This is not your typical recession. Its force majeure: Hand of God. Naturally, we have had to hunker down and pray for it to pass. And this too, shall pass.
The PE and VC sector have lost momentum and investor activity has receded. But this will not be for long. In fact, 2023 could be a bumper year for investors working hard through the lockdown to cherry pick good companies. There are several reasons for that.
Firstly, this more of a hiatus than a breakdown. Unlike the recessions in 2008 or early 2000s, that were driven by hyper-speculation and fundamental flaws in business models, the current one has been induced when the global economic activity was chugging along nicely.
Corporate balance sheets were well supported by healthy consumption.Financial institutions, largely, were resilient with caches of tier 1 capital. The PE and VC industry was flush with dry powder and confidence. And the Governments, in general, had enough fiscal and monetary arrows in the quiver just in case things went south. And then, they did. The arrows have been fired and results are awaited. If they buy us enough time to find a vaccine, we will be fine in couple of years.
Secondly, the typical organized investor base is visionary and learns fast from mistakes. Even before Covid-19, there were strong undercurrents of dissent in the way startups were being valued and governed. At Cianna, we have long been professing in favor of the Warren Buffett style of efficient, long term investment over the Masa Son style of unmitigated growth investment. Both these gentlemen are legends in their own right, the former will make you reasonably content over a long term, while the latter could make you a king (or a beggar) real fast, while.
Covid-19 will catalyze those undercurrents into seismic shifts in investment patters. More specifically, exponential value generation especially in non-essential services and products (enough of overvalued dog walking apps!) will take a back seat. On the other hand, SaaS companies providing meaningful services to corporates and SMEs will become the flavor of the market. These companies will have deterministic, recurring revenue streams, sticky client bases, and reasonable valuations.
Transaction-wise, VCs who were hoping to get exits via IPO and trade sales will have to wait, lest they are desperate to liquidate. M&A activity will be abundant, especially as businesses try to become efficient and increase revenue per employee. Several investment funds with the proficiency and mandate to restructure and consolidate companies are already on the lookout for founders willing to pass on the mantle.
Sector-wise, distance learning, video communication, home workouts, telehealth, children online privacy and augmented reality solutions should flourish. Anything that caters to the changed human behavior due to the COVID-19 crisis will get listeners.
All in all, when the dust settles in couple of years, the technology consumer will be able to accesss marter services and products in the market. And the brave investors who would have backed these technologies will form the new crop of thought leaders. Amen.