Industry Insights: 8 Investment Sectors that Thrive Through Recessions
Lessons learned: recessions, resilience & returns
By: Nicolas Du Cray & Rajive Keshup
A version of this article was originally published in Crunchbase News
Technical or otherwise, there’s no doubt the global economy will fall into a recession in the coming quarter (if it’s not already). How long it will last is anyone’s guess, but historians and statisticians will note that the average recession lasts 15 months, while the last recession in 2008 was 18 months. This is typically followed by 48 months of expansion.
With this background in mind, and the recession timeline coinciding with the launch of our latest fund — Fund III, we’ve been digging into the past to unpack parts of the value chain that have historically done well, along with parts that didn’t previously exist but could be catalysts for future growth.
From 2008 to 2022 — Learnings from Top Performing Sectors & Macro Shifts
In 2008 — the iPad didn’t exist (we only just experienced the 1st edition of the iPhone), the dominant enterprise smartphone was still Blackberry and the dominant network technology was some combination of GPRS, EDGE and 3G. A lot has changed.
Looking at the 10 best-performing equities of the S&P 500 in 2008–2009, there’s no surprise in the top categories:
- Healthcare & Life Sciences (3)
- Discount / Used Goods & Consumer Staples (3)
- Budget Travel and Leisure (2)
- Logistics (1)
- Personal Services (1)
This is a good place to start, but today’s world looks very different from 2008 and especially since 2018–2020. We’re now used to remote everything (work, healthcare, staffing, freelancing) without compromising productivity. We’ve also seen a rise in volatility across all fronts — food shortages, energy transitions, security issues, cyber and otherwise — and the VIX is trading on average 2X of where it normally trades (13–15 points).
Lastly, we can’t ignore the effects of inflation — a newer factor in this recession. As a result, the cycle of cost of goods rising vs. incomes shrinking vs. layoffs will make investing during this period challenging.
Factoring in all of these macro changes, here are 8 investment sectors we believe will thrive in 2023 and throughout a recession. While this list is by no means exhaustive, it does stitch together a few characteristics key to resilience (e.g., being mission critical, enhanced productivity with limited resources, and a general flight to quality).
1. Digital Health
People need healthcare to live and are less likely to pinch pennies here, even when incomes decline. The technical term for this is price inelasticity. That said, recessions can still hurt healthcare companies with more debt or CAPEX / OpEx costs and pre-revenue / less cash flow. These enterprises may have less ability to absorb losses and may not be as attractive to investors in a period of suppressed venture capital funding appetite.
Therefore, it’s prudent to stick to healthcare companies that can add productivity cycles to existing infrastructure and allow for more robust patient monitoring and tracking (e.g., doing more with less). It also may mean steering clear of biotech startups in very early phases or pre-revenue — unless there’s a clear path to revenue within 12–18 months. But any investments that generally help healthcare productivity should do well. In our portfolio, companies such as Inato and Resilience have us very excited!
2. Discounted / Pre-Loved Goods, Consumer Staples & the Circular Economy
Discount Retail: The one stock that outperformed all other S&P 500 stocks during 2008–2009 was Dollar General (The Dollar Store), rising more than 60% that year, almost 2X the second highest-returning stock. Walmart also featured in the top 10 performing stocks, further cementing this theme. This makes sense as recessions generally induce massive layoffs and reduce income. When consumer household incomes fall, they either substitute cheaper goods or buy fewer items. Unlike a Netflix subscription, staple goods like food and household supplies are essential so to save, consumers turn to cheaper alternatives. For this reason, discount retailers are likely to do well in a recession.
Pre-Loved Everything: To dig into the rise of the pre-loved / used goods space, looking at a parallel market with a large historical dataset can unpack the key trends — used cars. As seen in the chart below, used cars tend to weather recessions better than new cars.
Recommerce & Circular Economy: The used goods / re-commerce economy has traditionally focused on larger volume categories that are “need-to-haves” rather than “nice-to-haves”. Used cars top the list followed by consumer electronics. A number of companies have jumped on this theme including Nike and Adidas with recycled sneakers; Burger King and Loop with recycled packaging; Ikea and Patagonia with a used product program; and H&M and HP with sustainable product materials. These are just a few examples of thousands of companies operating on a triple bottom line basis — offering cheaper alternatives with better customer experiences that make consumers feel good about planet-friendly purchases. Asset-light, customer obsessed marketplaces and distributors of “must-have” re-commerce products will win this period of play. Emerging players to watch in this space include companies like Reebelo, Servify and Cashify.
