What is new in this crisis? The role of Science. — Part 1: Learnings from the btov community

Political leaders will have to make decisions based on sharp minds from the life sciences, economics and ethics

After a month of never-before seen events, we are attempting to sort out the current situation for the btov community and ourselves. As a learning organization and investment platform we are grateful to our btov community who have contributed to this post and are always happy to share their “Investment Intelligence” with the community.

Political leaders have to make crucial decisions based on weak data

The global impact of COVID-19 and threat to public health has been profound and overshadowed by data with very high error bars, from infection and case fatality rates to the supply chain knock-on effects on the economy. We are in a situation where both numerators and denominators of any impact variable have a very broad statistical variance. Will our governments really be forced to choose between severely damaging our livelihoods through extended lockdowns or sacrificing lives?

After the necessary initial extreme lock-down decisions, voices are now emerging around more measured government responses and intelligent testing and contact tracking like some of the Asian countries have shown us.

To narrow down the prediction spread of our models and to better inform political decisions, it is certainly necessary that epidemiologist, virologist, economist, public policy analysts and ethicists will have to collaborate closely to advise politicians in deciding how to best navigate the world out of the crisis — a challenge of “conducting an orchestra of experts”!

Capital Markets and the Venture Capital industry

During its Investee call on Mar 15th on the Corona Virus impact on the economy, Goldman Sachs stated that “technically the market has been looking for a reason to reset after the longest bull market in history.” The company also stated that “there is no systemic risk; no one is even talking about that. Governments are intervening in the markets to stabilize them, and the private banking sector is well capitalized. It feels more like ‪9/11 than it does like 2008.”

Asian capital markets have started picking up again as does business and life. Europe seems to be stable after a landslide and we assume that the US markets will suffer some more as panic is growing there. While tech stocks have suffered over-proportionally during the last financial crisis, the big tech companies are hit disproportionately compared to the Dow Jones Index this time.

The capital markets and Venture Capital are connected to one another — directly but with a time lag. The connection is most relevant when venture capitalists sell shares of startups they funded years before. Both channels — the trade sale through M&A as well as a listing or IPO — are directly impacted by the capital markets. This means for now that it is not a good time to sell but likely a good time to start investing over the coming years.

What this environment means for your startup investments

What have we learned from previous crises? First and foremost, we have learned that in good times portfolio companies raise as much capital as is possible (and sensible) and that, if possible, companies are sold in times when exit conditions are favourable. For four years now, we have actually been preparing for a downturn. We have therefore sold quite a few investments in recent years and many of our “big” startups have liquidity for at least one year. That is already reassuring.

Likewise, we had already learned collectively in the startup community during the financial crisis of 2008 that it is vital to reduce costs very promptly in response to an external shock to the economy in order to reduce the associated emotional stress within the remaining employee group and focus effectively on stretching liquidity in the most productive way. As in 2008 with its R.I.P Deck, Sequoia was again the first investor writing the in our view best blog post in the venture capital industry already on March 5. btov spoke with the CEOs of our investments and compiled a list of measures for the younger entrepreneurs to use as a starting point for their own analyses and measures. All companies have thought through new scenarios and have adopted their operations according to it already.

On our side, we have divided all btov startups into a matrix in order to gain a portfolio overview of those that are currently affected by the situation due to their industry and business model (e.g. startups from the travel industry), as well as those that can benefit from it (for example signature digitization) or a third group for whom the effects are still unclear today (as they might have complex supply chains which are in changing states of disruption). We have also divided the companies into very young ones, where sales (and gross margins) are less relevant or not relevant at all for budget fulfillment because the primary focus lies on product development, and those that are in the growth phase and depend on contribution margins to finance overhead — here too with a medium stage. Additionally, the capital reserves in the companies were considered, as well as our own capital reserves that can be allocated to those companies through our various vehicles. We also made an assessment of the co-investors involved. We are generally positive with regard to the btov portfolio under the V-shape hypothesis — where the markets are assumed to get going again quite soon and will not be closed down in further waves over the summer and fall due to external effects.

The various investment teams on the btov platform are currently preparing four different initial investments. In none of the cases have the terms been adjusted by us, as our medium and long-term hypotheses have not changed and we want to be loyal partners to our entrepreneurs — especially in difficult times.

What we expect in the coming months

In the coming months, we are expecting further disruption, overwhelmed healthcare systems and probably worst of all a worried population, all sliding us globally into a long recession. Governments might soon have to make very tough decisions — as outlined by the recent Wall Street Journal editorial suggesting governments might come to a point of needing to decide between severely damaging our livelihoods through extended lockdowns or sacrificing the lives of thousands, if not millions, to the virus.

McKinsey disagrees — and is suggesting to “timebox” this event — avoiding permanent damage to our livelihoods — by building strategies to suppress the virus and at the same time shorten the duration of the economic shock, not least by learning from the Asian experiences around contact tracing in particular. “China, Japan, Singapore and South Korea have shown that these measures can stop the virus from spreading and enable economic activity to resume, at least to some extent.”

