Two months ago we wrote a piece entitled COVID-19 and Risk Asset Ramifications. The S&P had closed down 7.6% in what was the worst day since the depths of the financial crisis, the 10-year had dropped below 0.5% for the first time ever with the entire US yield curve below 1% for the first time ever, and oil down 20%. This was 2 weeks away from the interim term bottom in the market and the focus was more or less on what was happening in the immediate term / how we could snapback. At the time we didn’t foresee a global shutdown with ~33.5mn Americans filing for unemployment over the next 8 weeks erasing all job creation since the depths of the GFC. But never could we have predicted the trends that would accelerate over the past two months.
In some ways COVID-19 feels like a time machine accelerating themes that felt inevitable but would take years to play out; now occurring in weeks / months including the new “Blue Collar vs. White Collar” becoming “Cloud vs. Land Jobs”, Content Consumption, Digital Banking, Domestication of Supply Chains, eCommerce vs. Physical Retail, Educational Disruption, Precision Wellness, Remote Work, Telemedicine, and more. This creates a significant opportunity for both incumbents and challengers to continue to innovate and best position their businesses for the changing future. For public market companies, while sentiment is shifting on a daily basis; the quarterly earnings gig is up for the balance of 2020. Companies have suspended guidance (and rightfully so) and the market is seemingly looking thru to 2021 vs. 2019 baseline. This gives public companies breathing room to be more long-term oriented (we’ll see how long this lasts) focusing on those initiatives that best position it for future success not what’s needed to meet the quarter. For private companies Venture Funds have continued investing throughout the crisis with a slight downward move in early stage valuations, but plenty of late stage companies getting funded as well as some private-to-private and public-to-private M&A. There have been no fewer than 7 $1.0bn+ VC funding announcements YTD (Insight, Lightspeed, NEA, General Catalyst, Index, ARCH, Flaghsip) which means there is plenty of dry powder to continue to invest; coupled with the record setting fundraising over the past few years.
Cloud vs. Land & Remote Work
COVID-19 has forced every company (that can) to determine a remote work strategy or perish. In the US terms like “Blue Collar” and “White Collar” jobs have been used as early as the 1920’s / 1930s stemming from the image of manual workers wearing blue denim, and office workers wearing white dress shirts. These descriptions haven’t been relevant for quite some time but the ramifications of COVID-19 have seemingly created a new divide going forward initially coined by Balaji Srinivasan “Cloud [Jobs]” vs. “Land [Jobs’.” What are the professions that can work remote? What are the professions that need to be in person? What are the job prospects of both industries? What changes are cyclical vs structural? There has long been debates that automation and AI would make many blue-collar occupations obsolete, while others have suggested technological advancements will shift the types of work being performed. But what happens if the number of “land jobs” is cut structurally as companies are reluctant to have that level of fixed costs going forward with the constant “What If” business is shut down again? We need to explore public private partnerships for a retraining of the workforce for jobs of the future to ensure there’s not a mismatch in supply and demand of employees.
At the end of 2018 the US Census Bureau noted that ~5% of Americans worked from home. This has accelerated at an exponential rate over the past 3 months. A study conducted by Netskope in mid-March found that ~60% of “Knowledge Workers” were working from home on March 19th; and that number is likely 90%+ throughout the month of April. Even firms like Goldman Sachs that had trading floors filled after 9/11 and Hurricane Sandy now have 98% of employees working remotely. In a CNBC interview when asked about remote work and video conferencing CEO David Solomon said, “It will make us more comfortable in providing more flexibility to employees, which, by the way, makes this a more attractive place for people to work.”
An IBM survey at the end of April found that 54% of adults polled would like to be able to primarily work from home, and 75% would like the option to do it occasionally. Once businesses can reopen, 40% of people responded that they feel strongly their employer should offer opt-in remote work options. People who have spent the past 40 years going to an office every day now realize they are just as productive from home. What are the implications on energy consumption? Cars / demand for public transport options?
While the migration to the cloud has been happening for about a decade, if there was ever a mission critical use case for cloud computing; it’s a global pandemic where everyone is forced to work remotely. Cloud dominance was far from certain 5+ years ago and even recently both the financial service industry & legal industry have been reluctant to make the switch; but now even the staunchest on-prem defenders are capitulating. Aaron Levis the CEO of Box recently said, “The cloud is becoming as fundamental to how the world runs as the electric grid, telecom network, or the railroad” and COVID-19 has just cemented this trend.