3. Budget Travel & Leisure
With energy costs at an all time high, and consumers looking to stretch dollars given reduced household incomes, travel will be prohibitively expensive during this recession. As a result, we expect a shift back to more local activities and staycations. This can already be seen with the recent surge in Airbnb Experience bookings and new hosts on the platform to help generate income. Companies involved with the infrastructure side of the house, enabling local travel and experiences, should weather a recession well. Against this theme, we have high hopes for companies like Peek.
4. Logistics
Product needs to be moved and stocked, recession or not. Supply chains never fully recovered from 2020 and geopolitical volatility, but demand never ceased. As a result, all parts of the value chain from warehouses to last mile delivery networks remain under great stress and new builds haven’t kept up. If you look up the price of a storage warehouse in your neighborhood, it’s likely doubled in the past 36 months. While all parts of the logistics value chain remain lucrative, we see particular potential in investing around productivity. Similar to healthcare, the play revolves around how we can squeeze more value and throughput from existing infrastructure. This includes tools like mapping, route planning, resource management, and seamless APIs to layer on device and resource connectivity. Volatility in the cost of energy and building materials will only make the need for productivity enhancements more valuable in the long term.
5. Personal Services
Two interesting themes to highlight here. First, regardless of a recession, most consumers will need to file for taxes, or tax exemptions, and companies will need to do their accounting. Thus, accounting and tax services will remain an annuity.
Second, it’s never been easier to start a company. As layoffs occur en mass, not everyone will rejoin the traditional workforce. This is where a plethora of services will come into play to cater to this generation. We should see a healthy rise of new company formations and freelance workers requiring everything from website design and marketing services to invoicing and payment gateways. Companies such as ZenBusiness should do incredibly well as traditional new business formations typically exceed SME churn during a recession. Companies that address the entire freelance workflow from finding the next gig to invoicing and getting paid should also thrive in this environment as fractional or gig-based labor takes off.
6. Critical Stack SaaS Only
While software may be eating the world, not all is created equal. We’ve noticed a material amount of churn across enterprises where the software is either one of a handful of players within the stack or is not mission critical. Our view is only SaaS which has an ‘easy to measure ROI attributed back to cost dollars will thrive during this period. The rest will have to fight to keep key accounts and will likely move to a consumption-based pricing model to stay relevant. When it comes to SaaS, think about the 3 Cs…Cost, Criticality and Controls. If the software doesn’t help manage or save costs; if it’s not mission critical (e.g., can’t conduct business without it); and if it doesn’t help maintain control of businesses or tasks…then it may experience headwinds in the coming 12–18 months.
7. The Energy Reset
People need power and energy for everything. Utilities have historically performed very well in recessions despite being increasingly CapEx-heavy businesses. Globally, we’ve woken up to the reality that given geopolitical volatility and the consortium controlling oil production, we need to find a more robust source of energy. More broadly, this recession will take place in the midst of a world-scale energy transition that aims to decarbonize and allow us to move away from fossil fuels. The Paris Agreements imply aggressive targets, reducing global carbon emissions by 45% by 2030. Consequently, the two threads to pull center around making energy output and management more efficient while digitalizing the grid to prepare for the energy transition, so it can balance multiple and intermittent energy sources like wind & solar.
Another interesting segment is the trading and measurement of carbon — this will draw a heavy level of regulation and scrutiny in the years to come as well as impact the P&L of businesses via instruments such as carbon emission-related taxes.
8. Remote Everything
2020 loosened several tightly held assumptions about the future of work and while a number of these have reversed back, many have changed for good. We expect more companies to hire remote teams, in foreign or lower-cost-base markets, to maintain high levels of productivity while increasing profitability — and use cash for more strategic initiatives. Companies that help identify, hire, onboard, pay, handle taxes or train remote corporate staff will likely benefit. Companies like Deel and Multiplier should perform well and take advantage of the global shift in work.
Parting Thoughts — Digital Transformation Must Go On
Of course, there are several other trends that are starting to show great promise such as the tight integration between content and commerce creating new ecommerce categories (e.g., social selling) or the future of food and agritech or even Web3 security. However, these are all still emerging as topics of scale and are in their infancy stages. For now, we believe these 8 key sectors will be those that thrive through the coming (or current) recession and represent the bulk of digital transformation in the coming 24 months.
Buckle up, it’ll be a bumpy ride!
