Selva Ventures: Q1 2020 Investor Letter (COVID-19)
Unique times call for unique levels of transparency. I’m sharing the letter below verbatim that I sent to my investors this morning (April 14, 2020). Typically such a letter would be private, but given the magnitude of COVID-19 I wanted to give brands in our community an open look at how a venture investor is approaching this situation and communicating with their stakeholders. It’s only an n of 1, but I hope you find it helpful. Stay safe — better times are ahead.
Dear Investment Partner,
First thing’s first, I hope you and your loved ones are safe. This past month has been many things: bizarre, strange, volatile and upsetting to name a few, but for those whose health or job have been adversely affected by this virus I can only assume it has been quite frightening. I hope that as this continues to develop you remain insulated from the worst effects of this. If we have not spoken recently please know that I am thinking of you and sending you my best.
It’s honestly quite strange to think about what this letter might have looked like if the quarter ended in February rather than March. I can’t think of any period that I’ve lived through where the world changed more dramatically in one month — not even September 2001. The level of uncertainty is staggering. The stances taken by smart people on what is happening and what should be done vary wider than perhaps any topic I’ve come across. To say we as a firm are proceeding with caution would be an understatement.
That said, despite the volatility and uncertainty, I’m actually quite optimistic for how Selva Ventures will fare in the months and years to come. We have called less than 15% of our committed capital, our existing investments have thus far weathered the storm effectively and our sector of focus has proven itself to be quite resilient in the first month of this global crisis. Chaotic events like these tend to shake loose some very interesting opportunities; I expect us to be ready for these opportunities with capital and a prepared mindset.
To make sense of what is happening and what will happen to early stage consumer I’ve first tried to unpack the virus into three variables of impact: demand, supply and financing. Then, I’ve separated the crisis we face into four stages of time as the virus runs its course through the food, beverage and personal care industry. I’ve spent the past month speaking with investors, CEOs, service providers and retailers — unsurprisingly there is very little consensus, but here is my take on how these three variables (demand, supply and financing) will react:
I’d argue we’re just about through this stage by now, and the toilet paper shortage at grocery stores across America shows strong evidence of an irrational buying spree. DTC brands are having some of their best days ever (many better than Black Friday / Cyber Monday sales), while online customer acquisition costs have reached 5-year lows (down 30–40% in March) as consumers spend more time on social media with fewer advertisers in play. Supply chains have held up so far, largely due to existing inventory flowing through the system and employee designations as ‘essential’ from manufacturers to grocery workers. Financing markets have ground to a complete halt, though firms who have signed term sheets are still funding the deals they signed up for.
At some point, consumers have grown accustomed to working from home. They’ve figured out how to buy their groceries, how to form an exercise and leisure routine. The week of March 16th felt like it lasted a month; the week of April 13th will feel like a week (well, maybe nine days). With stabilization of behavior comes reversion of demand, meaning the days of aggressive stocking up with likely end. I don’t expect May and June to be record months for DTC brands the way March and April likely were. What will change, however, is a lagging strain on supply chains that began in March. So much product is getting pulled through so quickly that supply chains should inevitably face pressure. Distributors and retailers will adapt — getting food to consumers is too important for them not to — but I expect the way they adapt will uniquely hurt smaller brands. Distributors will consolidate the number of products they deliver to focus only on best selling brands and products. Retailer resets will be delayed, delaying new distribution wins for fast growing brands. If contract manufacturers have any loss of capacity from employees getting sick, the smallest brands will get squeezed. As all of this happens, investors will see a world that has not yet normalized and likely remain on the sidelines through the end of Q2.
It’s quite arbitrary to pick July as the beginning of the ‘Aftermath’ — the jury is certainly out on when this will happen — but this stage begins when low-risk individuals go back to work. At this point, the virus still looms but the broader driver of consumer behavior shifts from virus counter-measures to coping with the economic damage of these measures. By this point I would expect that we’re living in a fairly serious recession, and investors slowly enter the picture with a new consensus on how this ‘event’ has impacted industry valuations. Supply chains should have by this point worked out any issues and generally be back to normal. Demand will be the biggest wild card: what will happen to consumer products that tend to be healthier but generally priced 30–100% higher than close substitutes? There is reason to be optimistic here: consumers will be traveling and eating out less but still taking care of their health and looking for things to look forward to. That said, we have never witnessed our economy with the 20–30% unemployment figures that some experts are projecting — the truth is we don’t know what happens to consumer spending more broadly when so many people are out of work saving every dollar they can.
At some point I believe the world will go back to looking pretty close to how it did earlier this year. I don’t expect that to happen by January and it won’t happen all it once; it will take a combination of therapeutics, vaccines, public policy and simple societal fatigue longing for how things used to be. Trying times have a way of stimulating communities when they finally emerge from the darkness. The ‘Roaring 20s’ or even the patriotic culture post-9/11 can serve as a guide perhaps not of ‘how’ people will come together this time but the magnitude of the movements when they do. Consumer brands will play a very important role in the Reset. The best ones will be remembered for having been functional and emotional solutions for people during times of darkness; the rest may not recover from struggling to capture consumer or investor attention during tough times. These defining times will foster some very big outcomes and I expect investors to be eagerly waiting to dive in the moment they see signs of clouds passing.
As a firm we pride ourselves in being thematic and proactive. We aim to predict consumer behavior top-down and then seek out the potential beneficiaries of our themes to partner. The coming months will be an interesting period of re-evaluation of our themes; many remain relevant, but the world has undoubtedly changed. During this period of time, the bar to make a new investment is higher than it has ever been. Your capital is sacred and we have a lot to learn about the new world we’re living in — we won’t act too early without conviction. Your capital also puts us in a unique position to play offense when others are on their heels and it is during these times that I believe we’ll see value in opportunities that others will miss. We’ll be ready.
Stay Safe,
Kiva Dickinson
Managing Partner, Selva Ventures