What we do not know

The biggest unknown for btov is the extent of the lock-down period. Analogous to McKinsey’s analysis of this issue mentioned above, we hope that we are dealing with a V-curve. Looking to China gives us hope, but we are still inevitably flying blind.

It is absolutely touching how humanity collectively has reacted to this crisis (from singing together on balconies, reflecting on what is really important in life, to hotel chains offering free rooms to doctors and support staff etc.), and how creative many have become (Decathlon has found a way to turn diving goggles into masks).

But: Do the aid programmes reach the needy in society or — in the case of btov — the startups at all?

In almost all European countries, programmes that can represent 50–100% of national budgets were passed overnight. The long-term effects of these expenditures (which are hardly investments) cannot be foreseen.

Own observations, food for thought and first learnings from the btov community

Part of our mission at btov is to be a “learning organization” — which is why we put together this collection of thoughts on the past weeks and share it with you in the sense of “collectively (re)thinking”. Let us start with some thoughts and questions about the current and future geopolitical situation:

• How will we counteract the diseconomies long-term in the globalized world of tomorrow? btov investor Stefan Loacker reminded btov of the model of Diseconomies of Scale by Prof. Haller (presentation here). There you can also find Dürrenmatt’s quote: “The more people act in a planned way, the more effectively coincidence can strike them”.
• What does it mean that China, Russia and Cuba have sent doctors and medical material to Italy to fight the epidemic (Spiegel article here)?
• On March 16th, we had a conference call with a US VC who stated that this day will go down in history. He was referring to Jack Ma, the famous Chinese entrepreneur and philanthropist, who on this day announced to send masks and test kits to the US to fight the coronavirus.

• btov Partner Andreas Goeldi noted that in comparison to Europe and the US most Asian countries have had much better communication around how to behave — not only communicating to the adults, but also targeting information towards children through comics via social media.
• Japan, Korea, Singapore or Taiwan have been much faster at communicating across all of society in a much clearer way it seems. btov Investor Max Burger in Hong Kong stressed the fact that the combination of human psychology and social media has amplified irrationality and grown it exponentially. In this context he stated that «the virus really comes through Facebook».
• btov Investor Otto Bruderer tells us that hardware orders (needles etc.) from Chinese textile manufacturers are distinctly above the previous year’s orders.
• In an update call with Equippo entrepreneurs and shareholders, Sumitomo told us that 98% of construction projects in Japan are still going on, which seems to align with the situation in most European countries.
• We have now seen in the past few weeks how the various Swiss cantons and German states have switched over to sudden homeschooling. We have seen everything from “the curriculum switched to online over the weekend” (in the canton of Appenzell) to “a mere letter home with instructions three whole days after schools were closed”. This made us think of a quote from btov investor Joachim Schoss from 2010. Back then he was involved in the eLearning start-up Bettermark and had observed the implementation of online learning materials and didactics in different geographies: “developing countries are developing while developed countries are developed” — aka digitize much slower.

What also distinguishes btov is the generational model. From within the btov community we have looked at the current situation through the lenses of the different generations and can see the following perspectives:

• We asked our children what they thought of the Corona crisis. The answers were clear: “That’s cool, I can play more now” and “it should only last until the summer holidays”.
• Adolescents concerned about climate change wonder why so many flights can suddenly be dispensed with.
• People in their 20s and 30s now seem to be surprised by the “disruption” they had regularly called for. They seem uprooted and are surprised that it can now affect them personally.
• The generation in their 40s and 50s is experiencing the third crisis, and is more or less cold-blooded in managing it.
• The generation of the over-60s — due to its distance to daily business, intellectual analysis and learned intuition — seems to have anticipated much of this better than anyone. We were particularly impressed by btov investor Konrad Hummler and a friend from the btov community: Both of them sent an analysis of the situation to the btov partners in mid-February, pointing out that they had hedged their stock portfolio with put options and recommended this to their friends. Their timing could not have been better.

Thus:

• We at btov will place even more emphasis on the generational concept in the future.
• We want to give much more weight to “contrarian views” in the future.

To sum up…

To close this memo we do wish you and your beloved the best health and hope our country leaders will take well informed, wise decisions in the next weeks.

Our economy is at risk. Destruction occurs fast, reconstruction takes time. The “Swiss, German or Dutch Way” seems to be a promising path where “containment and keeping business open” is balanced.

Please also read our interview with Dr. Philip Schnedler, Managing Director at Spinoza Capital, here, in which he talks about the current corona crisis, the effects on financial markets and why a calm risk assessment should be a priority.

Thanks to all btov contributors: Florian Schweitzer, Andreas Goeldi, Christian K. Winkler, Jochen Gutbrod, Benedikt Kronberger, Christian Reitberger, Robert Gallenberger, Christian Schuetz, Luca Martinelli, Michael Wieser, David Hug, Christian Theiss as well as Vanessa Gstettenbauer.