During last weeks we were facing a massive stock markets crash driven by #coronavirus pandemic and oil prices fall. The crash of Dow Jones Industrial Average, S&P 500 Index and the NASDAQ-100 on March 9th were compared with the Great Recession in 2008. Last week the ongoing fall of US and UK stock indexes were called the worst single-day percentage drop since 1987. Capital Economics, a UK-based economic research consultancy, forecasts recession of the eurozone, Japan and with high probability in the US.
InnMind decided to ask for an opinion of venture investors about the future of economic development and its effects on venture market and startups’ perspectives.
Good day to everyone! This is a venture investors’ economic forecast by InnMind. Today we wanted to talk about the situation which everyone is facing right now –coronavirus pandemic which consequently caused a global financial market and oil prices crash. It affected a lot of businesses and they are really panicking due to a slowdown in the decision making. But instead of this global panic mood, we wanted to talk with venture investors, professionals on VC market, to understand what their opinion is and what do they expect to happen in the nearest future.
So, today we have a very important and well-known player on this market–Alexander Galitsky, international VC investor, founder and managing partner of Almaz Capital VC firm based in San Francisco, California.
- Hello, Alex!
- Hi there!
- Thank you very much for joining us today. How are you?
- I’m good, in a good mood.
- In quarantine?
- Oh no. So, of course travel is reduced and since then, a lot of meetings have been cancelled. But in general, I will say no, I’m not in quarantine. It is not a right time to be on quarantine. People still can travel and do some job. So, you just need to be careful. This is the main point.
- Not every country tough. For example, right now I’m stuck in Barcelona which, as you know, is in quarantine. And you can’t even move from one city to another. But we hope it will change soon.
- So, you cannot leave country anymore?
- No, if you don’t have really significant reasons for that, you can’t leave or enter the country. Only if you are a citizen of Spain you can enter the country.
- Yeah, I get it.
- So, Alexander, how do you estimate the effect of the stock market’s decline? And what do you think how long it will take for us to get back where we were before the crisis?
- Predicting anything is very difficult since coronavirus is still on the growth stage. And we still do not have a clear statistic how it will be healed, when it will be healed and how it will impact many countries. So, just to pick up a random time frame will be not be professional. Well, I will say from my side that, definitely, we don’t know how deep it will be since many logistic chains have broken, everything is slowed down, investments are slowed down. And at least right now when people will see sales opportunities it will speed up as soon as possible. It’s all investors and especially technology investors root for any best trouble as the opportunity. So, from this perspective we cannot know all the factors that may have an influence. It all depends. Many countries act very friendly with each other and depend from each other. So, we don’t know the end, I cannot predict it.
- Yeah, there are different rumors over the market, but we don’t want to spread them. Speaking about venture business, how do you think it will really affect this business and startup perspectives of fundraising? You have mentioned that it will slow down, is it really so?
- Yes, and people need to, let’s say, build a communication with the companies. And when you communicate to the companies, the specialist portfolio companies, which still look into US, you have a general perspective to be invited. With some speech, you would like to see body language, you would like to see people, you would like to smell around what is going on with this company. It is not like you immediately jump and say it to you. And it will require time to variant yourself for new environments, whereby at the end you just slow down. Of course, the people whom you know and people who came from trusted sources it is much easier to support. But still, you would like to have some physical meetings. And if I would like to invest in a company from Barcelona, it is still pretty tough. Even though it is not my region but from my perspective…still, if you even would like to jump off some opportunities physically, usually you would like to see people. And it will slow down across industries and many meetings will be cancelled, so people will turn to Zoom. So, definitely Zoom stocks will go up soon.
- They already went up, did you see?
