Investing Upon a Global Pandemic: How COVID-19 Affects the High-Tech Industry and What it Means for Armenian Startups
Special thanks to SmartGateVC partners Hambardzum Kaghketsyan and Ashot Arzumanyan for reviewing and providing supportive comments to the blog. As well, big thanks to Georgy Melkonyan — Hub Technologies, Karen Khachikyan — Expper Technologies, Alex Baghdjian — YerevanRide, Sargis Karapetyan — Embry Tech, Gerasim Hovhannisyan — EasyDMARC, Khachatur Grigoryan — gg, Alex Saroyan — Netris, Artavazd Minasyan — Krisp, Narek Gevorgyan — CoinStats, Gevorg Soghomonian — AimHub, for taking the time and reviewing parts of the blog.
Over the past months, our team has been closely following global startup ecosystem changes and has captured some intelligence from the VC investing community. We are sharing three key learnings that can help understand the current crisis and possible changes in the VC investing world better, and projecting these changes on the Armenian startup ecosystem.
- Adaptability will ensure the survival
Amid COVID-19 pandemic, the global economy entered a bear market where consumption of non-essential goods and services drastically decreased. The 2020 bear market is distinct as both supply and demand have been profoundly affected for a few months now, because of major supply chain disruptions. The current recession is different in its nature as entire industries are shut down for an indefinite time. Although some states and industries are slowly reopening, further spread of the virus and the possibility of going through the second wave of the pandemic is still in the air. Experts project severe short term economic influence (US GDP decrease for 6.3% in 2020), but further projections are yet complex to make. In such economic downturns and uncertainty (e.g. recovery path, additional waves), revenues tend to decline faster than costs, opening room for fast and firm modifications in changing environments. Just like in Darwin’s natural selection, survivors “are not the strongest or the most intelligent, but the most adaptable to change.”
Here are a few recommendations SmartGateVC partners suggests to help companies adapt:
- Cut expenses through introducing the situation to teammates, setting the right expectations, and brainstorming together on the next steps (reduce salaries, go lean, and be quick);
- Prioritize profitability as almost everyone is changing their investment thesis and is looking for profitability in addition to growth;
- Raise as much money as possible from current investors or investors you interacted with in the past. In the short-mid term, VCs will focus on making sure their portfolio survives rather than back new companies, so do precision fundraising (better close a few small rounds than wait for putting together one big);
- Consider turning your sales strategy (you might lose some of the traditional customer segments, but there may be new ones emerging);
- Shape a new marketing approach (find the best value proposition of your product in the new market landscape, share your insights, build relationships for post-COVID-19 times);
- Do not look for bridges of escape as a founder, and let nothing discourage you from your way and mission;
- Get loans immediately but try not to touch them. It’s going to be mostly on a first come first serve basis. Reach out to your banks for this.
2. Angel-Seed stage startups will fundraise easier
For the past few years, the favorable bull market boosted VC deal activity and companies sealed recording financing rounds with high valuations. However, as seen at the economic slowdown during the Great Recession (2008–2009), fundraising is becoming more challenging as VCs become more conservative. If we compare the current stats of VC investing to that of the Great Recession, deal activity dynamics are similar to those from 2007–2009.
Notably, deal count peaked in 2008, meaning VCs were actively investing but with smaller deal sizes. A similar situation will likely occur now: VCs will prefer investing smaller cheques as usual, which most probably will also lower company valuations in the market. This trend is going to be most severe for late-stage startups that have high burn rates and require more capital to stay afloat. In the mid-long term, early-stage startups are likely to experience fewer effects of the pandemic in terms of fundraising, however, uncertainty in the economy remains as the main threat for them. According to Crunchbase’s “The Q1 2020 Global VC Report: Funding Slowly Impacted By Coronavirus”, 4,896 (~65%) of 7,600 total deals in Q1 were in seed & angel stage totaling up to $3.3B. It is crucial to note, however, that most of these deals were negotiated in a growth prone bull market of 2019.
3. The pandemic affects high-tech industry verticals differently: Armenia’s case
To help high-tech companies and investors navigate in this fast-changing environment, Pitchbook recently released the 2020 Q1 Report on “The Ripple Effects of COVID-19 on Emerging Technologies” which shows the degree of effect the current crisis could have on various industries.
It goes without saying that Armenian companies are logically exposed to the economic changes happening globally. Let’s look at a few verticals with respective examples from the Armenian startup ecosystem.
Healthtech and Wellness — Embry Tech, Robin by Expper Technologies
It’s a matter of time when the pandemic ends, but this crisis will motivate investing (institutional — hospitals, and individuals) in healthtech, specifically on remote patient/individual health monitoring devices. Solutions like BioIntelliSense’s BioSticker wearable sensor and Vici robot from InTouch Health have been helping medical workers in the US with the Covid-19 outbreak.
