Over the past two months, SixThirty has been asked by several in the startup/VC ecosystem to share our view from the ground on the current COVID-led crisis. So we boiled it down to 5 guiding questions:
# 1. 2008 and 2020 Compared. Are there lessons learned from the 2008 GFC crisis that made you more prepared to navigate today’s uncertainty?
As in 2008, the “instrument panel” that we use to evaluate investments is malfunctioning. The loss of the instrument panel makes it that much harder to read growth prospects, have a line of sight into cash flows, calibrate risk and arrive at value. So, in a crisis you double down on your reliance on the strategic rationale of an investment, on the basis that the financial rationale will take care of itself over time.
In navigating through a time of crisis, the question our portfolio management team has learned to ask is: ‘Why is it inevitable that this idea/company will succeed?’
We believe it is critical to test:
Resiliency and adaptability of business model and business plan. Is the value proposition relevant and can it adapt to the realities of the world we now live in? Do we need a new plan?
Unit economics. Can we scale, efficiently?
Leadership. Do we have the caliber and fortitude to lead through the crisis? Leading a startup in “normal times” is hard; steering a startup through a crisis of this depth requires the highest caliber of leader.
2020 is similar in the above respect. Yet it is materially different in others. Yes, as in 2008, the instrument panel is malfunctioning. But now the headlights have been smashed and the landing runway has changed!
We see two major differences from 2008 to the current crisis:
A. The previous crisis was a run on the banks, with a big knock-on effect for the economy. Today’s crisis is a direct run on the economy. The experience of social distance, the resetting of health care delivery and the dislocation in supply chains in the current crisis is unprecedented. Question: What is the knock-on effect on the financial and insurance markets?
B. The current crisis is impelling governments, businesses and consumers to consider privacy and information security in a new light. If it is shown that sharing and using personal data can help safeguard lives and restart economies, attitudes may change. With that, however, comes the need to secure and govern the data on a scale and scope we might have imagined, but never experienced.
# 2. The Investment Lens. How has the current crisis impacted the investment lens to evaluate companies current and prospective?
The investment and portfolio management team uses a SixThirty Vulnerability vs. Impacted (V-I) framework to assess the resilience of the overall portfolio and individual companies:
- Vulnerability assesses the condition going into the crisis (e.g., cash-on-hand, runway).
• Impacted assesses the impact the crisis might have on the business, the business model and the team.
Every portfolio company is evaluated applying the framework. It is a rigorous exercise — equal dosage of facts (e.g., cash-on-hand), estimates (e.g., customer retention) and intuition. The nature and type of near/medium term actions and support a company needs to take vary on where they lie on the Vulnerability-Impacted spectrum.
The assessment also provides us a read on each startup’s resiliency, which includes both their “staying power” through the crisis, but also how they might be able to double down for success, or pivot as needed, as the crisis unfolds and, hopefully, abates. It is a Darwinian moment. And it is not the strongest that survives, nor the most intelligent; it is the one most adaptable to change.
One additional lens: Inherent to the SixThirty model is the ability to rapidly evaluate the companies and investment opportunities through the customer and buyer’s lens. Given our focus on enterprise technology, and the strategic corporate investors/ partners that participate closely with our portfolio companies, we’ve gone back to re-evaluate where the priorities of our partners lie in this new environment.
Our lens to potential investment opportunities will be informed by these changing priorities. For example, we’re hearing from many of our corporate partners that the crisis has increased or accelerated their focus on privacy and cybersecurity, on digital adoption in both internal and client facing processes and on automation. We believe there is a coming wave of actions and opportunities to re-think product, service delivery and form factor (e.g., contactless for health, identity, provenance, payments). There is an equally big opportunity to re-map the customer journey across wealth, health and insurance.
#3. A Forward Look into FinTech & InsurTech VC. What is the shape of the FinTech and InsurTech VC ecosystem one-two years out?
We look at the FinTech start-up/VC eco-system along 4 dimensions:
- Quantity and Quality
- Collaborative vs. Disruptive Start-Ups
- Corporate (CVC) vs. VC
- Industry Structure and Convergence
Dimension #1:Quantity and Quality
The headline expectation is a lower aggregate number of new investments and lower overall capital deployed to early-stage FinTech and InsurTech companies a year out from now. Volume will drop, and there will be a flight to quality. Quality deals will get done, not necessarily at lower prices.
Lesser quality deals won’t just clear at lower prices, they will likely fail to attract capital. The music will stop for companies that failed to scale efficiently, and have hitherto been propped up by higher valuations in progressive rounds.
But we do not think such headlines should be viewed negatively. Venture Capital as a whole over the past decade has grown to new heights, fueled by tourist investors and a herd mentality. Rigorous due diligence has taken a back seat to FOMO. We see the COVID-19 fallout as beneficial to thesis-driven investors and entrepreneurs who are motivated to solve real problems arising from the crisis.
