One thing my C2 Ventures partner and I always enjoy as a side benefit to sifting through our weekly pile of new deal flow is the names of companies.

Many are fairly straightforward, some quite clever, some confusing, and others completely off the rails, but we love them all (especially the last two categories).

Below is a list of my favorites (along with my attempt to decipher each).

Note: I published version 1.0 of this in early 2021 and now that we’re about to cross 2,000 deals reviewed, it seemed like the right time to update it. Hope you enjoy it.

Informal poll for the comments section:

1) What do you have stuck in your head right now?

A) Love Shack

B) I Only Want to Be With You

C) We Built This City

D) All of the above / I hate you

2) What dates me more?

A) My movie references

B) My song references

C) My face

What’s In a (Startup) Name 2.0? was originally published in In the Trenches with C2V on Medium, where people are continuing the conversation by highlighting and responding to this story.

Below is the transcript of my recent interview with Lucas Takahashi, founder of our (C2 Ventures) portfolio company, Medmo. I hit an unexpected gold mine with one of the questions, but you’ll have to read on to see what I mean.

Hope you enjoy it!

[00:00:00] Matt: Welcome back to our founder interview series with Lucas Takahashi of Medmo today; welcome, Lucas.

[00:00:14] Lucas: Thanks for having me, Matt; I’m excited to be here.

[00:00:17] Matt: I’m glad to have you. Before we kick off, can you give the listeners the quick and dirty on Medmo?

[00:00:24] Lucas: Yeah, absolutely. Medmo works in the medical imaging space. It’s a fundamental piece of healthcare, with over a hundred billion dollars spent annually in the states alone. And it’s only 5% digital today. Most of it is done over phone, fax, and email. Patients get their images, usually on a CD run like a disc. As. a result, patients pay much more money than they need to. Imaging centers have a lot of unused capacity that goes to waste, and providers struggle to administer this. So it’s very costly for everyone. Medmo is the connective tissue within this market to help navigate patients to the best imaging center and create an excellent patient experience. By doing so, we are removing barriers like cost and access and improving patient outcomes for imaging centers. We’re increasing the utilization and efficiency of their machines.

[00:01:20] Lucas: And for the ordering physicians, helping them take care of their patients and get them back in the office for follow-up care. Medmo works with partners like virtual health groups and ordering physicians directly. Plus, we have a pretty big direct-to-consumer model, which you can see on our website, where patients can easily order and navigate the site.

[00:01:40] Lucas: Our goal is to take a pretty big, sometimes scary or unfortunate piece of a patient’s healthcare and make it easier, and most importantly, cheaper for them so they can get the care they need.

[00:01:53] Matt: Awesome, thanks for that. So tell me, what was your worst business idea that you considered pursuing or pitching?

[00:02:16] Lucas: I actually have an answer right off the bat for this. By the way, I could still see it working out one day, but a buddy and I were thinking about a side project for fun. A company called Future Mail. And The concept is tourists or people traveling around countries could write a letter to themselves in the future. So they could write the letter, hand it to us through a Future Mail envelope, and pay a dollar per year to hold it. And then, years later, we mail it to them. So I think it has some merit, even if it’s not the best business idea.

[00:03:09] Matt: (Laughs) Lucas, we love you, but you may need to go to a different VC firm for that one.

[00:03:15] Lucas: (Laughs) Yeah, we pivoted pretty quickly, even though there was a project plan around it.

[00:03:21] Matt: Oh God, I love it. What about a business idea you wish you had run with because someone else did it, and it’s crushing?

[00:03:37] Lucas: Yeah, there’s two of them. One is concerning student debt and how people finance education. Six or seven years ago, we were thinking about this idea of pitching to a pool of investors, “Hey, I want to go to Penn State. This is what I’m interested in, and here’s my background. Will you give me X dollars to fund my education?” Then you don’t start paying the dollars back until you get a job with a specific salary.

[00:04:16] Lucas: Many students leaving school have to take jobs that might not be best for their careers just to pay off debt. This leads to adverse outcomes, and no one wins. Whereas this model gives students the flexibility to find the proper role, investors or these institutions might be offering something like that. It incentivizes them to help get good jobs as well. And there’s a whole bunch of excellent content around it. And the math kind of works. A company called Upstart began that way. They’ve completely pivoted, now they’re a public company, and there are a few others.

The other idea is around housing. I think a company called Rhino is already doing this. So you have to put down a deposit of three months’ worth of rent when you lease an apartment in New York City.

Many people can’t afford that, so Rhino built a model where instead of doing that, you just pay a monthly subscription, similar to insurance, to offset that deposit. The landlords no longer have cash balances like receivables or liability because they can’t use that money. So it’s a way for them to get income from these groups. I wish I had pursued that, but I’m happy where I am today.

[00:05:31] Matt: Those are two excellent ones. But I think tackling the medical industry’s inefficiencies is about as deep of a pool as you could jump into. Remind me, is this your first time as a founder?

[00:05:39] Lucas: Yes, definitely.

[00:05:48] Matt: So what’s been your biggest positive surprise?

[00:05:53] Lucas: It’s rewarding to build a team with great people. Coming into the office and working with amazing people who believe in the business and each other and work well makes it so much fun. You think it will be fun when you hit these big milestones, like raising tons of money or helping many patients; that’s all great.

[00:06:24]Lucas: But I underappreciated the day-to-day, small wins, and the small challenges and getting through those with a fun group of people. Also, being able to control the team culture. So I think that’s been the most rewarding, surprising, and positive thing.

[00:06:42]Matt: What about the biggest negative surprise so far?

[00:06:45] Lucas: If you decide to raise capital through the VC/Investor game, there’s much to learn. Some things are frustrating, and no one’s doing anything wrong; it’s just how the market works. Both from the investor’s and the founder’s side. But the amount of fundraising, an ongoing process, has been fun and exciting but sometimes very frustrating.

[00:07:36] Matt: That makes sense. I would say the same thing about raising venture funding money. So let’s move on to your number one customer pet peeve.

[00:07:50] Lucas: Part of being in the healthcare space is selling to physicians. I do not have a healthcare background, so in the healthcare world, long before COVID, you sold into these groups by building relationships in a very old-school way.

[00:08:16] Lucas: And I mean, you show up with lunch and things for the physicians. There are still some legacy mentalities today that expect stuff like that. And that’s totally fine, but I think the pet peeve for me is that I’m here to try to help you. They will not hear a potential opportunity because we don’t do all these bells and whistles. That doesn’t make sense, and it’s not how business is really done, nor do I think it’s appropriate.

[00:08:50] Lucas: So that’s always been a point of contention and a little frustrating. That being said, I see their side of it. They get bombarded with other services, some of which are really bad or great. They don’t have a lot of time because they’re helping patients.

[00:09:08] Lucas: They’re not executives who are supposed to be doing meetings all day. So I see their side of it. But at the same time, it’s frustrating because the go-to-market is challenging with some clients due to historical mentalities.

[00:09:24] Matt: What about your number one hiring pet peeve?

