The New Normal
It’s hard to pinpoint exactly when the world changed, but with San Francisco and NYC essentially under indefinite lockdown, you can be rest assured that we will be talking about the world as pre and post Coronavirus, the same way we talk about the dot com crash and the financial crisis of 2008. While certainly not nearly as fatal as 2000 to the startup ecosystem, the Covid-19 pandemic of 2020 is going to pose a whole new set of challenges for companies and investors to have to think about.
The differences though stark, all have the same outcome— 2000 was caused by excessive speculation about internet companies that went public at insane valuations with nothing to back up those numbers. 2008 was a result of deregulation in the financial industry, resulting in speculation on mortgaged back securities that also ended poorly. It may appear as though the 2020 financial crisis is a result of speculative selling of stocks because people think the virus is going to disrupt business operations, and while that’s certainly a big reason, the reality is that such massive selloffs in the market usually occur for one reason — a credit crunch. So much of our financial system works on borrowed money, that the minute you can’t get credit to cover payments, you have to start selling equity positions. The credit crunch right now is real, hence the fed dropping interest rates to 0% and offering credit to ensure that companies have access to money to meet their short term liabilities.
So what does this mean for early stage investing? On the surface, perhaps not that much. VCs have more dry powder than ever before, and they need to deploy that money to generate returns for their LPs. Deals will get done (perhaps with a 30–60 day slow down period due to an inability to meet founders and a focus on the existing portfolio), and startups will be funded. However, when you dig deeper, a greater emphasis will now need to be placed on understanding what the new normal is. It is entirely likely that until there is a vaccine in place for Covid-19, we may have to continue to social distance ourselves to avoid another season of infection (and that’s assuming we actually manage to get this first round under control). A vaccine may take 12–18 months to get to market. In all likelihood, in person gatherings of any type may be severely reduced and restricted for the next 1–2 years. Even if not government mandated, it will likely be highly advisable.
While this will hamper a number of businesses, it also provides an opportunity for others to find ways to allow people to have social experiences without needing to physically be together. If we can no longer learn in classrooms, shop at stores, attend live events, eat at restaurants, workout in gyms, watch movies in theaters, or even work in offices, well, that sounds like a lot of problems that need solutions that startups can solve!
One of the things we constantly tell people is that the reason we invest in sports, fitness and gaming is because they are “recession resilient” — these are companies or products that go beyond just the average consumer into engaged communities that develop strong affinity and brand loyalty. These products become embedded into the every day life of a consumer and they help to shape habits. At the end of the day, when times are tough, people still need to find ways to entertain themselves and focus on their wellbeing. Nielsen estimates that time spent consuming media could go up 60% while people are sheltering at home.
If you take a family of 4 out to the movies, you’re going to end up spending about $100 for 2 hours of entertainment.
Instead, a $60 video game can provide entertainment for months. The largest publishers in the world — including EA, Activision, and Epic have launched free to play games that support thousands of hours of free entertainment. This will dramatically shift the way we engage with gaming content during a period where cost conscious consumers who are stuck at home communicate and play with one another. Over the past week, the internet is seeing a boom in traffic numbers from all sorts of streaming platforms, especially Twitch. Twitch viewership is up nearly 100% YoY from Q1 2019 to Q1 2020. eSports brands like 100Thieves have an opportunity to now reach tens of millions of home-bound content craving fans.
Going to a Knicks game will cost you a couple hundred dollars, and you’re pretty much guaranteed to watch them lose.
You buy an NBA League Pass subscription for $120, and you’ve got something to watch every night from October through April. Combine that with a second screen experience on twitter, and you could easily go weeks without having to leave your couch. Sports fans have almost no price elasticity when it comes to consuming and engaging with content about their favorite teams and players. With all sports on hiatus for a few months, the pent up demand for live sports will lead to a massive growth in consumer interaction and spend as soon as broadcasts are back.
It might be highly unadvisable to go back to a packed gym or fitness studio for some time, given the close proximity people will be in.
You subscribe to an on-demand fitness app for $9 a month, and you can now work out wherever you are, whenever you want to. We are very bullish on the the reinvented gym, that no longer relies on the old “breakage revenue” model, but rather encompasses both on-demand digital products and new physical experiences. On-demand fitness will not just be a short term beneficiary of the current global dynamics and macro impacts, as it has already established itself as a major growth driver to the industry as a whole. While still a relatively small percentage of the overall fitness spend, on-demand spend has increased ~60% since 2018 and ~130% since 2017 as compared to traditional gyms which saw business grow by ~3% since 2018.
Obviously combining a pandemic with a recession adds an extra layer of complexity, but the premise still holds true — if you’re stuck at home, you need things to do without spending too much money — sports, fitness and gaming offer that outlet.
While most of the world is cutting back on marketing spend and hunkering down, we’ve seen a number of our portfolio companies doing the exact opposite. For the first time in history, there is an audience of 300M+ people in the United States who are currently homebound, and spending most of the day either on their laptop or their smartphone. Some of our potfolio companies are going to keep them healthy now and in the future by guiding them through daily fitness and mental wellness sessions. Others are going to keep them entertained for hours on end now, and then on subway rides once they are back at it. Still others are going to help them connect with people virtually, even though they can’t meet them in person.
Some of the best companies in the world were born out of the ashes of a financial crisis, and we expect 2020 to be no different. We’re excited to see the ingenuity of entrepreneurs in full bloom over the course of the next year, as they navigate these difficult times and come out on the other side with incredible businesses that are built for the long haul.
Sports is the new religion, fitness is the new wealth, and gaming is the new community. As one of our portfolio companies so passionately preaches: In times of crisis, religion rises. Have Faith. #ReligionOfSports
About Courtside:
Courtside Ventures is an early stage investor in sports, fitness, and gaming. We have also as discussed with Forbes.