Cloud providers are emerging as one of the clear “winners” in the COVID-19 pandemic as online activity has continued to accelerate. During MSFT’s earnings call last week CEO Satya Nadella said. “We’ve seen two years’ worth of digital transformation in two months. From remote teamwork and learning to sales and customer service to critical cloud infrastructure and security — we are working alongside customers every day to help them adapt and stay open for business in a world of remote everything.” The Azure team has been updating the public on the status of Azure in a series of blog posts. In the latest one dated 4/23 they state “As businesses and schools around the world prioritize the safety and well-being of their employees and students, Microsoft Teams, which runs on Azure, is playing a critical role in helping them stay connected through video meetings, calls, and chats. We’ve seen a new daily record of 2.7 billion meeting minutes in one day.” The demand was so stark that MSFT had to place temporary resource limits on new Azure subscriptions, “Last month, the surging use of Teams for remote work and education due to the pandemic crossed into unprecedented territory. Although we had seen surges in specific datacenter regions or wider geographies before, such as in response to natural disasters, the substantial Teams demand increase from Asia and then quickly followed in Europe indicated that we were seeing something very different, and increasingly global. Without knowing the true scale of the new demand, we took a cautious approach and put in place temporary resource limits on new Azure subscriptions. (Existing customer subscriptions did not experience these restrictions as each Azure customer account has a defined quota of services they can access.) This allowed us to continue to meet the promised quota for all existing Azure customers, prioritize new needs for life and safety organizations on the front lines of the pandemic response and support the dramatic shift to remote work and education on Teams.”
The Big 3 Cloud infrastructure providers help power the businesses that have been popular during this time period including collaboration software, streaming, gaming, etc…. Based on 1Q numbers not only is the Cloud market still growing, AMZN, GOOGL, and MSFT each saw some re-acceleration of growth rates in 1Q which we expect to continue. Looking back over the past 5 years its remarkable to see the growth of the Big 3 providers from ~$7.2bn in run-rate revenue to $68bn in run-rate revenue. Perhaps more impressively is they seem to be ignoring the law of large numbers all growing 30%+ YoY (and likely accelerating come 2Q20).
CloudFlare CEO Matt Prince noted how well the industry has performed given the increase in demand: “If we think of the cloud as utility, it’s hard to imagine any other public utility that could sustain a 50% increase in utilization — whether that’s electric or water or sewage system — and not fall over. The fact that the cloud is holding up as well as it has is one of the real bright spots of this crisis.”
Bessemer has created an “Emerging Cloud Index” which as of 5/5 is +13.2% YTD vs. NASDAQ (-2.6%), the S&P (-12.6%), and the Dow Jones (-18.0%). While the stock market doesn’t always get it right, investors are clearly placing their bets on what companies are set to outperform in a post-COVID world (cloud / leading technology companies) and what companies are set to struggle (Dow components such as MMM, BA, CAT, CVX, KO, DOW, XOM). Bessemer’s index has 46 constituents at present with a combined market cap of ~$690 billion. The average age is 15 years old (5 years public, 0 years private), growing at 35% YoY, with 10% FCF margins, and trade at an average of 11x EV/Run-Rate Sales and 9.0x/forward EV/S. This outperformance isn’t new, in fact since 2013 the “EMCLOUD” has increased 370% vs. NASDAQ, S&P, and Dow that increased 120% / 75% / 75% respectively.
Top Companies / Subsectors
In the private markets there are more than 86 private cloud unicorns including companies like HashiCorp, UiPath, Snowfalke ,Stripe, Taost, and Procore. There are 54 public cloud companies with >$1.0bn in market cap including household tech giants such as Salesforce (CRM), Paypal (PYPL), ServiceNow (NOW), Salesforce (CRM), Shopify (SHOP), Oracle (ORCL) and Adobe (ADBE). Some companies to have on your radar on the public side to assess these trends:
Looking at a snapshot of the aforementioned names vs. the S&P -12% YTD they have exhibited average / median YTD performance of +39.8% / +36.9% respectively. We look at high level growth rate and margin profile and it’s clear public market participants are still paying up for growth with top performers such as ZM (+128%), TWLO (+82.8%), CRWD (+53.8%), and NET (+53.9%) also exhibiting top growth rates of (+78% / +62% / + 89% / + 51%) respectively.
On earnings calls we’ve seen significant growth and accelerations of trends in the past week alone:
· PayPal (PYPL)- PYPL reported earnings on 5/6 and subsequently traded up 15% on the back of better than feared earnings. They had 20.2mn net new active accounts added (which included 10.2mn from the Honey acquisition) but 10.0mn organic net new active accounts is a 1Q record. Total payment volume was $191bn.
o They noted accelerated trends in April with 7.4mn net new active accounts +135%; which is 250,000 daily net new accounts. They had ~1.2bn payment transactions up 20% YoY and $68bn in TPV up 22% on an FX neutral basis.
