Council Post: Rising From Rock Bottom

2020 released unprecedented black swans responsible for the deepest global market crash we’ve seen in a century. With an unavoidable recession in the cards, what can we expect in the coming months? How quickly can markets, societies and small businesses recover? Can they at all?

The past decade was successful overall, showcasing phenomenal four-times S&P growth and close to seven-times Nasdaq growth. After crashing in March 2009, both rose in the face of adversity by mid-February 2020. But that all changed by March 2020.

In just a few short weeks, both S&P and Nasdaq plummeted by around 40%. Historical data points to this descent as one of the steepest and fastest of its kind. Based on almost a century of data, deep market crashes generally take years to recover. The market crash of 2008 is a prime example, which took four years to be salvaged. The oil crisis of 1973 took six years. Today’s crisis brings the worst of both previous examples together, with a steep 40% market decline (and we’re still on the highway to rock bottom).

Venture Capital Firms Urge CEOs To “Tighten Their Belts”

Experienced managers of VC firms and private equity funds now know that portfolio companies will take longer than anticipated to make exits. With a lack of an IPO window, substantial M&A activity slowdown and complete travel shutdown, sales and business development executives have fallen victim to inefficiency. Most still rely on in-person meetings to conduct business. Supply chains have been disrupted. Business is suffering. Revenue is dropping. Margins are falling.

Portfolio companies have been urged to do anything necessary to survive, including reducing personnel (no matter how painful) and adjusting sales forecasts with the imminent recession and travel ban in mind. It’s the only way for companies to lengthen their runway and ensure a safer liftoff into life after the crash. CEOs have also been advised to attempt to raise additional capital from internal investors if possible. Should the need for urgent external capital arise, the company should adjust their valuation to attract new investors.

As managing partners in our VC firm, we chose to reallocate dry powder reserve to financially support existing portfolio companies. We further slowed investments in new companies, which is nothing new. The Great Recession of 2007-2009 saw a drop in venture investments from around 25% in late-stage deals to 35%-plus in early-stage deals (compared to pre-recession peak investment activity). Sadly, today, pre-money valuations of startups raising money are 30%-40% lower than just a few months ago. This is a low blow for startups, particularly those who recently made it to late and growth stages with value relative to public companies in the same sector.

Short-Term Impact. Long-Term Benefits

While the global market drop is tough on every industry, not all verticals are affected equally. The nature of the current crisis has seen demand rise in specific sectors, including ghost kitchen service providers, telemedicine, mental wellness, hospital robotics, remote patient monitoring, at-home fitness products and service and more. Future-forward industries embracing the likes of artificial intelligence (AI), machine learning (ML), cybersecurity and cloud technology are the least vulnerable, while those most adversely affected include industries that rely on physical mobility and out-of-home services. Such sectors include ridesharing, human-powered food delivery, mobility tech and micro-mobility. Companies such as Bird and Lime have already suspended operations in many cities worldwide.

While driverless technologies like Waymo, Aurora, Zoox, Auto-X, Cruise, Argo.AI, Pony.AI and Nuro may experience short-term negative impacts, they are projected to thrive in the long-term. Early-stage companies with recently-raised capital are expected to be the least impacted, especially if they are well underway to developing initial versions of their technology, products or services. Waymo, for example, recently raised $2.5 billion, and Pony.AI $426 million. To survive the current recession, companies like these should reduce or optimize their burn rate and halt hiring.

On the other hand, late- and growth-stage companies who fail to raise extra capital could go bankrupt. Others may be forced to make down-rounds and indulge in complicated recapitalization, trying to attract new investors by simplifying previously complex liquidation preferences.

On A Positive Note …

A lot has happened since the last Great Recession. The past decade brought with it the digital revolution, empowering many companies to keep their doors open, their sales activities alive and support active. Some are even able to introduce new products and services remotely via video chat and social media channels.

This Too Shall Pass

1929’s Wall Street Crash sent the market spiraling into a two-decade-long recovery, and it will take years for our current markets as well. Historically, crashes that fall from peak to bottom, by close to 30%, take an average of one to two years to recover (and habitually lead to an economic recession). Market crashes with declines exceeding 30%-40% take three to four years or longer to reach the prior peak. Needless to say, sudden declines like this heavily impact investment decisions and overall business activity.

We can assume that the current crisis could take 3-4 years to recover from, meaning S&P, Nasdaq and other significant indexes may only revive past successes by 2024 or later.

Recent developments and worldwide lockdowns indicate that we are only in the beginning phases of this market crash. The longer this phase lasts, the longer we will take to recover. However, we will likely see optimistic spikes in short bursts of 5%, 10% or even 20% before gaining real momentum.

The Take-Home

While we cannot predict the long-term impacts of closed schools, missed work or the chain reaction currently hitting the global economy, we can allow low-risk groups to continue working, keeping essential service industries alive like healthcare and manufacturing.

The Whole World Is On A Razor’s Edge, Forced To Make Difficult Long-Term Decisions

Ultimately, we cannot let new pandemics paralyze the economy. By implementing long-term strategies involving the healthcare system, economy, society, technology, intelligence and national security means, we can prevent problems before they become bigger problems.