[00:09:33] I’m probably a pretty bad interviewer because I like everyone. So I have a great team that’s good at recruiting. So this is probably my one Achilles heel, not being prepared. It doesn’t take much to even come off as prepared, but when you’re not, that really drives me nuts. It reflects how you will handle other things, your true interests, and maybe the role. My advice to anyone interviewing is to have a couple of questions ready. So if someone asks, “Do you have questions?” Have some generic ones that you can always use that apply to any company. It’ll show that you’re curious, which is, I think, is one of the most important elements and DNA that we look for is curious people who want to know more.

[00:10:35] Matt: All right, last of the pet peeves, number one VC pet peeve?

[00:10:42] Lucas: (laughs) That’s a good one. There’s a lot in that, but one of the qualifiers is we’re early. Revenue is a new and exciting thing for this year. Prior years when we were raising, revenue wasn’t such a qualifier as the first metric that an investor looks for. But there’s so much underneath the hood, right? For example, are the margins negative or zero on that? Or are they 90%? Is it recurring? How is it recurring? What’s the cost to acquire that revenue? There are so many other things, so I’ve always thought it was interesting that revenue is the main thing. So I totally get that it reflects a good proxy of the business’s maturity.

[00:11:31] Lucas: So it’s fair to ask, but I’ve had many great conversations with investors who do not care about revenue. They wanna understand the business and what we’re doing in the market. And I’ve had a lot of bad conversations with people who are really focused on the revenue story. And then they don’t really ask about the rest of the business and what we’re doing. So, it was interesting that the first question is, where are you at, and like run rate when there are so many other things to ask. I don’t disagree that it is a pretty standard proxy and probably a good understanding of the maturity of the business.

[00:12:11] Matt: It turns out that is my number one VC pet peeve, focusing entirely on revenue, and without thinking about where it came from or how efficiently it was acquired.

[00:12:24] Lucas: Well, hopefully, it’s a benefit for us in a couple of months, and I’ll be happier that people are asking about revenue.

[00:12:31] Matt: I think you’ll be fine regardless. Let’s move on to the meanest and/or funniest feedback your company or product has received from friends, family, investors, or customers.

[00:12:44] Lucas: Early on, it was, this doesn’t make sense, or no one really cares about this. In the past, one of the funniest things from clients is that we’ll call them and say, “We’re Medmo,” and they’re like, “Oh, we know Venmo. My wife uses Venmo.” So we got confused with Venmo a lot, which I thought was really funny. And we probably need a branding exercise in light of that. But, the big one was with investors; I call it investor goggles. We are in the business of helping patients save money; we’re negotiating special rates, filling used time slots, kind of like that price line model. So many investors were like, “Look, if I need an MRI in the hospital, someone just sends me downstairs, and I get my MRI. So having to explain to them, that’s great for you because you have great insurance and can afford to go to a hospital. But that’s the most expensive place for a lot of people.

[00:13:50] Lucas: 40% of Americans cannot afford more than a $300 or $400 expense when it comes to this. So there are investors that resonate with that. But others didn’t think it was a problem.

[00:14:11] Matt: Now we’re going deep on who Lucas is. So be excited. What is your last meal request?

[00:14:22] Lucas: I’m half Japanese and grew up with many Japanese foods, so it’s going to be Katsu. It is a well-known Japanese dish, like a pork cutlet with cabbage and rice. It sounds simple, but if you go to Japan, you have to get that. It’s like my favorite dish, 100%. So I’m going out on that for.

[00:14:49] Matt: So I’ve been to Tokyo twice, and I managed to not have that.

[00:14:53] Lucas: You’re gonna have to go back.

[00:14:58] Matt: We’ll have your exit party in Tokyo in a couple years.

[00:15:05] Lucas: I would love that.

[00:15:06] Matt: Awesome. All right, what is your least mainstream hobby?

[00:15:09] Lucas: This is so random, but at a younger age, my parents were totally freaked out by this, but a friend took me skeet shooting. My mom was terrified by this, and I don’t even know how they allowed me to do it.

[00:15:28] Lucas: At 14 years old, we met someone who said, “Hey, there’s this junior tournament out at Long Island. You guys should go. You’ll meet many other kids who shoot, et cetera.

[00:15:48] Lucas: All it took was for my mom to meet one person who said, “ Oh, I have a full scholarship to whatever school because I shoot skeet.” A couple of years later, I’m in the game and became an All-Americans skeet shooter in the summers.

[00:16:08] Lucas: I would travel all over the country. And my mom and dad started shooting for fun. I go to the range every once in a while as a hobby. So that would probably be the weirdest hobby to have, but it is fun.

[00:16:22] Matt: Lucas, that is incredible. You just made all of these interviews worth it. That’s why we ask these questions because I did not see that coming at all.

[00:16:30] Lucas: I was waiting for you to take me to the range for fun and I was gonna hustle you. Don’t tell Chris to watch this.

[00:16:40] Matt: I won’t tell Chris, and even better, there’s a beach club here in town that Chris belongs to, and in their off-season, you can shoot skeet. We will have to do this.

[00:16:57] Lucas: Let’s hustle, Chris.

[00:16:58] Matt: We’ll tell him you always wanted to try it. Could you still go and compete and do well in a competition?

[00:17:13] Lucas: I don’t know; I’d probably do okay. I was shooting a lot back then, and it’s kind of like the repetition. Still, it’s definitely a mental sport. Hitting one clay vision isn’t that hard once you know how to do it. It’s like shooting a hundred straight without missing. So it’s more of like a mental thing. I’m not good enough to win a competition, but good enough to hustle Chris hard. So we’ll be in good shape.

[00:17:37] Matt: You don’t need to be any better than that. Okay, moving on, you have a table for four and access to any person living or dead. So who are your three companions, and why?

[00:17:51] Lucas: Oh, that’s a tough question. I would love to put a bunch of weird characters together and see what happens. Maybe Benny Hunt, or it would definitely be a Bill Murray situation. I would love to throw Jackie Chan in the mix. If you watch a YouTube video of that guy’s career and what he’s done, he’s crazy with all his stunts and stuff. So respect, I love Jackie. We’ll put him in there, and then just to mix it up with someone hilarious, I’ll put like a Vin Diesel. You know Jackie, Bill, and Vin to see what’s going on?

[00:18:39] Matt: Oh, that’s awesome. Bill and Vin Diesel would be really interesting because Vin could be incredibly entertaining or just a huge disappointment. I love it.

[00:18:58] Matt: Now, you can go back in time and witness any historic event in person. What would it be?

[00:19:01] Lucas: My heart wants to do a huge natural phenomenon, like dinosaur stuff. I. But I’ll try to think of something interesting. I heard a recent story from someone that is completely true, which I think is fascinating. I think in New York City, in the sixties or seventies, a World War II veteran had too many drinks in a bar, and was talking about his experience flying planes in the war.

[00:19:32] Lucas: And a guy bet him that he couldn’t land a plane in the streets in New York City. He went to a Northern New Jersey pilot school at 2:00 AM or 3:00 AM in the morning. I don’t know if he was a teacher or coach, but he stole, probably intoxicated, and landed it on the upper east side of New York. And I would love to see that. And it’s not done yet. He did it two years later after that, again, in another drunken bar bet.