· Shopify (SHOP)- SHOP reported earnings on 5/6 with 1Q revs +47% YoY to $470mn. hey saw new stores created on the platform grow 62% between March 13, 2020 and April 24, 2020 compared to the prior six weeks, driven by the shift of commerce to online as well as by the extension of the free trial period on standard plans from 14 days to 90 days.
- Method of Purchase- GMV through the point-of-sale (POS) channel declined by 71% between March 13, 2020 and April 24, 2020 relative to the comparable six-week period immediately prior to March 13, as most of Shopify’s Retail merchants suspended their in-store operations, Retail merchants managed to replace 94% of lost POS GMV with online sales over the same period. Retail merchants are adapting quickly to social-distance selling, as 26% of our brick-and-mortar merchants in our English-speaking geographies are now using some form of local in-store/curbside pickup and delivery solution, compared to 2% at the end of February.
- Category Mix- Certain categories of GMV grew faster between March 13, 2020 and April 24, 2020, including Food, Beverages, and Tobacco, which doubled during this period relative to the 6-weeks immediately prior to March 13. Apparel and accessories, a historically larger contributor to Shopify’s GMV, experienced a softening in GMV in mid-March, followed by a recovery at the end of March, which continued into April.
- Shopify Capital- More merchants are making greater use of Shopify Capital, with $192 million of advances and loans outstanding at March 31, 2020, compared with $150 million at December 31, 2019. And, they announced they have committed an additional $200 million above the March 31, 2020 level for the remainder of 2020, to increase funding of Shopify Capital in the United States and expand Shopify Capital to the United Kingdom and Canada.
· Twilio (TWLO)- TWLO reported earnings on 5/6 and traded +39.6% on the back of 1Q earnings which showed first quarter revenue of $364.9mn +57% YoY. They had 190,000 active accounts + 23% YoY.
The implications of this aren’t going to be played out in public market performance & private market funding over the next 6–12 months. This has serious ramifications for the workforce of the future, job training, and skills required to compete in a post COVID economy.
The implications of this aren’t going to be played out in public market performance & private market funding over the next 6–12 months. This has serious ramifications for the workforce of the future, job training, and skills required to compete in a post COVID economy.
While there has been an insatiable appetite for all things cloud in an enterprise setting there has been an equally large increase in demand for consumer-facing services such as streaming providers Disney+ & Hulu (DIS), Netflix (NFLX), Amazon Video (AMZN), and gaming services like Fortnite and the balance of those offered by Activision (ATVI) and Electronic Arts (EA).
· Disney (DIS)- reported earnings on 5/5 which noted 33.5mn Disney+ subscribers as of 3/28/20. Notably on the earnings call they stated they had 54.5mn subscribers at the end of April (+62.5% MoM)
· Netlfix (NFLX)- NFLX reported earnings on 4/21. They added 15.77mn global paid net subscribers with 182.8mn global subscribers right now and 69.9mn in the US.
· Spotify (SPOT)- SPOT reported 1Q earnings on 4/29 highlighting 286mn MAU and 130mn subscribers both +31% YoY. They continue to emphasize podcasting with 1mn+ podcast tiles on the platform; a podcast API they launched for developers.
o Method of Consumption- Spotify noted what COVID-19 has done to the method of audio consumption. Not surprisingly, we have seen usage in Car, Wearable, and Web platforms drop (double digits in some instances). However, the audience through TV and Game Consoles has grown materially, in excess of 50% over the same time period. In fact, for Ad-Supported MAU in the US, game consoles have been a top 2 or 3 platform in terms of consumption for the better part of the month, and connected device usage generally is up more than 40% among Ad-Supported users globally. It’s clear from our data that morning routines have changed significantly. Every day now looks like the weekend. This trend was seen more significantly in Podcasts than in Music, likely due to the fact that Car and Commute use cases have changed quite dramatically. However, listening time around activities like cooking, doing chores, family time, and relaxing at home have each been up double digits over the past few weeks
TechCrunch published an article estimating that 44mn US adults use a borrowed streaming service; if they can get security right and user authentication we would imagine that a significant proportion of this would convert to paying subs.
