Economic Impacts of COVID
What are the impacts from COVID on our economy and on our investing strategies?
COVID is making a big impact on the economy, shifting consumer, company, and investor behavior. Some changes will be short term, but some will be long-term. To look for big opportunities in the start-up space, our firm has been closely studying the implications of COVID for the economy. Below, we’d like to share our five key insights from the ongoing economic and behavioral shifts.
1.Sectors of the Economy which will Thrive
COVID resembles war-time economics more than a typical economic recession. US unemployment has risen from a 60-year all time low to an 80-year high in 2 months. According to Nick Bloom, Stanford Professor in the department of economics, statistics are pointing to a possible 20% unemployment rate and a 20% GDP drop in 2020Q2. Unlike during a recession where all industries are negatively impacted, certain sectors actually will thrive, like tech and e-commerce.
2. Recovery and Restructuring
We estimate a U or W-shaped recovery pattern instead of the more optimistic V-shaped recovery. Traditional industries are likely not going to recover for a long period of time. Companies will be forced to become more lean, replace jobs with tech where possible, and internally restructure in order to survive and outlive their competitors. Many jobs will be permanently lost and workers from these traditional sectors will be hurting for a long time.
3. Reallocation of Industries and Investment Opportunities
COVID is forcing a rapid reallocation of industries. For example, brick and mortar sales are moving to e-commerce, casual dining sales are moving to food delivery, etc. This reallocation has a hugely varied impact on firms and industries: despite 13% of firms (mostly retail) reporting 100% negative on sales, 25–30% of firms report a positive impact on sales, and 3% of firms report a higher than +50% increase in sales. High tech industries, particularly online such as e-commerce, deliveries, short video, video streaming services, online medical care, and remote work sectors are reporting big wins. History has shown this kind of reallocation creates high growth opportunities for certain companies/startups that present excellent investment opportunities.
4. Innovations in Types of Telecommuting Jobs
Work patterns are shifting. After Twitter announced that it would allow all employees to work from home permanently, a few big corporations have issued similar statements. However, telecommuting is a source of socioeconomic inequality: currently only 33% of job roles are able to WFH. A huge share of US economic drivers are service workers, most of whom are not able to work remotely. Innovations that could create job opportunities for the large share of the workforce whose current jobs are incompatible with remote work will change the whole game.
5. Changes in Startup Investments
Although the Venture Capital (VC) industry currently has a huge amount — tens of billions of dollars — of dry powder, they will be much more cautious when investing in startups. We will likely see investors focus on hot startups by doubling down or by focusing more on serial entrepreneurs or founders who have proven to be more experienced at navigating the crisis and have insights and knowledge from building their previous companies. We will also see a shift in sector and investment focus, depending on fund flexibility. Since COVID, our firm has been working hard in mapping all the potential sectors and areas that could benefit or get fast-tracked by barriers removed and structural change in consumer behavior. We’ll share more on this in our next article.
