remain as optimistic as ever about the potential for technology startups to change the world and achieve outsized success, and we continue to actively invest in exceptional mission-driven startup founders who are undeterred by current market challenges. Many of the world’s most successful technology companies including Microsoft, Apple, Amazon, Google, and Facebook needed to survive challenging times along their path to success. Likewise, we will continue to be here in good times and bad, partnering with and supporting the next generation of technology entrepreneurs building enduring, category-leading companies.