At the end of March we published our first memo about the COVID-19 crisis. This second one will build on it, collecting observations and reflections from btov investors with the goal to sharpen our view on possible scenarios we may have to deal with in the mid- and long-term future.
Back in March we wrote the following: “In the coming months, we are expecting further disruption, overwhelmed healthcare systems and probably worst of all a worried population, all sliding us globally into a long recession.” Fortunately the lockdown has prevented most countries from medical disasters. This is certainly a relief. We also did not face a collapse of the supply for food and other essential goods. With our participation in SevenSenders, we did not know until mid March whether trucks would be allowed to drive to Italy at all. EU Commission President von der Leyen then urgently warned to keep borders open for freight traffic, and SevenSenders posted a breathtaking record month in April — there is a fine line between success and failure. However: The global recession is a fact, it is massive and it seems to us that uncertainty about its development has further increased.
In March we wrote: “We are in a situation where both numerators and denominators of any impact variable have a very broad statistical variance”. This specifically was meant with respect to COVID-19 related data. We today could sum it up saying: While uncertainty related to the corona virus has been reduced to some extent, it has tremendously increased for the economic situation. Numerator and denominator for debt to GDP is just not predictable and seems totally disconnected to capital markets.
Status of the medical situation: We learned a lot, but uncertainty remains
One aspect we described last time is the lack of accurate data about the medical aspects of COVID-19. Two months down the line, we have certainly learned that when it comes to global health issues the gathering and analysis of reliable datasets takes time.
Starting with the evolution of the pandemic across the globe there seem to be significant differences between countries, regions and even local hotspots. Many people are trying to find correlations between political lockdown decisions and the evolving curves of infections, survivors, deaths, R-rates, etc. But are we properly understanding causalities yet? Do we have a sufficiently detailed data set describing the different starting points at which lockdown measures have been introduced? German news outlets are publishing daily r-rates with two decimal places — giving a perception of detail and control. How accurate is this estimated r-rate? How accurately can we estimate the unreported number of infections today, 10 days ago or back in March? We are still reading about spreads of 2–12x between reported and unreported infections — considerable uncertainty remains.
One should be very careful when observations of “successful containment” in some countries are contrasted with “failed containment” in other countries. In our view it’s unfortunately too early to tell and we should rather view those observations as early and in many ways different experiments (ie. not dealing with the same starting point). China executing 10 million tests in Wuhan in May for sure was not an exercise done without reason. It however seems the outcome is positive in terms of total infections, and the cost per test came down significantly. All experiments should be analyzed carefully and data should be shared internationally to derive actual learnings over time.
When we read about a build-up of test capacity in Germany of more than 800k COVID-19 tests per week, but a current utilisation of less than 50% of such capacity, we are wondering if we are still trying to learn as much and as fast as possible. An understandable but still concerning perspective is that after two months of heavy restrictions of public life society has pushed politics into a phase of more rapid decision making. Attention has been drawn away from data capturing, analytics and learning. We are left with a question mark on how stable and beneficial those political decisions will be.
Not only politicians but also the science community has changed behaviour in view of COVID-19. The initial urge for data, analytics and learning has dramatically increased the number of pre-print publications. This is not a completely new trend and experts see pre-prints as a necessary way to break up traditional review processes led by established scientific journals which have become a bottleneck for the publication of an increasing amount of scientific work. However, it was never intended that mass media pushes findings from pre-prints into headlines and subsequently features shortcomings of initial datasets and methodologies, all the way to discrediting individual scientists. By necessity, the scientific process is iterative and will produce some incorrect results along the way, particularly under the pressure scientists are working under currently. An incorrect but visible conclusion in the broader public is to perceive scientific research and scientific recommendations as unreliable and hard to trust.
Capital markets and the venture capital industry
In our March paper we wrote: “The biggest unknown for btov is the extent of the lockdown period. Analogous to McKinsey’s analysis of this issue mentioned above, we hope that we are dealing with a V-curve. Looking to China gives us hope, but we are still inevitably flying blind.”
Capital markets have followed this V-curve. The underlying economic situation however seems as uncertain as rarely before. In Europe the output is set to shrink between 8% and 12%, according to ECB President Christine Lagarde in a statement at the end of May, calling a milder scenario (from last month) obsolete. The USA has registered about 40 million unemployed people during the past weeks — a severe mid-term threat to its economy which is highly demand driven. President Trump is putting a lot of pressure on institutions to continue flooding the markets with “liquidity” to raise chances of his re-election in autumn.
