Investing into Foundational Shifts: How to Capture the Opportunity Presented by COVID
“Change is inevitable. Growth is optional.” — John Maxwell
The time it takes for any given individual to form a lasting habit is 18–254 days, with the average sitting at around 66 days. COVID has been affecting most of our daily lives in the US since at least March 11th (the day the WHO declared the coronavirus outbreak a pandemic), putting us at 217 days and counting.
It appears as though the question of whether COVID-19 will produce lasting and likely permanent changes within the fabric of our society is now moot. Beyond the changes to our daily routines, COVID-19 also caused deep psychological damage, rooted in present isolation and future uncertainty, as well as wider infrastructure damage, reflected in vacant stores, political strife, and a slowing economic recovery.
At this point, it almost feels trite to discuss it; but the fact is, we are still in the middle of a tectonic, generational shift that is killing off stalwart industries, accelerating nascent business models, and fundamentally changing the way in which consumers address their basic needs.
Now the question is — what do we do in light of this situation? As a venture capitalist, my job is to recognize patterns and identify opportunities in disruption. COVID-19 represents the ultimate disruption and, therefore, the ultimate opportunity. So, I decided to break the problem down into its component parts to understand the extent of the opportunity and write an article every few weeks on a specific opportunity uncovered by my framework.
My thesis, from a very high level, is the following: COVID wreaked havoc on the basic routines, behaviors, and infrastructure we take for granted and have come to rely on for meeting our basic needs. This disruption invariably caused panic among consumers and forced them to change the way in which they met their needs, leaving large incumbents scrambling to adapt and opening the door to new entrants better-equipped to meet those needs.
To clarify, here are a few examples of these structural disruptions and how they manifested themselves in our daily lives:
A useful framework for thinking through how these disruptions affect consumer reactions is Maslow’s Hierarchy of Needs (as shown below):
I can’t take credit for turning to Maslow as a helpful framework for thinking through the long-term implications of COVID — my Partner Joe Miller over at Morpheus mentioned Maslow to me back in March when almost no one knew how to frame what was going on.
According to Maslow, a crisis pulls us from the peak of the pyramid quickly to the base, and COVID has been no exception. Fear and uncertainty force us to ensure that our most basic needs (our “deficiency needs”) are met before we can begin moving back up the pyramid.
The speed at which COVID struck and disrupted our core infrastructure left businesses woefully under-prepared and lacking the tools required to meet consumers’ needs. The winners in this market will be the quickest to adapt and build the products, services, and infrastructure that businesses and individuals will require in a post-COVID world.
That said, there’s a key question venture investors need to be asking: how do we know if the COVID tailwinds for any particular idea are long-lasting or fleeting? The reality is that we don’t know, but we can make educated guesses. I believe the best way to make these educated guesses can be broken down into two steps: first, look at the macro trends already underway pre-COVID that were accelerated by COVID. Second, take a page out of Jeff Bezos’ book: instead of focusing on the specific changes underway within a given market to identify winners, instead ask the question: “what’s not going to change in the next 10 years?” Customers will always want things to be better, faster, cheaper, more intuitive, with greater selection, greater exclusivity, greater personalization, etc.
As such, my next step was to map the infrastructure disruptions mentioned above to the Hierarchy of Needs in order to understand the various long-term, macro shifts accelerated by COVID. I then honed in on the spaces where I believed startups would be at a unique advantage (e.g. due to speed, model, technology, market fragmentation, customer dissatisfaction with incumbents, etc.). I also focused specifically on the middle of the Maslow pyramid; while each step in the hierarchy has been affected in some way by the crisis, I feel the impact on the two extremes will be more short-term, whereas the impact on the middle has been more deep-seated, and therefore, will be long-lasting:
The above theses are not meant to be exhaustive, but rather representative. As I dig into this series, I’m sure I’ll probably uncover more opportunities, dig in further than I expected into specific markets, and flat-out abandon one or two opportunities that proved to be less promising than expected (e.g. because the space is already crowded).
While these investment theses are admittedly fairly broad and sweeping, common themes do begin to surface. All problems address “need-to-have” issues (as opposed to “nice to have”) — they are drugs, not vitamins. They are either B2B solutions that will help drag companies into this brave new digital world or consumer/B2B2C services that address life’s pressing needs. Finally, all of these opportunities address foundational changes, a key criteria that must be met to avoid falling into “momentum investments” that capture the current sentiment but not the underlying macro trends.
This series will be an exercise in fleshing out these investment theses and testing my framework to identify investment opportunities for venture investors. I will be testing whether we can turn chaos into opportunity, and whether Warren Buffet’s advice to “be greedy when others are fearful” holds true in a post-COVID world.