[00:20:11] Matt: Just ice cold, having not flown in between?

[00:20:13] Lucas: I believe he was not flying in between; it’s a Googleable thing; check it out.

[00:20:38] Matt: Now we’re going to do some marooned on a desert island questions. So starting off with, you can access music from four artists/bands on this island. Who do you pick?

[00:20:54] Interesting and tough. There are the top four in different categories. I’m a huge Cut Copy fan, an Australian band, I like the Future Islands a lot, and cringingly, I grew up loving Third Eye Blind.

[00:21:16] Lucas: So I’ll throw that on the list and one Disco-type thing. I’d put Daft Punk on there as well. That would probably do me well on an island for some time before; hopefully, someone saves me.

[00:21:35] Matt: Those are definitely four-for-four that have not been mentioned in prior interviews, so good. Next thing, you can bring four movies and/or TV series with you on this island. What are they?

[00:21:54] Lucas: Well, on an island, I would go for a movie called The Wackness with Ben Kingsley. Its main character’s name is Lucas. Great, great story about New York City in the eighties. Fun stories. Then Children Of Men would be next. Kind of dark and gloomy, but way ahead of the game. Me, Myself, and Irene is probably one of my favorite comedies, so I’d also add that just for fun. Then I’ll add Happy Gilmore in there as well.

[00:22:32] Matt: Cannot go wrong with Happy Gilmore, and Children of Men is a great movie too.

[00:22:36] Lucas: Yeah.

[00:22:37] Matt: Alright. You can have one Twitter follow on your island; who would it be? Or alternatively, Twitter is a cesspool of human misery.

[00:22:49] Lucas: Yeah, I don’t use Twitter. I just never got into it. Everyone who uses Twitter also says how much they hate it, but I understand they use it for news and updates. I probably sound like a grandpa describing the internet right now, but I’ll get into the Twitter game one day.

[00:23:11] Matt: I use Twitter because I have to for promotional purposes; you’re not missing much. All right, we’re down to our last two questions. You can access one social media platform on this island; which do you pick? Or, you know, none of them is perfectly acceptable.

[00:23:32] Lucas: The one platform I do use is Instagram. and I’m already trying to stop following people. Once I deleted accounts, I guess Instagram started showing me random accounts. So there’s no hiding. But I would say I use Instagram to keep in touch with friends a little bit farther removed. So I would have Instagram while listening to Daft Punk and watching Happy Gilmore.

[00:24:04] Matt: Awesome. Final question, this is the person who you can listen to Daft Punk and watch Happy Gilmore with. You have to share this island with one C2V General Partner; which one is it? Keep in mind, you may be there a while. You can absolutely choose Chris. It would be a mistake, but you can do it.

[00:24:33] Lucas: Yeah, Matt, I would go with Chris because I need that much time with him to figure out how he got so lucky getting you as a partner.

[00:24:47] Matt: Wow. What a solid answer. That was a great one. Nicely done, Lucas. That’s all we have for you here. Thanks very much for doing this.

[00:24:56] Lucas: Yeah, thanks, Matt; it was a lot of fun.

Founder Interview: Lucas Takahashi, Medmo was originally published in In the Trenches with C2V on Medium, where people are continuing the conversation by highlighting and responding to this story.

Ever since Amazon first showed us the advantages of buying books online, ecommerce has taken the retail world by storm, but as this new market has grown and evolved, its disadvantages have come into clearer focus as well.

So where are we now and how does Retail Tech fit in? Glad you asked!

The Consumer Still Likes to Shop in Stores

While the pandemic was a boon to ecommerce overall and some of those gains will undoubtedly stick, it also highlighted for consumers some of its limitations, notably:

1) Consumers still prefer to see/touch/interact with many types of products before purchasing;

2) AI isn’t close to completely replacing human advice, especially when it comes to aesthetic nuance or consumer trust; and

3) Many services simply can’t be performed digitally

As illustrated in a survey published earlier this year (see chart above), there is plenty of pent-up demand for physical retail even after ecommerce had a year or so without competition to prove itself as a viable replacement.

Ecommerce’s Profitability Dilemma

From a recent McKinsey piece (note: “DNB” = “Digitally Native Brand”):

Few DNBs turn a profit for their first three to five years, and many fail to turn a profit even after a decade of growth. Over the past 20 years, fewer than 0.5 percent of DNBs have reached the $100 million revenue level. Even some large, publicly traded DNBs reinvest all earnings into additional marketing and capacity expansion and fail to turn a profit.

Prevailing wisdom is that Ecommerce has two primary advantages over brick-and-mortar:

1) A better understanding of the customer; and

2) Lower overhead

The former is an unquestionable (and substantial) advantage, but one that can and is now being tackled by new retail tech startups from a few different angles (more on that below)

The latter, on the other hand, is a bit of a double-edged sword. While there is no question that a chain of physical locations is more expensive to build and maintain than a webstore, a physical storefront also has a number of advantages and the lack of a physical presence for most DNBs is behind a large part of ecommerce’s current profitability issues.

The main drivers behind this are:

· Customer acquisition costs are 2–5x higher than brick and mortar, even at scale. Why? Well, that overhead-inflating store front isn’t just a place to transact, it’s also a giant banner ad. And it’s always there. And hundreds (or thousands) of people see it every day. And you pay $0 incremental dollars for each of those impressions.

· Shipping was expensive pre-pandemic and it’s really expensive now

· Returns are costly for any retailer and they are 3–8x more prevalent in ecommerce. One estimate put the cost at more than a trillion dollars a year over the next several years.

The Solution

As a result of these increased understandings of the relative strengths and weaknesses of on- and offline commerce, we think that while there may be some sub-sectors that migrate almost entirely online over time, most retail businesses will evolve into a hybrid of both online and physical retail, and the most successful will be those who (whether digitally or physically native) utilize new Retail Tech products to press their advantages and evolve into the form of hybrid model that best suits their product and customer base.

Among these technologies, we like:

• Customer insight tools that collect data at the point of sale and from more broad, on-premises activity, and (critically) tailor their data models to each vertical into which they sell
• Sales tools that allow retailers with a built in physical location advantage to scale sales within their existing footprints via ecommerce
• Scaling tools that allow retailers to leverage existing infrastructure to efficiently add products or services to existing offerings without requiring new cap ex

Our portfolio companies pursuing these solutions include:

• Copper — A smart point of sale (“POS”) system for capturing and gleaning insights from customer purchase data without requiring expensive hardware overhauls and even more expensive staff retraining
• OmniX — Computer vision software for capturing and gleaning insights from shopper, demographic and location efficiency data collected from existing security cameras (e.g., OmniX)
• OneShop — A customer CRM and direct sales outreach platform for in-store sales personnel to capture, organize and monetize higher-value shopper data and efficiently leverage in-store sales through new ecommerce storefronts
• Rumby — A white-labelled ecommerce solution, with functionality and e-marketing optimization tailored to the laundromat, dry cleaning and hospitality industries to scale physical locations and leverage existing delivery network infrastructure to enable on-demand pickup and delivery services

C2 Ventures Retail Tech Thesis was originally published in In the Trenches with C2V on Medium, where people are continuing the conversation by highlighting and responding to this story.

