Reflections from our VSQuarantine

When you cut to the core of it, our job is pretty straightforward: we predict what themes are likely to happen in the world, determine which young companies are best suited to benefit from those themes, invest and convince others to allocate capital into those companies. It’s part of our job to reflect on macro scenarios like that which the entire world is experiencing today. Follow closely as data is released, policies are rolled out and general temperament of people changes. Draw parallels to the First Gulf War of the early 90s, to the 2000 tech crash, 9/11 in 2001 and the Great Recession of 2008. Understanding the historical fallout from events like these can provide a blueprint for how to predict outcomes or make decisions today. But whether or not a trodden path exists for any particular company, organization, government entity or even individual, there is one absolute certainty: that the situation we’re in now changes everything for everyone. 

We are venture capital evangelists. Ultimately, we believe in the long-term gravitation of the world towards a more globalized and technologically interconnected place. There is a prevailing belief that these two factors, globalization and technology, are the root source of the black swan event we’re experiencing now. We have no doubt that it is the same two factors that will ultimately get us out of this. This conviction runs through the arteries of our company.

But we are also individuals, who can offer unique perspectives to our stakeholders, or other members of the venture and entrepreneurship ecosystem. 

So we thought it would be an opportune time for each of us partners at VSQ to share some insights into a.) how we are processing this frightening, bizarre, dynamic, fascinating experience and b.) where we think this dislocation will give rise to opportunity, for our stakeholders and investors, for our portfolio companies, or for ourselves as a team. 

Suneel Gokhale: Great VC Stories Have been Born out of Chaos

The rapid spread of COVID-19 and the resulting market crash has investors and startups within the technology ecosystem fearing the worse. Founders are extremely worried about raising capital and cashflow and investors globally have already started to pull back on deals just months removed from a venture capital market flush with cash and large financing rounds. Against this backdrop of doom and gloom, it is important to remember that numerous iconic investors have made their bones in downturns: Buffett has invested aggressively in the worst of times, so has Soros and world-renowned Silicon Valley venture capital firm Andreessen Horowitz (a16z) set up shop in 2009.

What sometimes is overlooked is that in the midst of the Global Financial Crisis, some of the most well-known unicorns in the world emerged to later become household names. Companies such as Uber, Airbnb, Dropbox and Credit Karma are examples of startups that braved the Great Recession to become global disrupters and once-in-a-lifetime investment opportunities. This is reason for hope – courageous founders will continue to build and create even during the worst of times. The question really is how will we, in the investor community, behave?

Reputations will be forged during this time of uncertainty and long-term VC investors who believe in technology and the impact it can have on people, businesses and society as a whole will emerge from this dark period stronger. 

But it’s not just a commitment to continue to invest in technology that will have an impact; it’s what comes with that capital. Firms like a16z, who quickly joined the Mount Rushmore of venture capital during the last recession, were not established to simply invest in startups and hope for good returns. Part of a16z’s blueprint was Creative Artists Agency (CAA), which was a talent agency started by Michael Ovitz, the acclaimed Hollywood agent. The CAA model was not to only represent clients in binary transactions with studios, but to provide strategic value to talent through leverage by representing actors, directors and producers and then packaging this talent together when negotiating with studios. CAA and their clients became omnipresent in Hollywood. In a similar vein, firms like a16z have sought to build a platform beyond simply investing in early-stage technology companies – they hired teams of people to service the “talent”, being the entrepreneurs they were investing in, by assisting founders with identifying and hiring talent, providing advice on marketing and driving relationships with potential key customers.

Venture investors can learn from this and not only continue to invest in great founders with big ideas through this rough patch, but also perhaps more than ever before support their existing portfolio companies given the current climate by guiding them on operational planning, finding synergies between portfolio companies and their key customers and assisting with fundraising. Many companies in all of our respective portfolios are going to feel varying degrees of pain during the next 6 to 12 months and maybe longer and we, as investors, have a moral (and not to mention financial) obligation to go down into the bunker with the founders we have backed through the good times. When the sun rises again, VCs that were side-by-side with their portfolio companies will have built up immense reputational capital, which will be extremely valuable when a hot tech ecosystem re-emerges.

