Opinions

Opinion: Venture Capital & YC companies in the times of Coronavirus

I always loved Warren Buffet’s quote, “When the tides go out only then will you discover who has been swimming naked”. Covid-19 is the tide going out not only exposing those with low immunities but also the struggling businesses that have negative cash flow cycles and aren’t considered essential for many of their customers. Now, its become very clear who is swimming naked.

We have all been hearing government orders around the world ordering “non-essential” businesses to shut down. So what is deemed an essential business vs. a non-essential business? Look at Maslow’s hierarchy of needs. Maslow’s first three important layers are physiological needs (food, water, medicine, warmth, rest), safety needs (security, safety, etc) and relationship and love needs (families, friends). Any startup or company that’s operating within those layers saw an increase in demand.

Getting into an essential business now is more important than ever. I say this as someone who runs a “tech-enabled” QSR (Quick Service Restaurant) business as well as an angel investor. I’ve been hit big time. Business is not only down it’s effectively shut down for me. Yet, there are so many opportunities out there. People are living and as long as they’ll be living, they will need essentials. If you’re in a business that is still operating and thriving during these tough times then you’re wearing a swimsuit.

Before Covid-19, I would always try to use this lens of “must-have” as I filtered through pitch decks sent to me and most if not all startups would claim that their product is a “must-have”. Sometimes I would share their bias and sometimes I wouldn’t. One of the companies I am glad to have invested in is ElCoach which can certainly help people with health and fitness advice as they sit at home not being able to hit public gyms. Is their product and service, “nice-to-have or “must-have? This is debatable. It will depend on how they position themselves and sprint to build a product that becomes essential for people’s health which is certainly their main wealth.

Now, where are those founders without swimsuits?

I attended YC’s W20 batch demo day for the first time as an investor. To those not familiar with YC (Y Combinator), it is the world’s most successful startup accelerator. It’s the Warren Buffet of accelerators. They have a portfolio of companies that are worth over $100 billion such as Stripe, Dropbox, Rappi, Airbnb, Breadfast, and many others.

Before attending their demo day in which they showcase their companies to investors, I spoke to a few investors who advised me to avoid investing in any of the companies in the current batch and instead double down on portfolio companies who are solving essentials to customers during the current pandemic. Nonetheless, I attended the demo day and made a few commitments.

This last batch had many great startups that I would call “Shorlong” companies. Those companies that are usually working and solving important and urgent needs but they need time to develop and launch this product or service.

Shorlong companies are working on biotech solutions, telemedicine, edtech, online essential remote work tools, and some fintech solutions that are serving the first three layers of Maslow’s hierarchy of needs. The companies struggling most to raise and survive are those working on esteem and immediate self-actualization needs. Yesterday, today and tomorrow will always be the time of Shorlong companies working on Maslow’s first three layers which are deemed essential to every living being.

According to YC, the average YC company usually takes 1-2 months after the demo day to close the round. I spoke to over 50 companies in YC’s last batch and most if not all “shorlong” company closed their investment round in less than ten days.

There were many great companies in the current batch. The Collison brothers of the future. Great founders who have exceptional experience working on ambitious ideas with compounded market growth if not already huge market sizes. Some ideas were so ludicrous and great that they’ll create new huge categories of industries in the short and long term future.

If we weren’t living in the times of Corona and I managed a sizable fund then I would have invested in over 60 percent of the current batch like a kid in a candy store. Now after Covid-19’s “essential business” lesson I started looking for current batch founders who will hopefully never swim naked.

Now, I’d invest in a way less percentage even if we were living in times of economic and social prosperity and even if I had over $1 billion to invest in early-stage companies. Now, it’s like a kid who knows it’s “nice-to-have” chips and chocolate, but he knows he must have his eggs and milk (try to order from Breadfast – fd: I am an investor) to constantly invest in his health. Eggs and milk are shorlong products served by shorlong companies. If you want to successfully build a startup then build a company working on a shorlong idea. If you want to successfully value invest then look for great teams working on shorlong ideas.

The best companies are those that meet the customer needs in the best way possible. Coronavirus has changed the customers’ needs and priorities for the foreseeable future. The best investments are in companies that meet those needs. Therefore, Coronavirus has changed the investment and startup landscape for the foreseeable future.

This too shall pass. Stay optimistic.

Farouk Kadous

Farouk Kadous

Founder at Gritegrity Ventures
Founder of Gritegrity Ventures, a seed-stage fund with cross borders investments in countries like Egypt, USA, India, Pakistan, Mexico, and Brazil. You can reach him on Twitter.
Farouk Kadous
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