One thing my C2 Ventures partner and I always enjoy as a side benefit to sifting through our weekly pile of new deal flow is the names of companies.

Many are fairly straightforward, some quite clever, some confusing, and others completely off the rails, but we love them all (especially the last two categories).

Having just closed on the 19th and final investment from our debut fund, I decided to look back at the 625 or so companies we reviewed and share my favorites (along with my attempt to decipher each):

Informal poll for the comments section:

1) What do you have stuck in your head right now?

A) Love Shack

B) I Only Want to Be With You

C) We Built This City

D) All of the above / I hate you

2) What dates me more?

A) My movie references

B) My song references

C) My face

What’s In a (Startup) Name? was originally published in In the Trenches with C2V on Medium, where people are continuing the conversation by highlighting and responding to this story.

Are we really doing this again?

As the 2020 numbers start to roll in, I thought I’d add my two (somewhat curmudgeonly) cents to the various “State of Venture” commentaries out there.

Where to Begin…

Let’s work backwards from an IPO market that’s starting to give off a whiff of that unpleasant 1999/2000 odor.

Crunchbase recently shared the following chart, which was troubling for more than just the fact that only 2 of these companies are profitable despite valuations that would qualify every one of them for the S&P 500 (and put several in the top 100).

There’s a fair bit to unpack here, but in the interest of brevity, let’s just focus on one comparison that neatly sums up the absurdity of these valuations.

Intuit

(A fintech company that’s been successful longer than the term “fintech” has been in use)

vs.

Snowflake

(A recently IPO’d SaaS darling from the table above)

There’s a lot to unpack here as well, but the short version is that a mere 24% premium currently buys you 15x the revenue and an additional $2.3 billion of P&L (and that’s with Snowflake off 20% from its peak).

Try modelling a scenario where Snowflake’s revenue and profit catch up fast enough for your IRR to exceed the yield on a muni bond. It would be easier to mathematically prove that lottery tickets are a good investment.

Am I Alone Here on Incredulous Island?

No! Although there might only be two of us.

Here’s what David Trainer, the CEO and founder of equities research firm New Constructs, told Business Insider ahead of DoorDash’s IPO, which he called “the most ridiculous IPO of 2020”:

“We think this proposed public equity offering holds no value, $0, beyond bailing out private investors before unsuspecting public investors realize the business is not viable in its current form,”

And DoorDash is the third most profitable company on this list!

So What’s Happening Here?

Supply and demand gone horribly wrong, that’s what.

Simply put, there is way too much money chasing too small a pool of recent IPOs and late-stage venture companies. Mr. Trainer alludes to the excesses in late-stage venture when he suggests the DoorDash IPO’s sole value lies in “bailing out private investors.”

Whether valuations or return targets of late-stage venture backers directly influence IPO pricing is a topic for the tinfoil hat crowd, but it’s worth taking a step back to look at how so many companies with no current ability to — or foreseeable hope of — generating sustainable cashflows continue to see their values skyrocket pre- and post-IPO.

If it Looks Like a Duck…

Could one describe many of these late-stage/IPO high-fliers as companies that “with little or no legitimate earnings, require a constant flow of new money to survive”?

And would it be fair to suggest that, ”when it becomes hard to recruit new investors, or when large numbers of existing investors cash out, these schemes tend to collapse”?

Would it surprise you to learn that the quoted text is taken from the definition of a 100-year old investment scam that, sadly, we’re all quite familiar with? (Hint: it rhymes with “Fonzie Meme”).

Now, I admit this might be a little harsh, as these types of schemes are also, by definition, intentionally deceitful and I certainly don’t believe that’s what’s going on here.

While the way in which these markets are being artificially propped up is eerily similar and equally dangerous, the data suggests this is more a case of the venture funding mix having drastically skewed toward the late stage in recent years, and there’s further reason to believe it may get worse before it gets better.

Late-Stage Funding Run Amok

In 2020, the share of startup funding going to late-stage rounds (>$50 million capital raises) hit its highest point since at least 2006 (as far back as the data goes in the most recent Pitchbook-NVCA Venture Monitor), having tripled over the past decade.

Mega-VC Funding Run Amok

As one might expect, this skew towards mega-deals follows a similar skew towards mega-funds, as $1 billion-plus funds’ share of total VC fund raising is also hitting new peaks. On a rolling 3-year basis, mega-funds’ share of total VC funding has doubled over the past 12 years.

Are SPACS the Answer?

No, they most certainly are not!

As little more than late-stage VC money in different packaging, the SPAC craze is actually more likely to make things worse.

The pro-SPAC crowd has pitched these vehicles as a way to let mature startups access public markets earlier, reversing the trend of longer and longer private funding cycles. The only problem is, they are way (way) too big for that.

The average SPAC raised in 2020 was north of $300 million. That’s more than double the size of the average late-stage mega round in 2020.

Furthermore, there are already way too many of them. The number of SPACs raised in 2020 was more than 4 times that of the prior year and total SPAC capital raised in 2020 was 6.8 times 2019’s total. To put this in further (and somewhat horrifying) perspective, total SPAC capital raised in 2020 was greater than the amount raised by mega-VC funds in the past 3 years combined.

But wait, it gets worse! According to CNBC, a further 128 SPACS have raised an additional $38 billion so far in 2021. That’s already more than half of last year’s total in 6 weeks!

Bottom line: this is all part of the same massively over-crowded trade.

Well, These Things Are Cyclical, Right?

Yes, and these types of massively overcrowded trades always unwind eventually (usually making a big mess in the process), but as the famous economist John Maynard Keynes once said:

“The market can remain irrational longer than you can remain solvent.”

Despite the recent profligate spending, VCs are still sitting on record-shattering stores of dry powder (double the levels of a decade ago).

While it’s hard to rule anything out after these last 12 months, I doubt that VCs will suddenly start worshipping at the altar of Buffett and returning unspent capital rather than continuing to chase overvalued companies, so this is likely to get worse before it gets better.

Where is an Intrepid Value Investor to Turn?

The early-stage, of course! Finally, some good news to share!

All that money pouring into the late stage has seen the share of VC funding going to Seed and Pre-Seed rounds (sub-$5 million capital raises) hit its lowest point since at least 2006, a full 40% below that previous low point.

Furthermore, the runaway valuations in the late stage have not had any impact at all on Seed and Pre-Seed prices. In fact, the median pre-money valuation for both rounds went down in 2020! By quite a bit in fact!

So Where Does This Leave Us?

I personally think the late-stage venture and tech IPO markets are headed for an ugly reckoning. That said, I wouldn’t step directly in front of that train either, because it’s too hard to predict what will cause it to derail or when (see Keynes quote above), but you can certainly avoid the track altogether.

As an early-stage investor, we get to buy into the overlooked and underfunded market and sell into the the overheated and oversaturated one. Value propositions don’t get much better than that, and as you can see from the data above, there’s plenty of room in our pool for those ready to jump in.

Tech Bubble 2.0? was originally published in In the Trenches with C2V on Medium, where people are continuing the conversation by highlighting and responding to this story.