Sonia Gokhale: Evaluating the Pandemic’s Impact on an Asset Class

These are the scariest times I have lived through in my entire life. COVID-19 is a worldwide humanitarian crisis, and we are encouraging founders to think first about their teams, families and loved ones. In terms of macro, non-financial events having this type of widespread impact on the economy and broader life, I must admit we were not ”prepared” for this. I didn’t think I’d be working from home for the foreseeable future or trying to figure out if I am 6 feet away from a person as I walk by them. As we figure out how to navigate our lives through the COVID-19 pandemic, we all can’t help but think about how this will impact the economy and our respective businesses. For us, our immediate attention goes to our existing portfolio companies – given the size of our portfolio, we have a pretty good sample size to assess the different ways this could play out. Different businesses, across geographies at various funding stages will all be affected differently. 

From what we have seen so far, one of the key takeaways is this – timing is everything. Being completely agnostic with respect to everything else, some companies will survive and even thrive based on having recently raised funding rounds. Having enough runway to ride out the impeding economic shock in front of us is right now probably the one thing that will separate the “survivors” from the rest of the portfolio. This is the unfortunate reality of the venture capital business at this moment – and the randomness of it all is what is a bit unnerving. As VCs we do our work and one part of this is always communicating with portfolio companies around fundraising timelines and trajectory – however in the span of a month, the world has changed and with the lack of active capital out there, we are talking more about preservation. 

Some companies will even thrive in this turbulent time based on operating in a certain sector or geography – we are seeing this in our portfolio already and a lot of this has to do with providing services or products related to “essential businesses”, such as food, healthcare or logistics or key segments such as education or financial services. Examples in our portfolio include Bravecare, a technology-enabled urgent pediatric care clinic, which has added telemedicine through its virtual clinic and a COVID-19 symptom checker. Another is Cloosiv, a software platform that enables coffee shops and cafes to provide online mobile ordering, which has seen a spike in sales where local businesses are able to serve its customers in a contact-free safe manner. Medinas founder Chloe Alpert also started Mask Match, a not-for-profit site where the public can donate masks to health care professionals, helping to ensure the people that are fighting this war for the rest of us are protected.

The overarching lesson here is that even in traditional offline verticals, digitization will start to become the market norm and startups that offer technology-enabled solutions will grow and even prosper, particularly in emerging markets. 

If e-commerce or food delivery or Fintech hadn’t yet supplanted traditional incumbents, they may now, and it will be interesting to see which companies in which countries will scale through this crisis. In MENA specifically, Fintech adoption may accelerate as a result of this crisis, as consumers and business opt for contactless transactions and experiences. 

At the end of the day, much of this is out of our control and the control of our portfolio companies. What we can do is start stress testing - turn this into a new variable. We can factor in a probability into our scorecards and evaluations: in the (hopefully low) likelihood that massive market-disrupting macro events like COVID-19 happen in the future, how will prospective and current portfolio companies be able to react? But no matter whether or not we get that right, we don’t think any company, like us will ever truly be “prepared” for something like this. 

Maan Eshgi: The Region’s Response Has Measured Up

People are calling this a “triple black swan” event for MENA: public health crisis, economic downturn and depressed oil price environment. It reinforces the extent to which MENA’s fate is linked with the rest of the world. I share the anxiety of others right now, but for me it has been a proud moment to see the firm measures undertaken by regional governments to ensure the safety of their citizens and residents. Saudi in particular was impressively quick to take action as soon as the first case was identified: installing thermal cameras at airports, shutting down certain flights, instituting work from home policies and a strict curfew. This is showing us that, relative to other countries/economic models/systems of government, the way that many of the countries here in MENA function allows us to act quickly and decisively. In situations like this COVID-19 outbreak, this is a positive and should reflect on how countries like Saudi rank on global competitive rankings. 