We have had many discussions with very smart investors during the past weeks. No one has so far given us a comprehensive theory linking actual valuations to the economic outlook — except that linked to zero interest rates there are few alternatives to listed equity. With the Q1 GDP Advance Estimate, the popular “Buffett Indicator” — the ratio of corporate equities to GDP — was 156.3%, up from 156.0% the previous quarter in the USA. This is an all time high ratio, exceeding the 2000 bubble. Given the lockdown in April and May with a massive reduction of economic activity on one hand and stocks continuing to climb on the other hand this ratio must be much higher today, without knowing the exact data.
Many “first time events” have been observed during the lockdown with yet unknown outcomes. Let us remember some of them:
We have seen negative oil prices. Even with massively reduced oil production Goldman Sachs is bearish on price levels of USD 35 for Brent right after a bullish outlook four weeks earlier.
March and April were the first months in the USA without a firearms massacre in 18 years — at the same time the share prices of arms manufacturers reached record levels.
The Swiss parliament has approved a motion forcing landlords to reduce their rent to smaller businesses by 60% for the period of the lockdown. On top of that it seems likely that the lockdown has lasting effects on economies and behaviors. The vast majority of white collar workers have been working from home and companies like Twitter have decided to allow all employees to work from wherever they want and paid them USD 1’000 to furnish their individual home office. If only 20% of people will continue working from home here and there, there is reason to assume commercial real estate will drop in revenue and value. Chain reactions to this scenario are likely to become significant for banks, asset managers and everybody’s pensions. Eric Schmidt has a contrarian view to it — may he be right.
The trade war between China and the USA has dramatically worsened and has reached the “threat” of not trading Chinese companies at US stock markets anymore. At the same time China has introduced its first civil code — a stunning process involving about a million of public comments and an outcome likely increasing private rights and ownership in China, as our friends at Silverhorn Group have pointed out.
The German Federal Constitutional Court has ruled against the European Court of Justice with respect to the ECB quantitative easing activities. This already is a historic event in European law with uncertain follow-on effects.
Central banks have continued ballooning with sums inimaginable to us. To help make it more tangible: The FED balance sheet has grown by USD 2.9 trillion from end of March to end of May. This roughly corresponds to the annual GDP of India — a country counting roughly four times the population of the USA. During the same time period the Swiss National Bank has grown its balance sheet by CHF 58 billion which corresponds to 640’000 km of chocolate bars piled up (in this case 58 billion as absolute numbers of Lindt & Sprüngli 1.1cm thick chocolate bars). To remind us: This approximately is the distance from planet earth to the moon and back. That is a lot of chocolate — even by Swiss standards.
Countries have increased their net debt position by 15–25% in relation to national GDPs (in comparison to 2019 figures). Tax income will drop significantly and the discussions about further “stimulation programs” are all over.
We already addressed the historical irrationalities in the bond market in an interview with Philip Schnedler in March. As Philip reminds us these days “the artificial low yield of government bonds is further inflating bond and equity markets. Central banks are aggressively purchasing bonds of their own country feeding moral hazard and distorting capital markets”.
To sum it up: Although social life was on “pause” the crisis seems to accelerate all trends we have seen before, towards the good and the bad.
The trends mentioned above very likely will have a positive impact on the Venture Capital industry over all. We however expect much more competition in the years to come because of exactly that, even if many corporations will end their corporate VC activities because they will have to focus on their core business again. We have addressed the issue of negative interest rates in the past like in this blogpost here. Since it bears the possibility of a major risk in the mid to long term future we will continue discussing it with the btov investor community.
How has the situation evolved for startups ?
As we write this paper we observe that promising startups with strong growth rates are able to choose their investors, setting high valuations. Physical meetings no longer seem a prerequisite for even some late-stage investors deploying impressive sums. At the same time the number of potential follow-on investors has fallen considerably due to international travel restrictions, cash preservation at some corporate investors and a certain slow-down of overall investment activity which we are also seeing.
In our portfolio we still observe the full spectrum of “COVID-related new realities” — from revenue levels declining by 95% all the way to opportunities from new multi-billion public development projects and new addressable markets that didn’t exist before. Although sales are slowing down in many companies we did learn that purely virtual/online customer engagement is indeed possible — even for complex B2B products. It remains to be seen if this was only a “one-off” situation because the entire world was locked into home offices at more or less the same time or if this online customer engagement channel will maintain its increase in importance across all types of businesses.
We have experienced ourselves in our daily business a noticeable productivity increase when replacing travel time with back-to-back Zoom meetings. Even the “plan B” online versions of long-established but now cancelled events have proven to be quite efficient for us. And while we are more than eager to meet many of our portfolio teams, limited partners, co-investors and friends in the ecosystem face-to-face soon again, we wonder how some of this “new normal” of reduced loss of time at airports, hotel check-outs and missed train connections can be conserved into a post-corona world for our team at btov, and particularly for our portfolio companies.