Many parts of the world are slowly opening up and lifting restrictions, as we adjust to a new normal. These tumultuous times are having a profound impact on business and the global economy as a whole.

Venture deal activity saw $34 Billion invested across 3K deals in the first quarter of 2020. By quarter’s end, VC funds raised $21 billion across 62 vehicles. U.S. Venture Capital Investment had a strong Q1 2020 showing, but COVID-19 brought an economic downturn which has slowed down activity.

This obviously translates to an entirely new landscape for the venture capital, investment and startup markets. We took some time to think about what this could look like.

1. We continue to love the marketing tech space and those companies that sell SaaS, in fact, we know of several companies that are accelerating revenues during this period. The reality is, this is a good time to consider making those company software updates, CRM overhauls, or general upgrades that benefit your team’s long-term revenue potential and cost savings. Smart CEOs are using the crisis to justify discounts while still supporting partner’s products and services. There is more bandwidth and time for implementation projects, as well as for training your engineering and products team on updating new tools and workflow from remote locations. In a challenging macro environment, the most efficient companies will win, and having the right software will be critical to those efforts.
2. Many industries are thriving and growing during this period like OTT, streaming, gaming, original content, health/wellness/CBD, video conferencing, 3D printing, etc. We are long on the wellness and fitness train as people are thinking of staying healthy and well even past this pandemic. For example, as CBD becomes mainstream, and more people become aware of its benefits, companies like Beam, a C2 Ventures portfolio company, are beginning to play a bigger role in the wellness category. They’ve even been covered in the likes of The New York Times.
3. C2V didn’t invest in the Ad-Tech space before the pandemic and we certainly like it less in this current environment. Assume that your Ad-Tech company could be in the middle of M&A or consolidation conversations like the Factual/Foursquare deal and think about what that could mean for you. Chris shared some of these very insights in a recent Business Insider article (behind paywall).
4. People’s behaviors will forever be changed in the long term and our team is excited to see what companies will emerge from the ashes. As early-stage investors, we are very bullish on the innovative startups being created NOW that will rise like a phoenix. We predict this summer and fall we will begin to learn about startups focused on the future like online retail, online learning, remote-work tools and services, home fitness, remote healthcare, logistics and supply chain, travel and clean energy (let’s not lose this huge improvement in air quality!) We’ll see new efficiencies in all challenged sectors.
5. Funding has been and will continue to be available for those companies with real, economically scalable business models, and those who showed some level of steadiness through these times. The investor community is alive and well, and as we mentioned, we expect to see some excellent companies get funded post this period.
6. One of the biggest topics has been working from home and the future of the office. While traditional incumbents such as WeWork and Regus are struggling and will need to reinvent themselves to survive, there is also a tremendous opportunity here to fulfill new demands for new needs. For instance, something we’ve heard from a number of our partners and industry colleagues is a desire for a flexible solution that would allow employees to come into the office 1–2 times a week to hold meetings and collaborate. And if you look beyond just the workspace, there potentially could be a whole new throng of digital nomads who will need different tools and services to help them work within their lifestyle.
7. On that note, while we’re focusing on how to improve our working lives, we’ll also want to work smarter. That means that the much talked about buzzword automation will finally truly have its day in the sun. By building the right tech stack for your business and your employees, you can save time on recurring and rudimentary tasks. This will mean less time getting bogged down by the day-to-day operations and more time to focus on the biggest most impactful tasks. 2020 has taught us all the importance of focusing on the big picture, which is now achievable work-wise with the right set of tools at your disposal.
8. This last one, is something we are just as much hoping for and actively taking the steps ourselves, as we are predicting happens. Given all of the social discourse and action happening, we believe we will finally start seeing a more diverse and inclusive community within the venture capital and startup ecosystems. We have gone far too long without this already occurring, but believe 2020 will be the year we make the much-needed steps to bring more women and people of all races to the table to start their own businesses, hold leadership positions and become more active in the investment world. We are already seeing steps being taken, but need to ensure momentum continues. We at C2V back these initiatives 1000% and will be getting involved in every which way we can.

What Does a Post-COVID-19 Early Stage Venture World Look Like? was originally published in In the Trenches with C2V on Medium, where people are continuing the conversation by highlighting and responding to this story.

We find ourselves infuriated and profoundly saddened as yet another inexplicable and inexcusable act of violence was perpetrated against a black citizen by those who are entrusted to protect the safety and welfare of that citizen. Our hearts go out to the families of George Floyd and all our other fellow citizens who have been victimized by the very system that is supposed to protect them. This is not the America we want to live in. These are not the American values to which we aspire and to which we want our children to aspire, and it needs to stop.

We’ve seen many comments from other organizations directed to the black community along the lines of “We Stand With You” and while we appreciate that people’s hearts are generally in the right place as they make these statements, as two white men ourselves, we believe that these words lack perspective.

For one thing, we can’t possibly understand what it’s like to be a black man or woman watching this pattern repeated for decades now. We can’t possibly know what it’s like to feel at one’s core a combination of outrage and hopelessness; to wonder when or if this is going to end, and at what point does something like this happen to our brother, daughter, cousin, parent or friend.

To appreciate this, you only need to watch Merck CEO, Kenneth Frazier’s interview with CNBC where he said that George Floyd “could be me or any other African American man,” or read Kareem Abdul-Jabbar’s op-ed in the LA Times about the differences in how we react to these events. These distinctions in perspective are critical for us all to understand.

Second, the simple fact is that we (all of white America) have not stood with our black community, and that’s why this problem persists. It’s not enough to just be empathetic and it’s not enough to just say, “Well I’m not a racist, so I’m doing my part.” What’s become clear to us (and shame on us that it took this long) is that we as a society can’t expect this pattern of racial violence to be broken with three-quarters of the voting public sitting out the fight.

As San Antonio Spurs coach Greg Popovitch so aptly stated in a recent podcast interview (which we’d highly recommend you all listen to) if we, as empowered white Americans, don’t proactively work to effect change, then we become complicit in each new instance of racial violence.

There are micro and macro issues at play here and we intend to put our efforts toward addressing both. The first and most pressing issue is to end police killings. To this end, we’re donating to an organization called Campaign Zero and are calling on our entire network to put their support behind this organization as well.

Founded in 2015, Campaign Zero has taken a very smart and thoughtful approach to ending police killings, using data to identify the key reforms that their statistical models indicate will have the greatest impact, and sharing this data and their recommendations with the municipalities who have the power to enact these reforms.

They’ve additionally launched a shorter-term reform package called 8 Can’t Wait, a set of 8 very straightforward and simple reforms that they want to see enacted across the country immediately, and which they estimate will reduce police killings by more than 70% if broadly implemented. In addition to spending some time looking through their sites, we’d particularly recommend you review their 2016 study on the effects of the use of force by police in the US.

The report is extremely well done and the data is as compelling as anything we’ve seen on the topic, particularly in refuting several fallacies that are often used to excuse police violence (for example, that police safety is compromised by less restrictive policies, when in fact the data shows the exact opposite to be true).

We’d encourage you all to please consider joining us in supporting Campaign Zero, which you can do here, as well as using the resources they provide to demand action from each of our local governments and national representatives.