Bigger picture, and with the acceleration in digitization across finance, insurance, health, commerce and more, the opportunities abound for tech entrepreneurs. And there is no shortage of capital: investors, facing low interest rates and tiring of hedge fund underperformance, continue seeking non-correlated returns in venture capital.
Dimension #2: Collaborative vs. Disruptive Start-Ups
FinTech and InsurTech start-ups are often labeled as disruptive or collaborative. The latter have gained in count and share of capital. Looking out 12–24 months, we believe these labels might blur.
For one, the sheer scale and pervasiveness of the pandemic creates room for bold, disruptive ideas. At the same time, we see incumbents/corporates recognizing an imperative to innovate and be disruptors themselves, to survive/thrive. Many of them have proven extraordinarily resilient in the last eight weeks, handling major “disruptions” and executing effectively in new ways in these entirely new circumstances. So, there is a dual sense of resilience and an imperative to transform amongst leading incumbents.
We believe this might have the effect of creating greater readiness and risk-tolerance amongst leading (resilient) incumbents to collaborate with startups who would previously have been viewed as “disruptors,”. Incumbents could likely accelerate their involvement with challenger startups. Therefore, while the startup scene out 12 months is likely to be more disruptive overall, we might end up seeing more collaboration with disruptors and incumbents.
Dimension #3: Corporate (CVC) vs. VC
As for the CVC question, our estimation is that we will see a divergence. Many will see their funding and mandates challenged. Those that stay “in the game” will strengthen their working relationships with the mothership and lines of business. Including possibly taking bigger and more disruptive bets, and probably moving later stage.
At the same time, many CVCs who are more “dabblers” will be shut down by their motherships who don’t feel they have the core competencies needed to run them, or the ability to move the needle forward internally.
Dimension #4: Industry Structure and Convergence
Industry Convergence: COVID-19 has hurled a perfect storm at our sense of personal well-being. And one thing is certain
The pandemic, and its fallout, have highlighted how intertwined our medical and financial well-being and privacy are.
For SixThirty, we expect our thesis and focus on the intersection of wealth, health, and information security to attract even more opportunities in the years to come. Entrepreneurs will set out to build solutions addressing problems that span across the industries and the value chain.
In the “next normal”, incumbents, particularly in financial, health and information services, will need to make tough decisions on how best to balance the social and economic sustainability of our businesses. We will need to re-imagine our value proposition, re-map customer journeys, rethink business systems, and reset our partnerships and vendors.
#4. Supporting Portfolio Companies. How are we helping our portfolio companies navigate through the crisis?
SixThirty is hands-on in our portfolio management in “normal” times, actively bringing our expertise and network to help our portfolio companies succeed. In this environment, that support is even more critical. We’ve been in close touch with our portfolio:
- Emphasizing that relationships are key, now more than ever. In this environment, cold calls & emails have especially low returns. We’re also making critical connections to our network of co-investors and corporate partners, and surfacing collaborations between portfolio companies.
- Prioritizing their sales efforts and their pipelines, with a focus on increasing the probabilities and challenging the possibilities of closing a deal.
- Scenario analysis, and building and pressure testing business and cash flow scenarios. The models built in the beginning of 2020 need to be reset, with contingency plans for downturns lasting 6, 12, and 18 months.
- Challenging product development. Rethink the product roadmap for the challenges at hand and ahead.
- Providing moral support to take courageous, decisive actions. Letting them know that it is OK to over-react.
#5. Staying Positive. What are we doing, individually and as a team, to stay positive?
This pandemic has been an upheaval for all of us. The changes to our professional and personal lives have been swift and drastic.
We are living in a duality:
‘Distance is back.’ We are physically apart like never before. This is true at the level of teams, companies, communities and countries, and yet
‘Distance is dead!’ We are digitally available all the time. The boundary lines between work and home have blurred.
Our houses are our homes, but also our office, our school and our new favorite place to eat! Some of these circumstances are the same for all (e.g. stay-at-home) and others are unique (e.g. kids home from school, family members ill, unemployment, etc.).
We’re trying to remember to meet each team member where they are, and be authentic as we experience challenges too. It is critical for our leaders to demonstrate empathy, to be vulnerable and genuine, and to understand that everyone is doing their best under trying circumstances.
In our digital, “zoom-first” world, we long for the human connection.
And one thing that has been really valuable is building in time to connect even while we’re remote. Weekly remote team coffee or happy hour has been a great add to our routines, and a fun way to get to know people in a new way. So, we are holding Zoom morning coffee and lunches. And while we’re very aware of “zoom fatigue,” we’ve been encouraging team members to have 1:1 chats with each other just to catch up, without a business objective. Even something as small as adding “chit chat” to the beginning of meetings, or via slack, has helped maintain team morale and culture.
When we all pull together, help each other, provide support when it is needed, and continue to be a team that values each member personally and professionally we create a culture that will not only survive but grow and thrive as a result of this unprecedented challenge.
