How COVID-19 Is Affecting the Global Startup Ecosystem
On July 22nd, we wrapped up a webinar with our long-standing partner in Japan, the New Energy and Industrial Technology Development Organization (NEDO), to discuss how COVID-19 has impacted the venture and startup landscape. Our guest speakers were Marvin Liao, a former partner at 500 Startups; Satoshi Miyagawa, CEO of Life is Tech USA; Mitchell Weinstock, Partner at HP Tech Ventures; and 10X Innovation Lab’s CEO Klaus Wehage and Head of Entrepreneurship Aaron McDaniel. The panelists gave insights on how the startup ecosystem would change and shared advice on how businesses can stay competitive amidst the global pandemic. The following transcription, with some minor edits for clarity, outlines the main discussion points from the webinar.
KLAUS WEHAGE: In surveys, founders have said that about 45% of businesses have been struggling with slowing revenue due to the COVID-19. Some of the toughest challenges for founders right now is being able to stay close to customers as well as keeping a high-performing “WFH workplace” and team morale. In addition, investments have been reduced by 44%, which obviously begs the question, “Will this trend continue?” Satoshi-san, as a business leader, how do you build great customer relationships in this new digital format and keep your employees engaged and motivated? Mitchell and Marvin how has COVID-19 have impacted your day-to-day as an investor?
MARVIN LIAO: My situation is pretty much reflective of a lot of other early-stage VCs. When you have these big shifts, like consumer behavior shifts, there's just a lot of stuff going on and we are trying to synthesize and make sense of where the market will move towards. One of the first things you do, especially if you have a portfolio, is that you don't look for new companies. You have to spend a lot of time with your existing portfolio companies. You help them think about re-shifting their business. Simply put, knowing that we might be going into a recession and knowing that there's a health crisis now, you're not looking for new deals. You have a responsibility to your previous portfolio.
MITCHELL WEINSTOCK: What's happened is that because we've always played a dual role, it's now become lopsided, where one of the things corporations are good at is reducing risk. And we’re the riskiest part of the whole company. We're picking the riskiest things they can possibly do. Moving towards commercialization versus investments is what is happening inside our group. What we're trying to figure out is whether we should help the company land something that they can ship into 2022 versus trying to figure out if we need to be in a $10 million investment round in a startup that doesn’t give an immediate ROI.
The vetting process that we have for new investments is still the same we would do for a commercialization opportunity. As a company, we can help by bringing cash and large orders. That's pretty good. We're looking at deals and investments in general but we're trying to figure out if we can do something that has a short-term impact instead of investments and pay back over time.
SATOSHI MIYAGAWA: We just launched a product called Code Illusion in the States last summer. Currently, we are mainly focusing on B2C customers in the States. As a subsidiary of a Japanese startup called Life is Tech, Inc. we have provided offline and online education to more than 50,000 students in Japan. Because of the COVID, right now our US company is focusing on online education as a natural step because the Americal education model has been disrupted by COVID-19.
KLAUS WEHAGE: What are some of the alternative resources that you guys can provide investors during this crisis?
MARVIN LIAO: It's a sort of combination of advice with introductions and tapping expertise, where possible. For example, for either partnership, we like helping them where these other larger companies are like looking for some help, even better if you can introduce customers. That’s something that as investors you try to do. Many of us who've been in Silicon Valley for many years know a lot of people where it's like, "Hey, I know this person. You should have talked to them either from hiring or you should talk to this person moving forward.”
MITCHELL WEINSTOCK: I'll ask the people I know, “Would you be interested in talking to these guys? They have X and I think it falls into your investment thesis.” I'll make those kinds of connections. Another important thing is to provide mentoring and be a good coach. It's asking the right questions that can help founders navigate the hurdles and day-to-day challenges, especially during COVID. As an investor, we try to help our founders and provide them with the resources and tools to be able to execute and excel their business.
KLAUS WEHAGE: Awesome. I just want to build on some of the comments that you made just now a bit of the difference between maybe the Japanese entrepreneurial culture and Silicon Valley. This type of support (coaching, mentorship, introductions, etc) in Silicon Valley you see less of in Japan, at least from my conversations with investors, founders, and entrepreneurs. How have your team, Satoshi, changed your way of managing and providing support to your team? How do you keep the team morale up?
SATOSHI MIYAGAWA: We have two things that we do at a high level. One is we try to conduct short meetings every day with our teams for approximately 5 to 10 minutes, just to show them that we’re involved and care about each member’s performance and professional development. Moreover, we try to respond to individual challenges and help them navigate those. The next thing we do, from the management point of view, is that we communicate less formally in Slack, text, or wherever to build closer relationships with our employees. Our team is focused on reducing the time spent on management and give our employees the autonomy to the executive on the direction and tasks set by the company.
KLAUS WEHAGE: What do you see from founders and startups in terms of what they're struggling with from a daily operational perspective?
MARVIN LIAO: I still think everyone is getting accustomed to operating in this new environment. Working from home is very different compared to being at the office, and many, have kids that are not in school and hence, have to balance work and family. These are the things that people I speak with are grappling with. Moreover, many of the startups I advise is still battling with their business projections as there’s a lot of uncertainty in the market. We literally have no idea about how COVID will affect industries and the macro-level economy as a whole.
Until now, we have seen some industries being hit way harder than other ones. For example, if you are taking in the travel industry where most of your customer base is the average consumer, you're in trouble. As an investor and former business operator, I am with the perspective that you need to revisit your business model under these circumstances. You can’t operate as per usual and if the current model doesn’t make sense in this environment, change it. Find a way to unwind things focus on unlocking market potential even under the hardest economic situations. For me, as an investor that manages a large portfolio, I am trying to do my best effort to help founders rethink their business, as the situation we’re in right now, can be overwhelming.
