For Generation X, born between the mid 60’s and late 70’s, blessed with the illusion of everlasting growth, and the succeeding Millennials, spoiled by the amenities of the modern information society, COVID was a hard stop from full throttle.
When talking about startups, thoughts are with the young Bill Gates, smiling at a police camera after being fined for speeding with his new Porsche, or Harvard drop out Mark Zuckerberg, both starting their empires in their early twens. Yet, this is a myth. Today, it is the Generation X, at the helm of startups. Entrepreneurs start their businesses on average at age 45 years.
The map is not the territory
Generation X, as well as the Millennials are the only population (in the western world), grown up in a brief period of uninterrupted peace, and continuous economic growth. COVID has put life to pause. We are waiting for social distancing rules, travel regulations, work-from-home-solitude, always annoying face masks, and the Robinson-Crusoe-family feeling to simply fade away, to return to our convenient normal. Initial thoughts for getting back to “normal” were…maybe late this summer, ok, before x-mas, well, in that case, but next year Q1. When the virus is gone, the vaccine has arrived, or…. Only very slowly we are realizing, there will be a “new normal”, yet, none of us wants (or can) imagine, what the new normal will look like.
For the economically active generations, COVID-19 is creating an unknown territory. For a generation, growing up in continuous growth and without any hardship, a permanent adverse change of living conditions is simply “unthinkable”.
COVID-19 as a catalyzer for the big shift
From an economic perspective, COVID-19 has been a black swan. Warnings from experts (and Bill Gates), from the risk of a pandemic, we have collectively ignored, just to find ourselves unprepared in the face of a global disease. The biggest mistake, company leaders can fall into now, is, to hope, tomorrow will be like yesterday. First data arrive, informing about fundamental changes of the economic landscape. Examples are:
Shifting consumer behavior
Frank Trentmann, Professor at the University of London, and author of “Empire of things”, is proclaiming the turning point of consumer behavior. Under the consideration of “Less is More”, more thoughts for sustainability and higher attention for quality (time), he sees people stepping out of the hamster-wheel to reconsider the coordinates of their lives. Sounds familiar? This is aligned with values often attributed to Millennials. What has been considered peculiar just months ago, might start making sense under the view of the COVID-19 experience. Shifting consumer behavior can change the landscape for many business models.
Shifting real estate markets
Over the course of COVID-19, we all became professionals, in video conferencing etiquette, weak WiFi signals, dial-in procedures, mute-to-avoid-echoing, and what to do unseen-aside-ness. Technology has evolved and is offering remote working experiences, with acceptable inefficiencies. After Siemens, announced 140’000 employees can work from home, the logic of the B2B real estate mark starts changing. The attention for prestigious city-center-premises is shifting to the Corporate Cloud Application manager. For the first time, real estate investors may face sleepless nights.
Shift in employment markets and social security
Remote work technologies create access to global talent. Hiring in the world of remote working is independent of location. Best talent might be located on another continent, might be required only for a short instance of time, and might be cheaper than local resources. All of a sudden, the local software engineer is competing with a counterpart out of rural India. Artificial protection of the local workforce through e.g. visa regulations became meaningless. Companies are challenged by requirements for new processes for collaboration but can create an agile workforce. Yet also, the social contract between employers and employees is diminishing. Facebook has already been observed, to introduce pay scheme adjustments, based on living locations of the remote worker, discounting for remote areas.
A gentle breeze before the storm
The list of changes of underlying dynamics is longer and, most likely, unknown for large areas. It will take more time for changes to unfold their full potential. For the time being, firms are facing a period of hardship, yet, the impact of COVID-19 on the economy is delayed by generous economic stimulus, distributed by the governments. As reported by IMF per August 2020, Direct government spending ranges from 0.6% of GDP (South Korea) up to 21.1% of GDP (Japan) with an average of 7%. In parallel, mandatory regulations, to file for bankruptcy are suspended in e.g. Germany. The conclusion is simple: With the current measures in place, an army of Zombie companies is created, not fit for survival under normal market conditions
An economic world war Z to come?
Once stimulus, employment support, and relaxation on bankruptcy regulations are discontinued and (artificial) inflow of liquidity to the economy ends, we will face an unprecedented wave of bankruptcies. Not only economic weak or highly exposed companies will be affected, but – in the chain of dominos, falling down – a wave of bad debt will hit the suppliers, and finally the tax income of the state.
By today we understand, GDP will take a dip from COVID-19. GDP is another expression for the productivity of an economy. Entering a depression means, a less productive economy, less liquid, to procure services, less in demand of labor, less looking for innovation, ultimately a less fertile breeding ground for Start Ups.
Yet, COVID-19 is changing one of the major rules of firm survival. So far, markets were balanced in an equilibrium at their carrying capacity. The number of firms in the market was efficient to serve demand. If a firm was selling airplanes or bananas did not impact its risk for bankruptcy. According to recent data on bad debt, this is changing through COVID-19. Data, show increasing bad debt in Agriculture, hospitality, and Real Estate. At this point in time, this can only be a first indication. The underlying message is, bad debt, hence the risk of bankruptcy has become sector-specific. Investors will have to be more conscious about the industries, they are investing in. To receive funding, it will be more critical for start-up ventures, how to position.
This is confirmed by recent investment Data from the US VC market. VC investors are more careful in their decisions. Compared to the first 6 months of 2019, 2020 looks at -57% of announced Seed deals, -29% of Series A, and -34% of Series B deals. Whereas the ticket size appears to be relatively unaffected with -3% for Seed, -4% in Series A, and +1% in Series B, values vary widely among industries. Not as a surprise, Traveltech is denied from the VC industry, Healthtech, surprisingly low appreciated, AI fostered at early stage, whereas Series B funding is falling behind, and only Data are peaking
Looking ahead, we find an economic landscape covered with fog. The “new normal” will differ from our legacy. For startups, this is not necessarily bad news. This also includes new demands that will be created and be freed up, where former suppliers failed. Whatever innovation a startup has created, adaptability and flexibility is at the heart of start up culture. Undoubtedly this is the most critical skill for surviving COVD-19, and taking advantage of the inertia of the industry giants, struggling to adapt to the new normal. Leveraging on their adaptability, today’s Start Ups may turn out to be the true winners on the long run.
Kolja A. Rafferty, MBA, IDP-C, CTP