Armenian Embry Tech is sensorising shoes through an insole to empower people to maintain the weight and lead a healthier life, using proprietary technology. The company has recently launched production in Los Angeles. Additionally, given the growing demand for digital health resources, the company launched shark.health platform, which curates the best health videos in one place to help you conquer your lazy self while on quarantine. It became the second product of the day on Jun 1st, 2020 on Product Hunt (the largest community for founders to launch and receive feedback from early adopters on the new products they built).
Robin the robot, AI-based companion robot for children, is preparing for deployment at UCLA Mattel Children’s Hospital, based in Los Angeles, California. Expper Technologies (the maker of Robin) has been running a pilot with Wigmore Clinic, recording a 26% improvement in satisfaction level and 34% reduction in stress among children. Additionally, Robin became the #1 product of the day on ProductHunt on February 25. Upon the pandemic, children are much more isolated at the hospitals as the visitations have been strictly limited and the medical staff avoids interacting with patients for reducing the chance of the virus spread. Hospitals are looking for solutions to help children cope with isolation, loneliness, and hospital-related stress. By using Robin hospitals can provide better emotional support to sick children without any direct human contact. Recently Robin was featured by Forbes as a robot that comforts kids in hospitals and can help with the Covid-19. Additionally, Sony files a patent for a gamer companion robot according to CB insights, so we know this industry is hot.
Mobility tech — gg & YerevanRide
Even before the coronavirus crisis, in 2019, the investing deals in mobility tech declined by 15% and recorded fluctuating valuations. The main reason for the decline is the cash/investment heavy and unprofitable business models in most such companies.
Over the past few months, similar companies in China (Didi Chuxing) and the US (Uber, Lyft) have experienced revenue declines due to lockdowns, ridesharing restrictions, and increased costs of disinfection of vehicles. Ridesharing companies can expect further declines in fundraising.
However, contactless food delivery can help these companies maintain growth.
Recently, gg expanded its operations and launched ggDelivery in Los Angeles. It provides on-demand shopping and delivery of any item from any store in Los Angeles. The delivery orders in Armenia have grown as well. Additionally, gg launched a contactless option in Yerevan which gives customers the opportunity to ride without contacting ggPartner drivers due to the installed partition between the driver and passenger seats.
Most similar companies in the US and China started offering lower margins to restaurants and free deliveries to customers. The main goal is to maintain active users and push smaller competitors out of business. Such giveaways are likely keeping the companies in growth mode, but will likely push profit margins down even further in an already unprofitable industry.
In contrast, micromobility (electric bike and scooter) companies can benefit in the long-term as people become less likely to share the public commute. Since the crisis started, similar companies to YerevanRide in the US, and Europe have seen a drastic decline in revenues (up to 69% for Lime and Bird), but as the pandemic stabilizes in China and employees are back at work, these companies (Hellobike, Mobike, and Didi Chuxing) report 150% growth, which creates a favorable environment for acquisitions and mergers. In the meantime, YerevanRide reported a five to nine times increase in rides in April-May and a user base jump of 100%. They are currently negotiating partnerships with global companies to help satisfy the growing demand․
AI and ML — Krisp
As companies cut costs in the 2020 bear market due to decreased revenues, SaaS startups’ growth will most likely decrease too, incentivizing investors to look into AI-first business models (companies that use data and algorithms to become leaders in product adoption, pricing, and workforce efficiency). Specifically, angel/seed/early investors are more likely to invest in such startups, which can patiently wait while AI models are trained over time. Previously, these companies seemed less attractive because of lower gross margins, but they have higher business value and “winner take it all” potential.
Over the past few months, Armenian startup Krisp, which mutes background noise during conference calls, has grown over 700%. Prominent media (Forbes, The Washington Post, The Wall Street Journal) have included Krisp in top remote work lists next to Slack, Zoom, and Google Docs. The company shifted to a freemium model with free 120 minutes/weekly plan, gave free access for academic usage (students/teachers), and dropped prices by 30% as downloads increased over six times. The newly launched Chrome extension is another step towards the steady exponential growth of the company. They now have paying customers in over 50 countries with the US dominating 40% of the sales. Finally, Krisp started collaborating with Discord, gaining 10s of millions of new users.
Fintech — CoinStats
With people’s willingness to buy new assets dropping and the stock market falling, AUM (Assets Under Management) of fintech companies providing investment services will also decrease. Most such companies earn a large portion of their revenue through the utilization of the uninvested cash on their platform or through transaction fees. In the long term, investments in cryptocurrencies can increase, with funds like Andreessen Horowitz raising $450M for its second cryptocurrency-focused fund.
