Uncertainty – Are we going back to work?

We have been speaking to a lot of large enterprises this week about their plans around Covid. And the news is not good.

Put simply, most companies seemed to be planning a resumption of work in the 4th quarter, September-ish. Over the last two weeks, those plans have largely been put on hold.

As we have been saying for a while, the big threat to the economy is not the actual spread of the virus (at least not yet), it is the perceived threat. Consumers and companies are going to base their decisions on the information they get. When that information is inconsistent, they will err on the side of caution. When they are told they can go back to normal and then told “no wait, do not go back”, they will become even more cautious whenever the all-clear signal sounds.

In the absence of any plan from the US Federal government, the data we all are getting is incredibly varied. The US system is designed to have a single Federal voice giving direction. With the undermining of the perceived reliability of Federal agencies, like the CDC, there is no clear signal coming from the Feds. Without that, every governor, mayor, strategy blogger and Internet-epidemiologist competes for attention.

The end result is a fully-distributed decision making process. And so the action of individual companies weighs heavily. Given our latest conversations, we think that there will be many sectors of the economy that do not return to normal activity this year.

Obviously some sectors will benefit from this – e-commerce, logistics, healthcare, etc. But many other industries will operate at reduced levels for a long time. And at the individual level, consumers are already showing signs of reducing overall spending, a decision feeding off all the other signals.

This is going to be challenging for tech companies on a number of levels. Demand is going to be weak, but will vary tremendously by industry. Travel is trending towards zero. Video games look good, but we have to wonder if conversion for in-app purchases starts to fade with consumer confidence. And everything else is somewhere in between those extremes.

Another big problem is going to be how to sell products to enterprises. Yes, we are all becoming experts at Zoom, but the lack of face to face meetings will take a toll. At the very least, we have heard many start-ups lament that sales cycles are extending at their big enterprise accounts. This is true across every sector. One person we spoke to who sells equipment into biotech labs was lamenting the fact that even though many of her customers were operating at 100% producing Covid-related drugs, she saw no path to meeting quota this year. Half her customers were in extended slow-downs, and even the half that were working full-tilt were deferring purchase decisions on many items for long periods.

We do not want to sound all doom and gloom. But a few months ago we examined three scenarios for growth, and we are clearly entering Scenario #3, the gloomy one. For start-ups, the next six to nine months will be about preserving capital. If you have raised money, conserve it.

If you are trying to raise money now, the outlook is mixed. As above, VC decisions are taking longer than they used to. Summer usually means a slowdown in VC investing, unclear if that is true now. There is nowhere to vacation, so maybe investors keep at it. The good news is that there is a lot of money still sloshing around the system. Investors have appetite for deals, even if they are doubly cautious about deploying funds.

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