What remains uncertain is how investment activity will continue to evolve. Many of the recent financings were initiated pre-crisis, and initial face-to-face meetings had already happened. These days international travel is opening up again. But will investors from overseas jump on a plane to meet European startups anytime soon? Will corporate investors come back to the table next month, next quarter, next year? Most well known VC investors remind us to view a crisis always as an opportunity. But some of the same names are still advising their portfolio to keep costs down and extend run rates beyond 2021. At this point in time we as btov Partners, like many early stage investors around us, plan to continue our investment rhythm on the early stage side but just don’t know how follow-on investors will look at and value financing rounds after potentially 3 months, 6 months, 9 months (or more?).
Own observations, food for thought and first learnings from the btov community
Part of our mission at btov is to be a “learning organization” — which is why we put together this collection of thoughts in the past weeks and share it with you in the sense of “collectively (re)thinking”. Let us start with some thoughts and questions we think could drive some central questions of the future:
A friend of btov observed very early on that this crisis acts as “Brandbeschleuniger” — an accelerant (of fires). This colorful picture became mainstream during the past weeks.
Our btov Investor and entrepreneur Sina Afra from Istanbul states, that: “Zoom brings enormous efficiency gains, I fly around the world much less and we can work very focused. But what you can’t do with Zoom are personal bonding conversations or creative work sessions in which you are more productive together in the room.” What we have realized at btov, however, is that the onboarding of employees in Luxembourg is much better than before, when employees there felt excluded compared to the “btov centers” in Berlin and St.Gallen. On Zoom, everyone is equally far and equally close — headquarters is losing its importance.
A lot of btov entrepreneurs seem to have been fueled with energy during the past months. Take the example of the fashion label Armed Angels producing masks as fashion items and donating at the same time or btov investor Danilo Schmidt who grew his business from EUR 15m to EUR 55m selling protective gear.
The CIO of a large pension fund told us his view: “The current crisis is almost the counter-crisis to 2000. Now the big issues are being solved by technology”. And: “The money supply is currently being expanded astronomically by printing one’s own money, and stronger currency manipulations can be expected — especially the Swiss franc will further rise as a safe haven”.
btov investor Korbian Mayer, whose family office has made substantial investments in medium and small merchant ships in recent years, estimates that world trade will decline by 14% from March onwards in a period of 9–12 months. As the large container ships are too unprofitable due to lack of capacity utilisation, his ships were sailing non-stop. Small is beautiful again.
Find the views on and from South Korea and Singapore in mini interviews with Markus Eugster, CEO of Korean Re Switzerland, and Uwe Krueger, Joint Head EMEA at Temasek International here. Both do not think that we’re at the end of this crisis at all.
A discrete btov investor from Germany when asked which institution he would trust with regard to health data in connection with the COVID-19 tracking app debate: “NONE. Not the WHO, not a foundation not the Federal Ministry of Health or the RKI. Reason: If the AfD or others get their hands on it, they could discriminate against minorities.”
On the other hand our investor Prof. Hubert Oesterle has formulated that the data protection discussion distracts from the real problem. Find his thoughts here.
eHealth and the potential role of tracing apps
Both — our Industrial- and Digital Tech Funds are having a close eye on the health industry from different perspectives. The btov Industrial Tech Fund has invested in Retinai and Lynxcare, both dealing with the acquisition, preparation and analysis of medical data in order to achieve clinical impact. Jan-Hendrik Bürk from the btov Digital Tech Team has mapped his view on digital therapeutics in his blogpost here. Our AI startup DeepCode just yesterday has contributed to improving the Swiss COVID-19 Contact Tracing App by identifying two issues.
But not only has the corona crisis accelerated the eHealth development — it may become part of the solution too. The efforts around tracing apps have been considerable. Chris Boos, an entrepreneur and investor from the btov Community has been at the heart of a coordinated European working group which came under severe pressure. We took the occasion to directly ask him about what happened and what the outlook of the tracing app is. You will find the interview with him and Prof. Gerhard Fettweis, who had been at the heart of the task force as well, about the questions related to “central or decentralized” data storage and their views on platforms in Europe versus Apple and Google handling them here.
To sum up…
We are thankful for how political leaders in Switzerland and Germany have managed the current crisis so far. We are very concerned about the state taking over more and more economic power and in the long term have serious questions about our monetary systems. In the mid term however we are confident that innovations and startups we invest in will thrive in our agile societies. Entrepreneurs are the central drivers of our future.
Thank you for your trust in and partnership with btov.
This blogpost was originally published on Medium on June 12th, 2020.
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