Armenian-based CoinStats is the #1 free cryptocurrency portfolio tracker app that helps manage crypto holdings on multiple accounts. The company manages over $5B in crypto assets of over 1M users (with 250K+ MAU — Monthly Active Users). Recently, they announced a partnership with Cred, which rewards users for making credit card payments in a timely manner. As Cred is offering favorable rates by 50% than the rest of the market, CoinStats users can now borrow and lend money with the most favorable terms. This partnership will likely help grow both companies and stay attractive for expenditure-aware consumers. Additionally, CoinStats partnered up with Mercuryo, to make the buying and managing of cryptocurrencies easier for its users: bringing it all into one platform. Now users can buy large amounts of tokens (including bitcoin and ether) and directly transfer the purchase to their connected exchange wallets. Being the one window for all your crypto assets, the app shows the best cryptocurrency rates across various platforms while providing smoother trading and significantly increased security.
Supply Chain Tech — Hub Technologies
The current pandemic resulted in supply chain tech deal activity decrease only in the short-term. As more companies are restarting operations, many start investing in optimizing their supply chain, as the current pandemic showed many flows in this sector. Interestingly, the pandemic is also affecting consumers’ behavior, pushing them to buy online, thus more companies are investing in their supply chain technologies and logistics infrastructure. Thus, in the mid and long term, investments in supply chain/logistic tech will grow.
Companies are always looking to cut their logistics costs. Freight brokers are the huge part of it charging 20–30% for each shipment. Hub Technologies is uniquely positioned as their technologies cut the fat that makes logistics expansive–freight brokers. Hub Technologies makes fright shipping broker-free and unifies all disconnected parts of the logistics industry into one platform. Now, the main challenge for logistics tech companies is to develop technologies to meet increasingly fast-growing e-commerce
Cloudtech and DevOps — Netris (previously XCloud Networks), AimHub
Cloudtech and DevOps sectors are more protected from the economic slowdown as they stay a critical part of business operations. Many companies are likely to invest more in digital solutions, given changing demand towards digital tools for work productivity. In the long term, with tighter budgets, DevOps teams are likely to decrease, and thus the demand for such solutions will decrease moderately.
Every application needs a network to move the bits between application components and its users. Netris (former XCloud Networks) is challenging the status quo of network operations. Netris is an automatic netops software for operating physical networks. The public cloud is fantastic, mainly because of it’s UX(user experience). Anyone who is used to the public cloud would expect cloud-UX for the private and local environment as well. Need for the cloud-UX is driving the $13B local cloud (LCaaS) sector to raise, which is currently growing at 177% CAGR. But the dinosaur-age UX of traditional Network gets in the way of humanity. Netris hides the complexities of network operations and provides users with modern, intuitive cloud-UX.
AimHub, an AI tooling company, provides a version control and collaboration hub for AI teams. The company recently closed a pre-seed funding round led by SmartGateVC and is currently in Berkeley SkyDeck Spring 2020 cohort. The company is working with Computer Vision AI Deep Learning companies to help their teams effectively track and collaborate on ML projects.
Infosec — EasyDMARC
With teams working remotely, the need for advanced phishing tools is increasing for distributed workforces as in March, phishing attacks grew by 667%. Hackers have developed novel phishing attacks and currently, no existing solution utilizes predictive analytics to determine zero-day phishing attacks (Ironscales, Avanan, and Inky). Recently, Privitar, an enterprise privacy protection solution, closed an $80M Series C round, indicating investor interest in the field as going forward, enterprises are likely to adopt advanced anti-phishing solutions offered by emerging cybersecurity companies.
An anti-phishing Armenian company EasyDMARC minimizes the probability of data leakage and financial loss for businesses by preventing email fraud. They help protect companies’ domains and reputations. Over the past period, they’ve recorded three times the growth of phishing attempts. The company also provides free tools like Domain Risk Scanner to scan and assess the risks of the company’s domain, or that of subcontractors, partners, and clients.
Parting thoughts: hopes and opportunities
We live in interesting times, a recession flavored with a global pandemic. Undoubtedly, this will drive valuations and deal sizes down in the upcoming periods, similar to that of the Great Recession. However, companies that adapt fast, will have a better chance of survival, especially in early stages, as the much larger and more liquid VC industry of the 2020 recession is likely to invest in them.
The current economic crisis is affecting high-tech industry verticals differently, opening new opportunities for pivots and growth. Remember, 50+ unicorns emerged during the Great Recession, and VCs that invested at the depths of the recession and towards recovery showed the best performance.