Police violence toward black citizens is also part of a larger problem of bias in American society that we all need to continue to work to change. Nothing makes this clearer than the emotionless, callous demeanor of Mr. Floyd’s killer, as he calmly squeezed the life out of a man lying motionless on the ground, ignoring bystanders’ pleas to move off him and check his pulse.

No amount of police reform can fix the vile corruption of that killer’s soul. That change can only come when people grow up in an environment with not only zero tolerance for overt acts of racism, but where racial biases are eliminated at their core.

As we all saw in the video of the white woman in Central Park calling the police on a black man because he asked her to put her dog on a leash (as she was legally bound to do), racism isn’t limited to violent attacks or hateful language, and racist biases exist even in educated people who consider themselves progressive and enlightened, whether we recognize them or not, and we all need to work harder to honestly assess our own biases and work to eliminate them.

Martin Luther King said of his dream for his children that they would, “one day live in a nation where they will not be judged by the color of their skin but by the content of their character.” He said this almost 60 ago. 60 years. And as the woman in Central Park who probably considered herself a tolerant, progressive person proved, it’s still not true. Not even remotely.

Reverend King dreamed of this world for his children but isn’t even true for his grandchildren. That’s what we need to change. And we need to practice it every day.

When we read things online or see things on the news, we need to stop and examine our reaction and understand how our underlying biases may have impacted that reaction, and then work at eliminating those biases. We need to make concerted efforts not only to hire, work for and befriend people of different backgrounds, but to proactively seek to understand and appreciate their perspectives, however different from our own.

High-minded ideals are easy to utter, but they rarely make a real impact and they won’t work here (and if you don’t believe that, take a look at where the world’s capital of high-minded ideals sits in the below chart of police killings per million inhabitants, courtesy of Campaign Zero).

Real change will take place by individuals, taking small, thoughtful, targeted and consistent daily actions over many years. This won’t be easy, and it won’t be fixed overnight, but it will be worth it.

Enough is Enough: It’s Time To Act was originally published in In the Trenches with C2V on Medium, where people are continuing the conversation by highlighting and responding to this story.

In the spirit of never letting a crisis go to waste, I thought I would share some of the broad lessons I hope we take away from our first direct experience with a full-scale pandemic in more than a century.

I’m going to make a concerted effort to avoid anything that could be construed as political bias, but since the current environment seems to dictate that readers must always infer bias (and always against their party of choice), I’ll state for the record that I’m as politically down the middle as anyone I’ve ever met, which is to say I generally find myself consistently and equally disgusted with both parties (I’m even registered as an independent — you can look it up).

So, infer what you will, I just ask that we all try to take a dispassionate view of what when wrong and work on fixing it before we go back to finger-pointing.

1. It Can Happen Here

I don’t know if this air of invincibility is a uniquely American attitude, but I do know that 1) it’s been a recurring theme since at least the isolationist movement of the late 1930s (maybe longer), 2) I’m certainly guilty of it myself, and 3) despite our consistent belief that it won’t, the unthinkable keeps happening. Pearl Harbor, 9/11, too big to fail — the list goes on and on.

Well, here we are again, completely unprepared for a viral contagion to hit US shores and far too slow to respond when it does. Why does this keep happening despite America having by far the largest pool of collective resources and concentration of the world’s best minds and research facilities? Political will. Which is, in a democratic system, an extension of the will of our populace. This needs to change.

We’ve proven repeatedly, over hundreds of years that Americans are incredible in a crisis. Our collective ingenuity, ability to marshal immense resources on short notice, and unassailable will and collective spirit are unrivaled, but do we always have to get right to the brink before we act?

I appreciate that it wouldn’t make for nearly as good a run of movies after the fact if we just heeded the warnings of our experts ahead of time and avoided some of these crises all together, but as much as I enjoy a good Mark Wahlberg vehicle, can we please try the alternative approach next time?

2. Data and Transparency Are Critical

No country has handled the COVID-19 outbreak nearly as well as South Korea (other than its neighbor to the north, who miraculously hasn’t had a single case of COVID-19). Despite being a very densely populated country (roughly the land mass of Virginia, but with 6 times the population), Korea has barely cracked 10,000 total cases, or 207 cases per million people, growing at fewer than 50 new cases per day. By comparison, the US (at around 650,000 cases as of this writing, growing at more than 25,000 per day) is currently at nearly 2,400 cases per million, and as for Virginia’s relatively thinly spread population, they’re at 1,000 cases per million.

What’s even more remarkable is that Korea never even went on a general lockdown anywhere near the scale of the US or western Europe. They accomplished this through early and widespread testing.

When South Korea went from 31 cases to over 1,000 in a week due to patient number 31’s having been a “Super-Spreader” (which, incidentally, wouldn’t be a bad title for the aforementioned Mark Wahlberg movie), they immediately began widespread testing and isolation for those infected, having tested hundreds of thousands of people by the time the US was still debating whether we should even consider worrying about the threat, and the results speak for themselves.

New daily cases in Korea peaked at 851 on March 3rd, only 2 weeks after the infamous Patient 31 (also a solid title for the Wahlberg movie), and within 12 days (March 15th) were under 100 where they’ve mostly remained since.

Bottom line — it’s hard to prevent or solve a problem while making zero effort to even understand that problem. The almost willful avoidance of COVID testing in the US until the problem was massive and our only option was to indiscriminately shut down everything, is arguably our biggest failing in this crisis.

3. Uncertainty is Always Worse Than Bad News

This isn’t a new idea, but worth repeating as a corollary to the previous lesson about data and transparency. Everyone fears uncertainty more than bad news and this is especially true both in the general economy and the stock market. When all risks — big and small — are known, business owners and workers can make informed decisions on hiring, investment, career paths, etc. When faced with a risk that is unknown, however, they stop making any decisions at all (fearing the potential size and scope of that unknown risk). Similarly, when investors in the stock market understand risk, they price it in accordingly, but when they don’t understand risk, they indiscriminately sell everything and wait for more information.

This makes the aforementioned willful avoidance of implementing widespread COVID testing that much more baffling. Far be it from me to suggest that a national leader might have a transparently self-serving agenda in an election year (even in the face of humanitarian crisis), but let’s suppose (just hypothetically, of course) that such a leader’s sole aim was to maintain record stock market levels. The answer is not to repeatedly deny that a potential problem is brewing, the answer is to assess the scope and severity of the problem, and act to address it.

If this wasn’t clear before, I hope it is now.

4. Don’t Politicize Everything

Actually, make that, “don’t politicize anything.” On the one hand, this may be a naive pipe dream. On the other hand, grow up, Washington. Sadly, it might be too much to ask every member of the Legislative and Executive branches to show real leadership, but is it too much to ask each of them to act like an adult with a least a degree of concern for their fellow human? It certainly shouldn’t be.

Under normal circumstances, you may feel the need to treat every action and utterance as campaign commercial, but in a crisis, you can just do a good job. People will notice, I promise. There will be plenty of time afterwards to make outlandish claims about how you single-handedly slew the corona monster.

This is making me sad, let’s just move on….