MITCHELL WEINSTOCK: You think about all the collaboration problems that come with WFH and less in-person conversations. One of the things that bother me the most is that we have all these artificial cut-offs in our conversations. If we were together in person, we would just keep talking until the conversation time is up, but the zoom can come to a sudden end with technical issues. It’s impossible to wrap up and go for a beer later. These sorts of interactions are invaluable and without them, we’re less likely to do any business together, that’s a simple fact. There's a lot of stilted conversations that are very hard to recapture with WFH and virtual meetings.
“We’re going to be doing this for a long time and you better get comfortable at it. ”
Some of the things that I'm now looking now are what people (ie startups) are doing to recreate this experience? How do you help everybody operate better and more efficiently under these circumstances? As Marvin said, it’s not going away. I completely agree with him. We're going to be doing this for a long time and you better get comfortable at it. Hence, let’s focus on how we all can help companies get through this period.
If it's retrenching, do you have enough money to make it through here? Those that are in the best shape are pre-revenue companies. You don't need money right now. You just got a slug of money back in December or November and you're good for 24 months. I don't have to worry too much about those guys. But the people who are supposed to come up with dollars, boy, they're in all kinds of trouble. Though, there's a lot of things depending on who the customer is. SMBs have a particularly bad problem, whether they're startups focused on them, or whether you're on the receiving end. Everyone is trying to figure out how to survive.
KLAUS WEHAGE: Awesome. Thanks, Mitchell. That was a great segway into my next question about investment strategy. Has your investment strategy changed during COVID-19? Where do you see a change happening and what interesting areas do you recommend looking at?
MARVIN LIAO: I'm best known for investing in things like B2B, enterprise SAAS (Software as a Service), and SAAS- related products but I started getting much more interested in video games. I started becoming much more interested in B2B solutions like IoT related products, particularly manufacturing and supply chain management, just because of the continued trade war coupled with COVID.
Those areas are interesting to me as they have become sort of COVID beneficiaries. I've followed the gaming industry for a while and it continues to skyrocket, even during this crisis. Media tech is another area that is interesting to me and haven’t previously dabbled with too much. It’s gratifying to see that there are some markets in some industries that seemed not to be COVID beneficiaries but are proving the opposite. My thesis is that I'm leaning more toward consumer stuff now even though we are going into a recession. I'm a firm believer that there's a lot of cheap luxuries that people are willing to pay for despite the economic crisis and reduced buying power.
For example, video games you're going to pay for. You're going to pay a little bit extra for a high-end video game and game device. You're stuck inside, you have a lot more time to spend on games and new media products. Just look at established media players like Netflix. Within the last six months, they have experienced crazy growth compated to last year.
MITCHELL WEINSTOCK: We're looking at things where people are trying to challenge the status quo of an industry. For example, we're seeing people starting to challenge products like PowerPoint again. It’s essential to work, but I mean, no one really enjoys the PowerPoint product. As examples, we're seeing companies emerge like DeckRobot and Pitch. People you'd never think would try to attack those areas have gone ahead to tackle the issue of work productivity and collaboration. Building better and more engaging collaboration tools will be an area that companies will continue to invest in.
Another area is data loss and privacy. Maybe people would never have thought to go get a VPN for anything other than trying to use Netflix out of the territory, but now they have an increased and real concern. SMBs need to start thinking about data loss protection and VPN. But that's an enterprise sale, of course. For people who are now worried about cybersecurity attacks, they're becoming more and more concerned about this issue and want solutions to mitigate the risk.
KLAUS WEHAGE: Will biotechs keep being funded? Will restaurants, travel, and the retail industry be interesting to look at post-COVID?
MARVIN LIAO: I'm not a biotech investor but I do think like biotech was already very interesting prior to COVID. I don't see that changing. There is a lot of money going into it both private and public sectors for good reasons. Biotech was well-positioned even before COVID. Retail and the travel space is experiencing severe challenges and it will take a while before it recovers, probably more along the lines of three to four years at the earliest. But I'm also very pragmatic.
KLAUS WEHAGE: Do see any new economies/opportunities appearing? What about the sharing economy and companies like Uber, etc. What’s the long-term effect?
MARVIN LIAO: Looking at Uber and a lot of those companies, they weren't that profitable, to begin with. They made a lot of revenue so you could argue that's product-market fit, but then, the market shifted and changed dramatically. They do not have a product-market fit in this environment but luckily have raised so much money. It's going to be a while before people come back. Nobody wants to take the risk. Hence, we will see if these companies will be able to survive long-term because they're impacted badly by COVID.
“Surviving is winning. ”
KLAUS WEHAGE: Any final thoughts?
MARVIN LIAO: This year is just gonna be tough. This will be my fifth recession and I look back on almost every single crisis, thinking, “yes, these were awful but fortunately didn’t last forever.” We need to remember that recessions will also leave a lot of great opportunities for us to innovate and improve the world. I’m an optimist and think we’ll see new investment opportunities arise and job creation. These big shifts in the economy like consumer and corporate buying behavior open up a tremendous amount of opportunity for more businesses to enter new markets. After 2021, there's going to be lots of interesting opportunities for startup founders, companies, and investors alike. You kind of just gotta make it through. Surviving is winning.
KLAUS WEHAGE: Guys, thanks for sharing and appreciate you taking the time to sit down with us. Great insights and looking forward to following how things market will shape out over the comings months and year.
If you are interested in learning more about 10X Innovation Lab and the work that we do to support corporates, startups, governments, and universities you can contact us directly at klaus@10Xinnovationlab.com.