Movie theaters are clearly troubled especially as large IP owners such as DIS have growing platforms to do D2C releases. Trolls World Tour was set to be released April 10th but as opposed to postponing they made the movie available as a digital rental for $19.99. In the three weeks since they have racked up $100mn in rentals. With nearly five million rentals in the U.S. and Canada, the digital release has in three weeks generated more revenue for Universal than the original “Trolls” did during its five-month domestic theatrical run. There are thoughts that large Box Office hits will still want the “Opening Weekend” bang; you could likely see a Pay-per-view effect not dissimilar from Boxing where households have to pay $50-$60 for opening weekend while making it available thereafter to the masses and skipping the theatres altogether.
Could COVID-19 be a catalyst for AR/VR particularly as it pertains to sports consumption? What about second screens? If teams come back to empty stadiums, they’ll have to get creative with incremental monetization strategies; forward thinkers like Steve Ballmer with the Clippers or Joe Lacob & team with the Warriors might look to sell court-side seats available on VR glasses that are assigned to the individual recipient. We’ve seen virtual concerts have varying degrees of success. Who will release the first blockbuster direct to consumer? What types of security protocols will be built to try to avoid password sharing?
COVID-19 has been a boost to digital banking and has accelerated the move away from cash globally. Cash is notoriously covered in germs; with studies suggesting paper bills can contain bacteria & viruses that ultimately lead to the spread of disease. In China banks began disinfecting cash with ultraviolet or heat treatments immediately during the COVID-19 outbreak. We’ve seen other parts of Asia and Emerging markets following suit.
In the US we’ve seen growth in mobile wallet provider such as Square’s Cash App, PayPal’s Venmo, Apple Pay, and Zelle. Ark Invest published a great paper comparing the Cash App vs. Venmo. They draw the comparison between mobile peer-to-peer payment adoption in the US to that which we saw with social media adoption from 2006–2012. As many have been sheltering in place and reluctant to go to the bank even when they have a need for cash they have turned to these digital wallet providers and found a more seamless experience. We think this serves as an even greater accelerant than the merge passage of time which occurred for the social media generational transition.
Ark also showed that if you measure financial institutions by active digital users Venmo, and Cash App become the two largest financial institutions in the US totaling in excess of 50.0mn users each.
Internationally this trend has become even more prevalent. China has long been the leader in digital payments, with $24.0 trillion in total payment volume in 2018. Emerging markets have followed this lead and COVID-19 will likely accelerate that process. Sub-Saharan Africa is home to the world’s largest free trade area, youngest labor force, and the 1.2 billion-person market and is only going in one direction. It’s hard to believe that Kenya kicked off the digital payment ecosystem back in 2005 with a beta version of M-Pesa and the public launch in 2007. According to the World Bank ~66% of adults in Sub-Saharan Africa are “unbanked” yet there are over 600 million Africans who currently use mobile phones. 21% of adults in the region having a mobile money account. This correlates with GSMA supply-side data on mobile money, which shows that Sub-Saharan Africa plays host to almost half of all mobile money registered accounts i.e. 396 million — of which 37% are active on a 90-day basis. In person solutions such as Western Union will be a thing of the past, and startups such as Chipper Cash are well positioned in Africa with offices in Nigeria, Kenya, Ghana, Tanzania, South Africa, Rwanda, and Uganda.
The FT highlights the growth of SoftBank funded Uala which has issued more than 1.9mn debit cards in Argentina, including 140,000 since quarantine began, and is now signing up ~0.5% of Argentina’s 55mn population every month. Ualá’s digital bill payments service, which uses Western Union as a partner, has had a 300% increase in transactions during the past month.
Earnings reports have also supported this trend:
· Square (SQ)- SQ reported 1Q earnings on 5/6 with total net revenue $1.38bn +44% YoY and the stock traded +10%. In March the Cash App added its largest number of net-new transacting active customers. As the CARES Act was drafted the SQ team worked across their Seller & Cash App ecosystem to help customers.
o Square Capital secured SBA approval to offer PPP loans and have submitted $855mn on behalf of 54,000 sellers of which ~$520mn has been approved to 45,000 sellers. The average loan size to businesses in all 50 states is $12,000. 50% of the applicants were sole proprietors.
o Cash App published an FAQ on the stimulus program making it easy to receive stimulus check. In four weeks the number of Cash App customers with direct deposit accounts grew from 3 million to 14 million.