- Yes, they will go up even more! And of course, some people who build alternative solutions, as Zoom will definitely soon be overloaded and will show not so good results possibly. I hope that the Zoom team is working very hard to prove that they can stay with such a big amount of work. I will say it will fall down, but from the other side, this change will be, let’s say, an old industry for new tone so that we need to speak and communicate more. But it will have an impact on savings, since we all travel less, so you always need to look for opportunities. And there are some opportunities coming, but definitely, it will be some dead period in venture capital investments, in exits and meetings with first customers. Many sales, especially in the b2b business, go indirectly, so you need to meet with new people, you need to demonstrate the product. Therefore, our scene will move in a little bit different direction, and some companies that develop remote type of software to support these processes will be able to gain some interest. So, for some companies there will be more opportunities. That is where we are.
- What about yourself and Almaz Capital? You’re investing mostly in software companies, in IT businesses, so would it be easier for you then? Are you going to freeze any activities?
- I would say no, but you know, my trip to US was cancelled since I wanted to go to pretty interesting roadshows with companies over there to pick up some investment. And some of my colleagues got stuck in different places, so they also could not show up because you cannot leave some countries right now nor planning to leave them. That is why this is also a period to rethink how we operate and how should we move on. But we’re still active, we are not planning to stop, so we are not staying or waiting for something.
- You have mentioned already that some fields like travel industry, hotel industry and others, they might be ending up in a deep crisis situation. But what about the fields which may fly? I refer to those businesses which can potentially benefit from the crisis. I hope it doesn’t sound too cynical.
- As I told you, you can refer to those businesses which will get more interest, such as remote software demonstration, for example. A lot of companies which try to do something like Zoom or some other stuff, that bring a more valuable communication between remote places. This type of companies will gain since they will change a lot. Definitely, we will also witness a change in education as many kids (not only university students, but also kids and kindergartens) started to get education remotely, and the staff working remotely with kids. For them it is also a new era: how parents will see the impact on their kids – is it better or not? But this will also improve this type of education, which will then get more interest on the market, same for a remote medicine as well. There are so many things that you can do online right now, which will become more demanded and will get more attention from investors and give opportunities for entrepreneurs as well. So, I don’t know if that’s good or bad. But I hope it will finally be proved when coronavirus is passed. From this perspective, I think it will be good for everyone, and it will have a positive impact.
- And did you think about changing a little bit your investment focuses due to the current situation? I mean looking to those sales more precisely which may be more perspective at this point?
- Yeah, of course we need to regulate our portfolio and see if it’s okay. If there will be more and more requirements for remote education, it is possibly the time to move in this direction. We didn’t pay too much attention to this field. Why it was not such a growing market since now? The main reason for not growing is that since many countries (In US for example, each state has a its own system), it is very difficult to move the same software solution all over the country. And right now, when all students get into remote education, people understand that it is not about ‘my personal state solution’, it is a solution that needs to be reasonable for everybody. The same with universities: it will go over all the countries. It is just an example. And when we have long queues of people in medical centers, it also changes how we operate in this area. So how to use it: possibly even an artificial advice in the beginning to help people get an ability to have first estimations, to get first advice on their health state. Of course, we need to pay attention to what is going on there and whereas artificial intelligence will be more useful and more important to people.
- So, you didn’t make any significant changes yet within your company, did you?
- No, no…venture capital is a very slow business and we haven’t changed our strategy that fast. Of course, we started to think about it, and we started to discuss it between us, but it doesn’t mean that we need to have an immediate rush in decision-making. Who is doing that? It will be stupid! But once again, I’m not looking for short-term solutions which can help out right now. Of course, some people need to worry about it, especially government officials. But in long term, I’m looking to change strategy and find out what actually is going to happen in some period of time when we will have opportunity to use something for good. Like remote education, remote dental service or remote medical care, or even remote consulting.
- I really like the way you think, because this can really create opportunities. Can you imagine how many people, who first-time logged in online, will discover an online education or delivery? The ones who never did it before? And maybe they will indeed stay in the industry, so it opens up more opportunities.