From our standpoint here at VentureSouq, while external interactions with different stakeholders have definitely slowed down, this has been an opportunity for us to reassess our own priorities and start utilizing all the digital tools we follow so closely. We’ve changed the way we work together, have hosted some impromptu but very successful online meetups. We’ve put out fires that arose because of this, and also jumped on unique opportunities (like M&A for example) that otherwise wouldn’t be here. Most importantly, we’ve reinforced our role as a "solution provider" in the market, both for companies facing fundraising and business development challenges, for investors who view this market as an opportunity and for government entities whose job it is to keep the economy going strong.

The positive response of GCC countries like KSA to COVID-19 proves that the investments they have made into technology have been worthwhile. The companies and infrastructure that has been built was ready to be put to the test when the time came. 

Our investment thesis will continue to focus on backing local champions and helping to expand the MENA venture ecosystem. We believe tech-enabled businesses that survive this time will rebound quickly and take market share from traditional businesses due to innovation, efficiency and speed. So we think at the end of this, we will definitely be deploying more capital into the venture space.

Sonia Weymuller: What Technology and COVID-19 are Teaching us about Conscious Investing

This time is one of self-reflection for many investors. The pandemic and its ramifications have highlighted and will likely accelerate the broader movement towards more conscious thinking when we invest. Companies are doing extraordinary things to leverage emerging technologies for the collective good of our species. Examples abound: from the use of AI to track and forecast outbreaks and diagnose viruses, to harnessing drones for medical supply delivery, to chatbots being used to disseminate health and travel information, to robots sanitizing and delivering goods, just to name a few. 

Recently, we were fortunate to host Deepak Chopra and Mona Hamdy as part of our newly launched Conscious Collective content series. In this inaugural session we addressed how these very technologies are being used as positive weapons towards combating this pandemic. “We are a species of short vision and shorter memory – this experience is a reminder of how interconnected we are.” Mona was right, technology is forcing all of us to commune in the face of a common threat. COVID-19 has exposed just how intertwined we are and how issues of public health and the environment need to underpin any investment now being made. Some of our portfolio companies already reflect that - DendraPachamaMedinasHelium Health - others are adapting to today’s status quo and reinventing themselves – Immensa Technology Labs has recalibrated its 3D printing business to provide medical face visors and address supply chain disruptions and Scanwell is looking to launch an at-home 15-minute coronavirus test.

But this virus has also blatantly exposed quintessential systemic issues - “gross income disparity, a huge carbon footprint, a pitiful level of well-being for the world’s under-privileged and an ingrained prejudice against the poor and anyone not like us,” Chopra highlighted. Technology can therefore also serve to exacerbate these imbalances and world divides. “It is part of our evolution - you can’t stop technology, it reflects our biases and is an expression of our collective consciousness,” he continued.

So what does this mean for us as investors? 

We need to rethink how we choose to invest our money. Investor demand for conscious investment strategies that prioritize positive impact is front of mind today and will inevitably continue to grow. 

We’ve already witnessed the next generation of investors leading the growth in demand for ESG-focused, mission-driven finance. It’s clear: millennials want both ROI and impact – they demand that their investments have a positive global impact and act as meaningful influencers of change. Similarly, we’ve seen conscious CVCs emerging – private and publically listed corporates shifting their CSR budget towards equity-based conscious investments: Twilio, Comcast Ventures Catalyst Fund, Salesforce Ventures Impact Fund, Parrot and ENGIE are just a few examples. Mainstream traditional players have already followed suit as well – from TPG’s $2.5B impact fund to KKR’s $1.3B vehicle announced just two months ago. BlackRock CEO Larry Fink’s annual letter backs this up and serves as a clarion call to chief executives worldwide: “We believe that sustainable investing is the strongest foundation for client portfolios going forward. A company cannot achieve long-term profits without embracing purpose and considering the needs of a broad range of stakeholders.”