On the conference call Jack Dorsey made some interesting comments about SQ’s positioning which we think are applicable to B2B FinTech company’s more broadly: “Now more than ever, we see the strength and value of our ecosystem strategy. It comes down to speed and trust. Our tools have been — have proven to be simple enough that anyone current or new customers can quickly pick them up and adapt to many different challenges they may meet. And we have shown that we aren’t just here to provide tools, but help and support navigating complexity safely. This is a transformative moment, and as a business, we have made the strategic decision to invest through this challenge to come out on the other side in the position of strength. We see significant opportunity to bring new sellers and individuals into our ecosystems and build and launch new products to serve them both today and long-term.”
We expect the battle for digital banking to continue to be elevated with a focus on controlling that direct deposit account as the central hub of “autonomous finance” or “self-driving money.” As most banks have been looking to cull their physical footprint over the past 5 years this should serve as an accelerant of that trend or a repurposing of retailing banking. This could also lead to an acceleration of real-time payments and money movement as we continue to migrate away from physical currency towards the digital.
According to BAML eCommerce share of total retail has been growing at ~1%/year over the last decade. It grew 15% over the last 6 weeks and is now at 30% of all of retail (China is at 37% right now). The ripple effect has profound implications on physical retail throughout the US and real estate pricing more broadly.
Many traditional brick & mortar retailers have resisted the migration to eCommerce for some time; but when stores are closed their hands are forced to embrace technology. At a time when consumers need reliable e-commerce experiences, COVID-19 is exposing underprepared e-commerce strategies, poorly designed websites, and the lack of guidance and assistance offered to online shoppers. It’s become evident retailers and brands need to adopt new strategies to effectively support the surge of new customers and reliance on e-commerce.
A recent UBS report estimated 100,000 retail locations could close by 2025. What does that mean for the American mall and for the hundreds of millions of square feet of physical retail presence across the country? What does that get converted to and how?
Naval Ravikant summed up the impossible position that higher education universities find themselves in over the next 12–24 months.
First colleges have to convince incoming and existing students that they should pay full price for remote education. If students truly believe that will they look to unbundle the existing higher education basket and turn to remote learning full time with classes that position them to excel in a post COVID-19 economy while ignoring classes that have been “core” parts of the college syllabus just because. In order to retain students, post that they’ll have to reverse course and preach the value of an on-campus education as opposed to remote learning.
The financial implications of COVID-19 are effecting all universities. Harvard, Yale, Stanford, Cornell, the list goes on and on of top tier universities that are claiming COVID-related budget shortfalls of over $100mn+ for the coming fiscal year. While many of these schools applied for PPP loans under the CARES Act due to public scrutiny over the size of their endowments they almost all returned the money. While Harvard’s endowment might be $40 billion+ nearly ~80% of endowment money is benchmarked for a cause and cannot be used discretionarily in the event of a once in a 100-year pandemic. Universities have implemented budget cuts across the board cutting salaries by 25%+. A recent Washington Post article highlighted that Johns Hopkins disclosed it will suspend contributions to employee retirement accounts, cut salaries of top leaders and prepare for furloughs and layoffs as it confronts a massive budget shortfall touched off by the coronavirus pandemic. The paper projects a budget gap of ~$375mn for next fiscal year. It disclosed issues for state systems in Missouri, Kentucky, and throughout the US.
While there’s still “sticker value” and “signaling” obtained by attending a Top 15–25 university the vast majority of higher education school systems will be under unique financial duress during this upcoming academic year with real questions about how to best go about positioning their brand for the future. This includes right sizing budgets & faculty, spending on athletics and other ancillary programs. We had seen small evidence of unbundling of higher education with programs such as Lambda School and General Assembly, or free online resources such as Khan Academy and Coursera. There has been experimentation with new forms of financing such as income sharing agreements; which despite their flaws seem to be better than the alternative for many looking down the path of $200,000+ of student loans with uncertain job prospects. What seems to be clear is 20 years from now it will be next to impossible for large state schools to command $50,000-$70,000/year for a commoditized 4-year education.
What’s the ripple effect downstream for high school education and earlier with remote work possibility? Could we see the scalability of teachers where the top teachers can command a premium and attract a nationwide class? Will there be greater competitiveness for admissions for these teachers and in turn higher compensation available? Through the use of AI and Machine Learning can we look to more personalize curriculum to better fit a student’s ideal learning environment and style? Education could see the biggest revamp in decades if the opportunity is properly capitalized upon.
When 33.5mn+ Americans can be laid off in a 6-week period due to a global health crisis it’s critical that healthcare benefits are not tied solely to employment. We need to innovate on benefits holistically in the US as they have not been overhauled in decades.
