COVID-19 Is a Forest Fire That Will Seed New Growth
The public health crisis created by COVID-19 rapidly developed into an economic storm as well. With mandates to shut down and shelter in place, unemployment quickly reached 14.7%, the highest rate since the Great Depression. Added to the devastating loss of life, many businesses gasped for air, struggling to survive until normalcy resumed. It is no surprise that COVID-19 has been reminiscent of our worst doomsday fears. While undeniably catastrophic, COVID-19 is not the final curtain call to the existence of healthy capitalism, but an economic forest fire that will destroy some things but ultimately it will seed new growth. For those who doubt this, reading The Great Influenza is a wonderful way to set a base rate for what the world will look like as green shoots begin to sprout.
Crisis is an Accelerant for Change
Just like a forest fire builds upon itself as it finds new fuel, an economic crisis like COVID-19 creates momentum for changes that already needed to happen. We’ve been in the midst of an 11-year economic growth cycle, and sometimes during a prolonged economic expansion, companies get complacent.
This crisis is accelerating much-needed changes in Private Financial Markets. With deals taking place entirely virtually for the first time in history, investors are relying on data and video conferences to replace the board rooms where deals usually take place. Believe it or not, the largest private capital managers, do not have research and development budgets so this forced modernization comes as a shock. Take Blackstone, for example, which manages over $600B and has over 3,000 employees. The company has no research and development line item in its financials. It pays out 75% of its revenues in the form of salaries and employs just 50 engineers!
Private Financial Markets Need a Forest Fire
It is 2020, companies like Amazon deliver an unimaginable variety of products to your door within 24 hours. Google has made the world’s information instantly accessible. These companies also build self-driving cars and computers that can talk to you. Private capital markets have flourished with over $5T under management and private asset managers generate nearly twice the revenue per employee that companies like Google do. Despite this, they have made the choice not to reinvest these earnings into their businesses.
Fortunately, a new breed of technology-enabled asset managers is building technology to monitor portfolio company operations in real-time. These companies can deliver risk management appropriately nuanced to the COVID crisis. For example, they can tailor their sourcing to segments of the economy that are currently thriving due to COVID, such as restaurant delivery. They can also systematically inform portfolio company CEOs and CFOs about acquisition opportunities and other mechanisms to convert market distress into profitable growth.
“Dumb Money” Goes Away
The past few years of the boom saw a lot of wasteful investments in tech companies, particularly by growth capital investors and sovereign wealth funds that didn’t really know what they were doing, but just wanted to “invest in tech” because they thought it was cool. The worst-case scenarios of this type of boom-era investing have seen billions of dollars wasted on debacles like WeWork.
Toward the end of a cycle, there’s almost a surplus of money available. Companies still want and need funding, so of course, they take it, but they don’t always know how to deploy it. However, a scarcity of funds can teach entrepreneurs how to optimize their ROI and be efficient with capital. After the forest fire, companies tend to use money more wisely. Society sets new standards for efficiency. That increased scarcity of capital also encourages innovation. You can’t just throw people at problems, you have to do things in a way that’s more fundamentally sound.
Seeds of Opportunity Come to Life
Being forced to be lean, resourceful, and hungry in moments of crisis can often prompt startups to adopt a constructive mindset of discipline. It’s not a bad thing for entrepreneurs to pivot back to the fundamentals of what their business is about and really focus on how they add value.
It’s never too late to make positive changes in your business. Companies that embrace change sooner, rather than later, are going to have an advantage, especially in the Forest Fire climate that we’re in now. If your company was already at risk of failure before COVID-19, because you were ignoring trends like eCommerce, or you were slow to adopt new technology, then that probably means you were happy with the status quo, not paying enough attention, or not willing to make tough choices. In times of crisis, companies like these are forced to pay attention or burn. They are forced to innovate or fail. And they will be more likely to save themselves as a result.
The old ways of investing, allocating capital, running companies, and doing business might not work anymore. Sometimes that’s really painful in the short-term but in the long run, it tends to be a net good. No one wants to live through a forest fire. But after the fire passes, and the forest begins to heal, there are new possibilities coming to life. The same will be true after COVID-19.
