Innovation During Downturns: Data First Opportunities in the COVID-19 Crisis

Weekly Reflection

“The significance of crises is the indication they provide that an occasion for retooling has arrived.” Thomas Kuhn, The Structure of Scientific Revolutions

Recent news is encouraging. China has emerged from 76 days of lockdown and business is returning to normal. In Europe, the slope is declining for new COVID-19 infections and mortality. In the US, stocks have surged 26% in the past month and plans to reopen the economy abound. As warmer weather bathes the north, the worst appears to be behind us and the path to recovery seems imminent.

Let’s hope so…yet the fundamentals tell a different story. US unemployment surged to its highest rate since 1938 and national debt as a percent of GDP reached an all-time high. Desperation abounds despite rapid distribution of $2.7 trillion in aid. Lockdowns went into effect quickly. Reopening the economy will be more measured. Some industries may rebound quickly, many will return gradually, others will be forever altered.

A Brief Review of Past Downturns

Deeper drops require longer recovery periods. In the financial crisis of 2007, the S&P dropped 50% over 18 months and took 4.5 years to recover. In 2000, the NASDAQ fell 85% over two years and took 15 years to recover. Tech stalwarts like IBM, Amazon, Oracle, and Microsoft took 7–15 years to recover their value. Many of the tech industry’s brightest stars in 2000 never fully recovered: Cisco, Lucent, Sun Microsystems, and PeopleSoft, to name a few.

“Many of the tech industry’s brightest stars in 2000 never fully recovered: Cisco, Lucent, Sun Microsystems, and PeopleSoft, to name a few.”

As the chart below shows, recession indicators in the US have fallen faster and steeper than at any time since 1929. The Great Depression took three years for the stock market to hit its trough and ten years for a recovery. The COVID-19 outbreak is a health, not an economic crisis, yet spillover effects are evident in the travel, entertainment, retail, auto, healthcare, oil & gas, and financial sectors. We must get back to work before short-term economic impairment metastasizes.

Companies must therefore prepare for a long recovery period. We advocate that our companies take a Survive and Thrive approach: they must be able to play through a prolonged downturn and have a plan to emerge from the crisis in a position to win. Survive and Thrive helps focus the discussion. It is a high bar, yet investors and sponsors do a disservice by slogging through without a credible Thrive plan.

Innovation During Downturns

There is light at the end of the tunnel for those that survive. Down markets are the best times to start and build companies. Incumbents are distracted, startup costs are lower, and talent is amply available and less costly. Lower competitive intensity gives more time to optimize for product-market fit and pursue capital-efficient growth.

“Down markets are the best times to start and build companies.”

These factors alone do not fully explain why startups flourish during downturns. Bull markets rarely spur introspection. Recessions are laboratories for experimentation — an opportunity to reflect on what went wrong and repair past problems. As Thomas Kuhn wrote in his seminal treatise The Structure of Scientific Revolutions, “The significance of crises is the indication they provide that an occasion for retooling has arrived.”

Entrepreneurship flourishes when prevalent catalysts for innovation coincide with favorable startup conditions. That is what happened during the last recession. Apple launched the iPhone in 2007, marking the dawn of the Mobile-First era just as the financial crisis hit. The result was a surge in innovation that spawned many of the iconic tech companies of the past decade. AirBnB, Cloudera, Dropbox, Slack, Square, Uber, and Didi were all founded between 2007–2009. Vintage venture returns also tend to be counter-cyclical. Bull markets are sellers’ markets, bear markets are buyers’ markets. Venture returns were 8% in 2006 (a cyclical high) but averaged 23% from 2008–10 (cyclical lows).

The COVID-19 crisis coincides with the rise of Data-First companies, an era when everyone and everything transmits a signal, and when augmented intelligence translates data noise into signal. In the next couple of years, conditions may be favorable for a spate of innovation akin to 2007–9.

“The COVID-19 crisis coincides with the rise of Data-First companies, an era when everyone and everything transmits a signal, and when augmented intelligence translates data noise into signal.”

Innovation opportunities often emerge from breakpoints created by the downturn as well as inexorable trends and tailwinds generated by economic, demographic and business conditions. Disruptive opportunities arise when technology innovation aligns with broader business needs. The COVID-19 crisis has uncovered several issues that create opportunities for Data-First innovation. Following is a small sample of emerging opportunities:

Commerce:

· Omnichannel Retail: The COVID-19 crisis accelerates the shift from traditional to online retail. Amazon is hiring 175,000 people to meet surging eCommerce demand. Yet this is just the start. We need an omnichannel retail capability where stores double as warehouse space and integrated inventory data creates a more flexible, efficient supply chain. Nike recently acquired NGP Capital portfolio company Celect to address this opportunity.

· Logistics: COVID-19 has laid bare a rigid, balkanized supply chain. Crops are rotting in the fields while people are hungry in their homes. The focus of logistics needs to shift from efficiency to resiliency. We need a nationwide capability for daily delivery of food and other necessities to everyone, everywhere. Technology exists to solve these problems. Deliveroo, an online food delivery company backed by NGP Capital, delivers food to households in over 500 cities worldwide. NGP Capital recently invested in Shippeo to bring transparency to the logistics and supply chain industry.

Future of Work:

· Remote Work: Video calls are the new meetings. Zoom grew 30x to 300 million daily users within two months. COVID-19 has mandated a work from home policy that companies have contemplated for decades. Employee safety is now job #1 for companies, a responsibility that includes both the commute and time in office. Scoop, an NGP Capital portfolio company, offers companies a trusted transit alternative with safe carpooling commutes.

· Workforce Automation: Robotics Process Automation (RPA) has attracted $3 billion funding in recent years to reduce operating costs. COVID-19 has put RPA higher on the agenda to enhance business continuity as well as save costs. Workfusion, an NGP Capital portfolio company, offers a high-end solution to automate complex, rote work.

Online Services:

· Healthcare: Hospitals have been overwhelmed by COVID-19 crowding out patients with other needs. Telemedicine and digital health have increased use as a result. Vida, an NGP Capital portfolio company, helps people manage and monitor chronic diseases online.

· Education: Millions of students around the world now rely on online education daily. Online education services have surged in the past month as we have seen in NGP Capital companies Babbel in Europe and Classba in China. A surge in online education creates opportunities for new content services and underscores the need for technology to close the digital divide.

· Gyms: Peloton sales surged during the lockdown. Online fitness apps also surged as NGP Capital observed with Yogaia. Gyms must provide an online, healthy alternative for home workouts. eGym, an NGP Capital portfolio company, addresses this opportunity.

Innovation flourishes during downturns. We are delighted to see many of our portfolio companies respond well to COVID-19 and are excited to back companies that are responding to needs and opportunities emerging from the current crisis.