The concept of work has changes and COVID-19 will only accelerate that change. Benefits need to be personal, portable, and flexible not anchored to employment. According to the IRS ~80mn Americans don’t have access to employer benefits including freelancers, gig workers, founders, and full-time employees with inadequate benefit plans. Macro tailwinds are accelerating individuals to be their own boss; in 2018 independent workers contributed $1.28 trillion to the American economy. Given some of the anticipated structural changes around employment we need to get creative around portable retirement accounts, healthcare accounts, health savings accounts, etc.… Other societal benefits such as social security and Medicare should also be looked at and re-hauled to meet the demands of a changing society.
Fitness / Wellness Evolution
COVID-19 is accelerating trends in the fitness & mental health industry catalyzing opportunity for startups in a new era of digital fitness, innovative at-home fitness devices, and influencer / digital marketing. Once again the public market tells part of the story. If you look at the performance of publicly traded at-home fitness equipment providers such as Peloton (PTON) and Nautilus (NLS) they have dramatically outperformed traditional gym companies with large physical footprints such as Planet Fitness (PLNT) and Town Sports (CLUB); with the at-home companies up +132.5% vs. the physical footprints on average -45.6%…would’ve been a great pair trade even post shutdown.
Several venture-backed companies have found product market fit for at-home workout devices including Hydrow, Mirror, and Tonal. PitchBook recently put together a good overview on the market highlighting some of these companies, capital raised to date, and deal stage. They break it down into at-home fitness development & fitness applications; both of which have seen significant demand since the shutdown.
The question becomes what do gym memberships look like going forward? How many dormant gym memberships were finally cancelled? What have people found out about their ability to use an app for $20/month to get the same type of workout as a $250/month Equinox membership? What does wellness look like in addition to physical fitness? Under Armour CEO Patrick Frisk said that the daily record for runs tracked on Map My Run has been set 6x during the COVID-19 pandemic. Is this something that reverses course anytime soon?
· Peloton (PTON)- Peloton reported earnings this week and highlighted connected fitness subscribers grew 94% to 886,100 with paid digital subs +64% to 176,600; with total members at 2.6mn. They saw 44.2mn total workouts form their subs which averaged 17.7mn monthly workouts.
One of the trends we’ve seen that has been accelerated by COVID-19 is the concept of precision wellness. Precision Wellness involves the intersection of connected devices / fitness equipment extending into nutrition and wellness holistically with a personalized view based on key biometric data. While there are some very early stage companies looking at tracking LDL Cholesterol, and continuous glucose monitoring through the use of both invasive and non-invasive technologies. We think the most effective are still looking at variables such as RHR, HRV, and sleep.
Whoop is one of these startup companies leading the way. On March 9th they launched an interactive Whoop Journal, which allows members to track a variety of daily behaviors against their physiological data to make healthier lifestyle choices with real-time feedback on their bodies. That same week, they included COVID-19 as an option within the WHOOP Journal for members to monitor their symptoms; while exposing Respiratory rate for the first time which seems to have had some predictive power based on a study with Cleveland Clinic. Incumbents such as Fitbit have also launched COVID-19 information centers, and partnered with Stanford & The Scripps Institute to see if a wearable can help detect, track, and contain COVID-19. As these devices mature away from counting steps and calories for fitness enthusiasts to being viewed as “must haves” for front line workers the addressable audience expands considerably.
We think there will be an increased focus on these metrics to track health and become part of the daily fabric of overall physical wellness.
Mental Health applications represent a compelling synergistic play on digital health and fitness. The pandemic has caused significant mental stress and we’ve seen companies that have been forced to make tough choices around employees increasingly offer as a health benefit. A number of mental wellness companies have reported a spike in demand since COVID-19. While users are taking advantage of a number of free trails it’ll be interesting to see which platforms and approaches are able to retain new signups. There are providers that rely on humans in a 1x1 outreach or in a 1:many outreach, others that rely on AI, etc….
Prior to COVID-19 we started to see several trends emerging in the fitness space all around the theme of athlete monitoring around three core tenants: game / practice / conditioning (GPS / Heart Rate monitors), rest / recovery / nutrition (Sleep / HRV), and strength-training (velocity-based training). We began to see startups emerge around the concept of the “gym of the future” focused on velocity based training (VBT), with the big-picture vision of being part of the “Amazon Go” of fitness, where someone walks into a gym, completes cardio activity, barbell / dumbbell weights, cable weights, body weights, etc.… and all of that information is tracked, with the data stored in a single place, coupled with biometric data from wearables to create the “optimal athlete” / “plan.” The goal of capturing this end-to-end data is to provide predictive analytics & workout recommendations to athletes & fitness enthusiasts that are far superior to lifting programs today. How does this change (if at all) if workouts are predominantly in the home? Does the gym of the future become more exclusive and therefore more expensive? How does mental wellness play into all of this?