5. Do Not Spread Misinformation

I understand that politically bent journalism gets better ratings than good old-fashioned reporting (hang in there CNN), but there’s very distinct difference between hammering the other party’s response to a crisis and just making things up. While MSNBC was obviously going to highlight every White House and GOP congressional gaff and gloss over those made on the other side of the aisle, that’s a lot (A LOT) different than throwing the “hoax” label on any inconvenient scientific data and confidently telling viewers they’re not at risk when they are in fact at risk.

I’m personally not a fan of the cartoonish vilification of politicians in either party and as a result I can’t stomach MSNBC any more than I can stomach Fox News (seriously, hang in there CNN), but at least that won’t get anyone killed.

Bonus Lesson: Carole Baskin is a Historically Horrific Human Being

Somehow she managed to make Joe Exotic, a man who hired a meth addict to kill her, come off as a sympathetic character. How is that possible? We haven’t seen anything like this since Hitler had Americans rooting for Stalin for a few years.

5 Lessons From the Lockdown was originally published in In the Trenches with C2V on Medium, where people are continuing the conversation by highlighting and responding to this story.

As a follow-up to my earlier post about the dangers of the second-order effects of fear and panic in the face of global uncertainty, I wanted to further comment on why times like the present have historically been the moments not to follow the herd and sell everything, nor to take a “wait until everything is back to normal” approach, but to buck the trends, headlines and apocalyptic predictions, and buy while everything is on sale.

In the interest of full disclosure, I am technically talking my own book (as they say), as I’m currently running an early-stage venture fund that is still actively raising money, but I am, by nature, a staunch contrarian and firmly believe in everything I’m about to write.

Without further ado, here are 5 reasons why now is a great time to buy equities (and especially venture capital funds):

1. A Recession is Already Priced into the Market

The median and average declines in the S&P 500 during the 12 recessions since the Great Depression, from peak to trough are 24% and 32%, respectively. As of the close on 3/16 we were down 29.5% from the recent peak.

Of the twelve recessions since 1937, seven saw smaller selloffs than the current one, while four were materially larger, at around 50% (the other was reasonably close at 36%). Three of the four biggest drops were underpinned by major structural issues with the economy — sweeping regulatory changes following the Great Depression; the Middle East oil embargo and double-digit inflation; and the near-collapse of the global financial system. The fourth, a massive repricing of equities following the dot-com bubble, was less about the economy than it was about equity valuations.

Can the market go down further from here? Of course, but historically speaking, any looming recession seems to already be mostly (if not fully) priced into this market, and unless we start to see significantly higher death rates among those in the global workforce, it does not appear that there will be lasting structural damage from COVID-19.

2. The Stock Market Isn’t Actually That Great of an Economic Forecaster

“The stock market has predicted nine of the past five recessions.”

One of my favorite Wall Street quotes (from economist Paul Samuelson) which we generally see in the financial press whenever market declines get into double-digit percentages, and for good reason. While the stock market is considered by most economists to be a leading economic indicator, it’s also wrong about as often as it’s right when it comes to predicting recessions.

Since 1937 (per Yardeni Research), there have been thirty-eight selloffs of 10% or more that did not immediately precede recessions (vs. 12 total recessions) and 12 selloffs of 19% or more that did not precede recessions, including two in the current bull market, the last of which happened 15 months ago. In this most recent case, the market had fully regained its previous peak within two months (41 trading days), and two-thirds of that recovery was in the first 16 trading days following the low (one of the reasons financial advisors consistently tell clients to invest long-term and not try to time the market).

3. It’s Always Darkest Before the Dawn

As one might expect, public equities generally have their best returns in the years following these major market selloffs, especially the immediately following years — even at times when the economy is still in recession — and the deepest selloffs are generally followed by the largest gains. This phenomenon is even more pronounced in the private markets. Not only do PE and VC funds launched after huge market selloffs tend to be the best performing vintages, they also tend to be the biggest outperformers relative to public markets, often by many magnitudes.

For example, (per Cambridge Associates’ private equity and venture capital indices), venture funds launched in 2007, in the teeth of the credit crisis, outperformed funds launched in the prior 10 years by an average of 9.3% per year. That’s the difference between turning a $100,000 investment into $186,000 versus turning it into $428,000. Furthermore, venture funds of this same vintage outperformed the S&P by 3.8% per year.

4. It’s What Warren Buffett Would Do (and Probably is Doing Right Now)

“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”

Probably Mr. Buffett’s most famous quote and a philosophy that has played maybe the biggest role in his long-term success.

As my venture partner will tell you, there are few things that rub me the wrong way quite like the, “Well if [insert successful investor] is buying this/passed on this, there must be something great about it/wrong with it,” line of reasoning. That said, there are very few people (frankly, probably none) who have as consistently trounced the indexes and outperformed everyone for anywhere near as long as the Oracle of Omaha. I’m also not suggesting you pile into Mr. Buffett’s specific investments, just adhere to his general philosophy (besides, as Buffettt himself would tell you, “Invest in what you know…and nothing more”).

While we’re here, a couple of additional Buffettisms relevant to the Corona Crash:

“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down”

“Don’t watch the market closely”

“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years”

(Incidentally, venture funds are generally 10-year vehicles — just saying).

5. Your Psyche (and Ego) Will Thank You

Psychologists tell us that we dislike losses more than we enjoy gains, which is one of the reasons that market selloffs tend to be so rapid, while stocks can grind higher for years before reaching tops. That said, getting a good deal also feels great (ever wonder why everything at Walmart is always selling at a “discount”?), and doing something constructive and proactive always feels better than sitting and fretting.

Now imagine yourself in 2028, hoisting a glass with your friends. One of them says, with palpable envy, “Boy, I wish I had put some of my cash into that venture fund when we all thought the Corona Virus was going to take over the world. How did you make yourself do it?”

You shrug and say, “Well it wasn’t easy, but there was one day at the height of the panic when I decided to block out the noise and consider the situation. That’s when it dawned on me that the world wasn’t ending and that I might not see an opportunity to buy-in at discounts like that for another decade.”

5 Reasons Now is a Great Time to Buy Equities (and Venture Capital Funds) was originally published in In the Trenches with C2V on Medium, where people are continuing the conversation by highlighting and responding to this story.

“Let me assert my firm belief that the only thing we have to fear is fear itself — nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”

FDR who, aside from Lincoln and Washington, arguably presided over the most turbulent and challenging years in American history, was both brave and astute in this statement. Astute because it shows a clear understanding of the profound impact that a negative feedback loop can have in exacerbating the damage from already damaging events, and brave because in early 1933, extreme fear was a justifiable and fairly rational response to the situation, which at that point was beyond dire.

The Great Depression, by then on its third and largest year of GDP contraction (-12.9%!) with unemployment at 25%, had already taken a massive toll on the US (and global) population, was still getting worse, and probably felt like it would never end. Despite that, however, Roosevelt knew that the second order effects, the further damage that a continuing culture of fear and hopelessness would cause (the “animal spirits” as Alan Greenspan would later call it), could multiply the damage many times over.

I find Roosevelt’s words to be even more pertinent today, because I believe that the fear and panic around COVID-19 could end up doing many magnitudes more damage than the virus itself, and the possibility that we enter a self-perpetuating cycle of existential dread and hopelessness is what honestly concerns me most at this point.