Source: New York Times

Therefore, just as we’re seeing technology act as a multiplier for good, it’s also time for VCs to act as a magnifier - of good. It is up to us to ensure the investments we choose to make are true reflections of our collective consciousness. We should take this time to reflect on how to make lasting systemic changes starting with how we choose to invest our own capital. Chopra ended our session by reminding us that the last extinction occurred in less than an hour. “At this moment it’s not important to think about ourselves because we are not important in the big scheme of things. If insects disappeared from our planet today life would stop in 5 years. If humans disappeared from this planet, life would flourish in the next 5 years.”

The need for an alternative system of investing is on the rise. And you, as an investor, have the choice to ensure that your capital acts as an accelerator of change for today’s most immediate challenges. 

Tammer Qaddumi: Three Measures of Success in the time of COVID-19

I can find ways to relate to this. I’m from Houston, a hurricane bullseye zone. Every few years shops shutter, people hunker down, basically the world stops in advance of an impending disaster. My first job was on the mortgage backed securities desk at an investment bank. This is the product that triggered the Great Recession of the late 2000s. I saw the world change then but didn’t really get why - just too fresh to have any real context, but I saw it. And as a private equity investor, we were long O&G when the supply-side war of 2014 caused oil prices to drop 80%. So, I’ve kind of seen each of the 3 wings of this “triple black swan,” just not at the same time…

The current situation is teaching us that the meaning of progress & success are very much functions of our macro environment. For the past 5 years, which is substantially the lifespan of VentureSouq, progress and success were measured by growth, of basically everything: capital deployed, returns generated, revenue, team, countries. Of course, not easy to achieve, but straightforward to track. But this is not the case anymore.

For us success right now is three-tiered:

-   How our portfolio companies are doing

-   How our own company is performing, and

-   How well positioned we are to take advantage of the recovery

On the first point, we are only as good as the companies into which we’ve invested. For some of our companies, the current situation represents the potential for an immediate boon to business (think dev & workflow tools, food delivery, online education, 3D printing). But for most, success means survival. We are learning to measure how well companies communicate with customers, manage down expectations of shareholders, optimize resources, recalibrate strategies and plans. “Scalability” has always been an essential criteria for us, but we have always evaluated that in one direction: scaling up. Now we better understand the importance of companies being able to scale down. Now we better understand why variable cost structures are so beneficial. Simply put, success in this first instance means having the vast majority of our portfolio companies living to see the other side of this. 

On the second point, our progress is measured in how well we use this situation to improve long-term productivity. Now is our chance to nail our remote working processes, as we have no other choice. Now is our chance to redefine our investment thesis and approach to be macro data driven, as we have been slapped with the global cyclicality that underpins venture (and every other asset class). 

On the third point, this is less about reputation, funding or even market confidence and more about preparation. Prior to COVID-19, we had developed a specific thesis around regional Fintech, based on first principles: customer and enterprise habits, global trends, developments in technology, speed of regulatory changes, etc. That thesis hasn’t changed; in fact, it has become more pronounced. If you look at the 2000 and 2008 market events, we draw two very clear observations: 1.) Fintech and payments companies outperform traditional banks, insurers & FIs during and in the immediate years that follow a downturn and 2.) Fintech revenue growth is higher during these same periods than during “good times.” Couple this with the valuation re-set that will certainly follow (with a lag) the public market repricing that we’re seeing now, and we believe we will eventually have a once-in-a-generational opportunity in the Fintech space. We are concertedly building this narrative with our investors, and spending a lot of time with the Fintech companies that we believe will be positioned to take market share across the region. 

Source: VSQ analysis, including publicly traded banks, fintech and payment companies