Government Technological Infrastructure Overhaul
In early April we saw a number of articles from the likes of Bloomberg entitled “An Ancient Computer Language Is Slowing America’s Giant Stimulus” and The Verge entitled “Unemployment Checks are being Held Up by a Coding Language Almost Nobody Knows.” They talk about how the COVID-19 pandemic exposed aging, inflexible computer systems at the heart of the U.S. economy; and perhaps even more troubling — a shortage of people with the appropriate domain expertise to fix the problem. Bloomberg highlighted problems in states such as Connecticut, New Jersey, ad Oklahoma where the government systems run on COBOL. A survey by The Verge found that at least 12 states still use COBOL in some capacity in their unemployment systems. Alaska, Connecticut, California, Iowa, Kansas, and Rhode Island all run on the antiquated language.
The problem is COBOL is a 60+ year old programming language and there is a shortage of programmers that still know the language; according to Gartner the average COBOL programmer is over 60 years old. In 2019 the US Government Accountability Office mentioned COBOL 26 times in in a report that urged multiple agencies to modernize critical legacy technology. According to the Bloomberg article, “There’s little documentation explaining how these systems were built decades ago, so government agencies and companies often relied on programmers remembering how it was done — COBOL ‘folklore.’” New Jersey has been front and center with this issue given how strong the impact of COVID-19 has been felt in the state. Governor Phil Murphy made a plea for more COBOL programmers and said, “Literally, we have systems that are 40 years-plus old, and there’ll be lots of post-mortems…and one of them on our list will be how did we get here where we literally needed COBOL programmers?”
Steve Mnuchin boasted that 130mn Americans received their Economic Impact Payments which totaled more than $218bn in “less than 5 weeks-record time.” In the year 2020 where Amazon can deliver almost any package in 48 hours, where Google can parse the internet in microseconds, where high frequency trading firms can trade tens of millions of shares per day, how are we celebrating payments dispersed in weeks vs. hours / days as an accomplishment?
The US Government needs to modernize its technological infrastructure; particularly in a world with escalating geopolitical tensions where it becomes a point of systemic risk. This should include all critical infrastructure from payments to water to electricity to miscellaneous benefits. In an attempt to catalyze local economies putting RFP’s out to modernize legacy infrastructure should be low hanging fruit.
Telemedicine / Teletherapy:
A lot has changed since the Spanish Flu in 1918; but one of the things that has evolved much less than you would think over the past 102 years is the mechanism of healthcare delivery. In 2020, just like in 1918 a patient thinks they are sick, they visit a doctor’s office (while potentially spreading the disease), a doctor diagnoses the patient, sends the patient home, and they either recover or it comes back and they have to go back to the emergency room or some other form of escalation.
Hospitals and doctors’ offices banned elective procedures in an attempt to stop the spread which led to new adopters of Telemedicine. Telemedicine is faster, many times delivers better quality, and universally cheaper than traditional delivery systems. Google search trends suggest peak searches for Telemedicine at the end of March likely as people were looking for alternatives
We need to have better testing, better connectivity amongst health records, and start to utilize automation, artificial intelligence, and machine learnings in point-of-care diagnostics, and treatment delivery.
Just like we’ve seen an explosion in the demand / interest in Telemedicine the same can be said for Teletherapy as alluded to earlier with the proliferation of mental wellness applications. Both Teletherapy and Telemedicine are not without their challenges particularly around privacy and compliance with HIPAA rules and regulations. Presumably the types of treatments such as Cognitive Behavioral Therapy and Mindfulness interventions will also be more or less effective in a virtual domain. In a post COVID world this could be more of the norm as opposed to the expectation removing the stigma and association of lesser quality than being in person.
Video-Conferencing / Collaboration Software:
Mary Meeker and the Bond Capital team put out a great piece entitled “Our New World,” in it they too discuss some of the changes that we’ve seen. While the entire piece is worth the read, one of the things we found most interesting was their emphasis on the unprecedented growth rate that Zoom has seen over the past few weeks. They note that Instagram secured 100mn MAU in 2 years, Fortnite in 108months but Zoom went from 10mn to 200mn daily meetings in three months during the pandemic
Video Calls have had some mixed reviews thus far but on the margin if not overused have been productive and more likely to start and end on time as opposed to in person meetings. The elimination of commuting time to and from in person meetings is significant and we’d expect many inter-company meetings to go the way of video conferencing going forward.
