No one knows what is going to happen next. The world is awash in bad news. Covid. Unemployment. Protests in the Streets. Covid Wave 2. A brewing Constitutional Crisis in the US. Cats and dogs living together. But you have to run your business, how do you cope?
One thing we like to do with clients is run through a session of scenario planning. Make some assumptions about how the world will change and think through how that will affect your business. Then iterate through changes in to those assumptions.
In this post, we are going to look at some scenarios and think through how this will affect technology in general, and some specific industries.
We see five different scenarios coming to the economy over the next year.
Two of these are the extreme cases – things get really good and things get really bad. We see both as very unlikely. There is little chance that the economy snaps back and we go back to 2019. True, the stock market is indicating a “everything is normal” outlook, and the stock market is never wrong…. Similarly, we can worry about the virus surging back and hundreds of thousands more people dying, the economy collapsing, and the world devolving to some combination of Mad Max and The Walking Dead. There are some people who believe this is coming, even some who seem to welcome it. This seems alarmist and not likely. Moreover, if it comes to that, running your SaaS start-up is going to be the least of your problems, so we will skip over this one too.
That leaves us with what we see as three possible outlooks:
1 – This is the new normal. We remain in this weird limbo, with the economy slowly re-opening. At some point next year we get a vaccine and people gradually starting resuming activities they have shunned for fear of the virus.
2 – A “V” shaped recovery. The economy reopens soon, and while the disease continues to spread, its lethality diminishes to the point where the healthcare system can manage things.
3 – The 2nd Wave – Covid comes roaring back later in the year and we enter a second phase of some form of lockdown.
There are really three assumptions at play here: 1) the status of Covid; 2) the impact that has on individuals in their daily life; 3) and how that then affects the overall economy.
If the disease has peaked in the US, the economy in the US should start to unfreeze. However, the latest data shows at best a plateauing of cases. Under Scenario 1, it is possible this continues into next year, or whenever we get a vaccine. This is not terrible, but it is less than ideal. The US has found some stabiilty here, there do not appear to be lasting shortages of groceries. Unemployment is a big problem, but under this scenario, we would assume that things start to pick up, albeit slowly.
If things play out this way, start-ups will still need to operate in survival mode for a year. As we discussed in our post last week, cash will be king and survival will matter more than growth. Batten down the hatches now, but start to move faster later in the year and see what opportunities arise. Raising money will be slow but will still be possible. This will probably be a great time to bootstrap some new company. By the time it reaches scale, there will be money lining up to invest. Some of the hottest tech companies today started in the aftermath of the dot com crash or the Great Recession. So, cautious optimism.
Under Scenario 2, maybe the disease has run its course. Maybe it has mutated and we have all gotten smarter about how to prevent the spread. Under this scenario, things start to get better much faster. The US government has pumped an incredible amount of money into the economy, and some portion of that will trickle down to venture investors who will seek to fund emerging companies. One of the big differences here is that travel may come back sooner, which would make sales a lot easier. Personally, we think this is highly unlikely, and the data on Covid does not support that, but it is possible. So, moderate optimism.
That being said, in both these scenarios it is important to remember that eve as things start to get better, the underlying economy has taken a lot of damage. This will be a drag on the economy and on tech for a long time to come. For instance, travel, restaurants, in-person events will have bottomed out but recovery is years away. Many restaurants are never coming back, and anybody starting a new restaurant today has so much rick tolerance that they are probably smarter to just take their money to Vegas.
A key factor in this analysis is to understand that even if governments open things up, that does not mean individuals are going to rush back to normal. Sure, everyone will be excited to go see a movie or dine out, but there is enough fear (and common sense) out there that they are unlikely to make a habit of this until we have a much higher degree of confidence in our ability to deal with the virus.
For what it’s worth, this seems to be what is happening in China. The economy there bottomed out in March, and then started coming back, but still operates a good ~20% below (or more) below pre-virus levels. This is not ‘bad’ but it is a very different economic position than even a year ago.
And even if things in the US, Japan, China and Korea stabilize, the rest of the world is still in early stages of the disease – Mexico, India and Brazil, to name just a few, are much earlier in their virus cycle, creating further headwinds for the broader economy.
Which brings us to Scenario 3. Here, the concern is that the virus comes back. Epidemiological models make it seem likely that the virus will return to some degree, and historically the 1919 Influenza saw much higher casualties in the second wave than in the first. So what happens if Covid cases and deaths start to spike higher again, maybe around the end of summer or early autumn?
Given the way that the virus has become so politicized in the US, it is hard to predict what governments will do. We imagine most authorities are going to be reluctant to shut things down again. However, this could mean the virus keeps spreading, ICUs and hospitals get overwhelmed and the governments are forced to shut down again anyway. This is not a pretty path. The US government has already exploded its balance sheet to stimulate the economy, it could try that again, but the affects may be different.
We think the biggest problem in this scenario is the way it will affect individual decision making. For everyone to endure this current lockdown only to see a second one six months from now, will mean when that wave is over people are going to be twice as reluctant to return to normal spending habits. This will mean the eventual recovery will be much slower. This will be true even if we ‘only’ have a resurgence in the virus but no widespread lockdowns. There are also A LOT of second order consequences, a prolonged recession is going to wreak havoc with things like housing and banking.
Perhaps the simplest way to think about this is to ask parents “Are you willing to let your children go to school in September?” Any answer short of an unequivocal ‘Yes’ is a clue that the economy is going to be much slower to recover.
If this, admittedly pessimistic, scenario comes to pass, then start-ups need to stop thinking about growth. Find a way to survive and sustain without raising any more money. This period will not last forever, but it may feel like that.
Our point in all this is not to alarm people. We are not epidemiologists and have a barely passing understanding of the virus spread statistics. Instead, we are want management teams to spend more time thinking more broadly. The prevailing philosophy in start-ups is that they do best when they focus. Starting a company requires so many tasks, that usually it is best to hunker down and focus solely on the business. That is the winning strategy when venture dollars are abundant. However, in the current Uncertainty, it will pay to keep a close eye on the virus and the broad economy.