- Yeah, and many people will just say: “Oh, why did I make these stupid travels a few blocks from my house if I can call a person and to see him, and then to decide if I would like to do something with him, he can give me all advices which I need. Why do I need to go there?” So, people will spend time differently and possibly, will spend more time at home and use their time more effectively. Since people are speaking about reducing the working hours from 8 hours to 5 hours, it is possible that if you’ll take travel time to come there and back, you can effectively work even 8 hours at home and keep your 2 hours of travel to transform it to something more effective. Or if you move to 6 hours per day again…. there are lots of opportunities which people will learn from and become more focused on pleasure traveling than on business travelling.
- Just a short question about your model. You’ve mentioned previously that many things slow down also in venture process and one of the longest processes is a startup due diligence for venture capital firms. Will this remote style of work somehow be affected? Because in due diligence you also have to meet with companies and involve lawyers etc. Can it be transferred online?
- With lawyers it is easy. We can put this online as well as many staff members. But once again, you would still like to see people because it is still difficult to feel a person through a screen. Yes, you can see eyes and face, you’ll see a smile, but you still need to see body reactions. This way, you make an estimation about a person, especially if you meet someone for the first time. So, it is very important to do a due diligence physically. And of course, it will get slowed down as I told. But definitely some of the processes will move online and we need to curve them so we can execute them more efficiently. Just again it is also for the better, since it will keep us from more travels. We are not changing our model, it remains cross-border. We cover big regions like Eastern Europe and other global markets, such as US. And we will not change it as we believe it is working fine and we have good results. But of course, this travel will require to change our style and to decide more carefully what to do first. We go to travel first and to see this person and after this, we start a due diligence. It is what we need to discuss.
- But is it possible to just eliminate the physical meetings and do investments only online?
- You know, possibly in future it will be possible since millenniums will live different lives and communicate more online. Anyway, you are going to date a person almost immediately, you first meet a person in cafeteria and after that, can possibly have a deeper relationship. So, you still need to have physical meetings. From this perspective it is pretty important. It’s just all about the exact time and place in your process where you would like to put this physical meeting: at the beginning, in the middle or at the end. Of course, you would not like to spend time working on due diligence and then end up too disappointed about it. Possibly it will change. Since you will start to use surroundings of people whom you trust, who met this person to get a deeper understanding. So, definitely we will face some changes and discover new models of due diligence. But still physical meetings will stay for some variable time. People in their 40s will possibly say that we don’t need it, that right now we still need…
- Alexander, can you please give your advice or recommendations to startup founders who are watching us now? Tell them how they can secure and maintain and maybe grow their business during these turbulent times.
- Of course, you still need to look for long term since short term is not a right way of thinking. You need to look on a current situation to see what you can do right now, how can you help. But definitely you need to see that similar disasters will happen from time to time, and you need to be ready for new waves of it. So, you will see how your product, or your development can be helpful here, but also how it can damage you. It is what you need to pay attention to. And to also monitor how their sales model is organized, how’s marketing organized. It is important since you will have fewer physical demonstrations and also no capability to travel so much. Working as a VC, I would not like to receive some random amount of out-of-sky presentations which hit in my mailbox. I know these people send this mail to 50 or 100 other people, but we would always prefer to have unique relationships. And from this perspective, you always need to go through some advice of people, who know me, to present some projects. So, if I trust this person, if this person brought me something in the past or I know he is expert in this field, I will take this seriously. I’m getting too many projects per day, so this is what they need to do and think of right now. At this time, I am more careful since our physical meetings will happen only in two or three months from today.
- So, they should not spam you now in social media benefiting from the fact that you are not doing only offline meetings now. But they should think over who could recommend them from your network, from the people you trust or organizations you trust. And then also include this information in the introductory email or whatever.
- Yes, for sure. This is a right explanation.
- Thank you very much, Alexander. Thanks a lot for your time today.
- Stay the same positive! And I really enjoyed your approach!
- Yeah, be safe in Barcelona!
- Be safe in… where are you now?
- Currently…I came to Moscow.
- Oh my God! Be very safe in Moscow!
You can watch the interview below:
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