With the caveat that I’m neither a doctor, nor a biochemist, my read of the science community’s feedback on the direct impacts of the virus (realized and potential), has me feeling unsettled and concerned in the shorter term to be sure, but not panicked or fearful for the medium and longer term, and I find this to be inconsistent with both the tone of reporting on the topic (especially the sensationalist headlines, which unfortunately color everything that follows, however responsibly reported) and much of the commentary I’ve seen and heard directly, often from very bright, otherwise reasonable and highly-educated people whom I greatly respect.

I don’t mean to make light of the deaths that COVID-19 have caused, nor the pain this has caused to the victims’ families and friends, and I applaud the tireless efforts of first responders and the global medical community to combat this virus, but I would also hope that people will rationally consider the underlying data being presented (not just the click-bait headlines) within a broader context of the many risks to human life that were present before this virus and will remain afterwards; that above all, we remain cognizant of the damage that could be done if we collectively fail to balance prudent and robust near-term responses with a more sober, calm and rational longer-term perspective.

Starting with a quick look at the underlying data, we (in the collective sense) seem to have a decent and steadily improving picture of the risks posed by COVID-19 (and in the vein of optimism, consider for a minute how impressive a global medical establishment we have to get from 20 or so people sick from an unknown cause in a remote part of China to what we know today, only 10 weeks later).

Stats via the initial findings of China’s Center for Disease Control and Prevention, this incredibly helpful database and various articles quoting the WHO and US CDC.

· While the overall mortality rate in the initial COVID-19 cluster in China was 2.3% (higher than the flu, lower than SARS and some other recent outbreaks), it is overwhelmingly concentrated in older and already ill people (9.8% mortality rate for patients 70 and older, 14.8% for those 80 and older, and 5.6% — 10.5% for those with cardiovascular disease, diabetes, chronic respiratory disease, hypertension, and cancer)

· The WHO and others have speculated that quoted mortality rates may be overstated due to testing sample bias (i.e., in most areas, only those with more pronounced symptoms have been tested thus far)

· Data from South Korea — by far the largest sample size yet published (more than 140,000 administered tests vs. roughly 13,000 so far in the US) — appears to confirm this suspicion, as the mortality rate there is reported at around 0.8%.

· The global number of “severe and critical” cases appears to have peaked on February 18th and are down 50% from that peak as of yesterday

· Active cases in China peaked on February 17th and are down 77% since then (dropping every day since)

· New daily cases in Korea peaked on March 3rd and the spread seems to have slowed rapidly since (from 851 new cases on 3/3 to 114 yesterday)

· If the US were to follow the same pattern as China, cases here would peak in the first week of April (obviously there are a huge number of underlying factors to consider, so this is not meant to be an actual estimate, just some general perspective on the potential duration of the outbreak)

· Add to this some context as to the risk posed by COVID-19 compared with risks we take for granted in our daily lives:

o In days since the first reported COVID-19 case in the US, 41 people have died from the virus, while over that same time period:

§ 15,900 people are estimated to have died from the seasonal flu

§ Roughly 5,373 people on average will have died in car accidents (though maybe fewer this year since no one is going to work), including 871 pedestrians

What follows is admittedly a bit reductive, but the broader points I’m trying to make here are:

1) Ordinary daily activities we typically take for granted like interacting with other people and commuting to work (on foot or by automobile) have and will always present risks of fatalities, even for otherwise healthy, working age (and younger) people.

2) Of the data sets we have available, those which span the longest time horizons suggest that there is at least some reason to believe this phenomenon is more likely than not to be fairly short-lived

3) As a biochemist friend of mine pointed out to me yesterday, the relatively long incubation period for COVID-19 (compared with SARS or Ebola, for example) could result in a higher absolute number of deaths, because the risk of infecting others prior to being diagnosed is higher; however, it does seem clear based on what we know thus far that the overall mortality rates are far lower than with other recent outbreaks.

4) This is not 2008 all over again. The fact that most of the active global workforce are in the lower risk demographic materially reduces the risk that even a broad outbreak does any long-lasting structural damage to the global economy (directly, that is), and in any event, it does not remotely compare to the structural damage done by the near-collapse of the global financial system and a massive global credit default of unprecedented scale. That may sound cold, but it is true.

Now contrast all of this with the damage that the reaction to COVID-19 has already caused and more importantly, where an escalation of fear and panic could lead. We’ve already seen spending on travel, tourism and entertainment activities plummet, and while this sector only accounts for about 7% of US GDP, a 20% drop could wipe out most or all of Q1 GDP growth.

What’s more concerning, though, and the risk that is analogous to FDR’s 1933 concerns, is if an atmosphere of fear causes a broader and longer-lasting freeze in investment, growth and commerce, particularly among small and medium-sized businesses (employers of more than half of the US workforce), who cannot survive a sustained shock in the same way bigger companies can.

Consider also the herd mentality that we can all fall into at times like this. For example, I’ve had several people tell me that the situation must be dire because the stock market is tanking, but the stock market sells off for all kinds of reasons, especially at times when it has recently hit an all-time high and valuations may have gotten a bit frothy. Furthermore, sharp moves in the stock market are often exacerbated by all manner of structural factors that have nothing to do with macroeconomic or earnings outlooks (e.g., ETF rebalancing, unwinding of short volatility yield strategies, quarterly fund manager reporting optics, etc.).

I’ve also had people tell me there’s no way the market recovers before the end of the year, but we’ve seen many (many) instances where this type of short-term panic selling quickly turns the other way (as a more sober and rational assessment of risk returns), and typically, the more swift the drop, the more swift the recovery. The key takeaway here is not that I’m making a specific prediction (I most certainly am not), but rather a reminder that while the stock market is highly rational over the long term, it can be, and often is, highly irrational over the short term, and as such, we should be careful not to read too much into any short-term move.

The point of all of this, is not to be cavalier about the risks posed by a novel virus that has spread rapidly thus far, nor to suggest we don’t take decisive action to combat this spread in the short term, but rather that we also need to make concerted efforts to be rational about it, to put those risks into perspective, to avoid panic and group-think, and to understand that the far greater risk in times like this is that we descend into a self-perpetuating cycle of fear and panic.

This post may very well age poorly, especially if things get materially worse for an extended period of time, but in one man’s (possibly wrong, but at least reasoned) opinion, the odds of this virus directly causing a global catastrophe with lasting impact are many, many times lower than the odds that a sustained, panicked reaction to this virus cause a lasting negative impact.

I’d very much encourage everyone to be thoughtful and form their own opinions, but I’m going out on a limb here and predicting that the world is not ending, we are not in the first inning of a months-long crisis and in a few weeks, everyone will be back to wondering how we ended up with three versions of that crazy uncle that everyone tries to keep away from the bourbon at Thanksgiving as our presidential finalists.

Or, in the much (much) more eloquent words of FDR:

“This great Nation will endure as it has endured, will revive and will prosper.”

Fear is Also a Contagious and Destructive Virus was originally published in In the Trenches with C2V on Medium, where people are continuing the conversation by highlighting and responding to this story.