In addition to Video Conferencing other enterprise SaaS collaboration tools have seen dramatic usage increases. Slack reported a 2x increase in paying customer adds in Q1 plus a 20% increase in average daily messages sent per user per day, while Microsoft Teams reported 44MM DAUs (daily active users), +3.7x week-over-week, during the initial weeks of COVID ending 3/19.
We expect these trends to continue to grow even when we “return to normal” and anticipate a slew of derivative products to be built on top of them as platforms in it of themselves to solve for pain points around security, privacy, record keeping / monitoring, and collaboration.
Other: There are countless other sub sectors that are also being impacted that we’ll look to opine on at a separate time including:
· Advertising- People have never been more engaged online / in social but brands have been forced to pair back ad spend. How can you more effectively target end customers and use the platforms through which they are engaged?
· Bitcoin- Central Banks printed $3.9 trillion since February (6.5% of global GDP) in an attempt to combat COVID-19. This is an unprecedented expansion of fiat currency that the developed world has never seen. At some point this should lead to tremendous inflation; in that world what assets should perform well? Paul Tudor Jones recently penned a great letter on this and highlighted Bitcoin for the first time publicly. He noted Bitcoin is “literally the only large tradeable asset in the world that has a known fixed maximum supply. By its design, the total quantity of Bitcoins (including those not yet mined) cannot exceed 21 million.” He also highlighted that Bitcoin is “the only store of value that actually trades 24/7 in the entire world.” Finally he noted Bitcoin’s superior portability vs other “store of values” including gold and treasuries given the fact that Bitcoin can be stored on a smartphone, a UBS drive, etc… amongst other options.
· Cloud Kitchens- Online ordering has changed how restaurants approach food service even prior to the COVID-19 breakout. Many have turned to cloud kitchens which are focused solely on fulfilling online orders for delivery. As expectations grow for curbside pickup and delivery the restaurant of the future might have significantly less seating than the restaurant of two months ago.
· Domestication of Supply Chain- Almost 90% of global trade is transported by sea. National COVID-19 measures, local restrictions, and reduction in human capital make it challenging for ships to dock, load, and disembark; which is just one of many issues COVID-19 has exposed with the global supply chain. In the US, we were unable to create masks and ventilators at the pace governors and state officials needed during the early days of the pandemic. This has led to calls for a “domestication” and diversification of the supply chain (particularly away from China). In the US we’ll likely see production taken back domestically with a focus on partnering with Mexico & Canada as well as other parts of LatAm as opposed to China. Some companies such as Apple have already started to build products in Vietnam and exploring India to diversify their China exposure.
· Energy Consumption-
· Food Delivery / Supply Chain- COVID-19 has highlighted both weaknesses and inequities in America’s food supply system. Prior to COVID ~50% of all food spend in the US was “away from home” which included restaurants, cafes, etc.… During the lockdown that split is more like 90/10 in favor of the home with that increased demand coming from conventional grocery stores. Farmers with storage crops and value-added dairy products (e.g., cheese, yogurt) that can product year round are seeing a boom. Some farmers are trying to make the pivot into home delivery directly. There is strain around the supply of these crops where uncertainty around the harvest system has created a misalignment of supply and demand.
o Meat Supply Chain- One of the problems that continues to bubble up is the COVID-19 linked issues in the meat supply chain which could mean shortages & trouble for ranchers.
· Housing Market- What does housing look like in a post COVID-19 world? If people are able and willing to work remote will you spend $1.0mn for a 700 square foot apartment in Manhattan or look to move to Texas or Florida with no state income tax, better weather, and a lot more bang for your buck? Is this the revitalization of middle America that’s been missing by the move towards the coasts over the previous two + decades given lower cost of housing / living? What do towns look like in this scenario?
· Sports / Concerts- Reuters / Ipsos conducted an opinion poll from 4/15–21 that surveyed ~4,429 adults and it found that only 17% of those polled said they would attend a game without a vaccine, while 55% said movie theater screenings & live concerts should not resume until a vaccine was available. The data was slightly more constructive for those that regularly attend sporting events with 42% saying they would return whenever it reopens to the public. What does a sporting event look like without fans? What are the economic ramifications and opportunities? How do the Big 4 leagues and beyond respond? How do artists look to monetize their brand and IP in different ways?
· Travel- What does travel look like in a post COVID-19 world? Will people look to stay closer to home for the foreseeable future and not take the cross country or international trip they had been planning for? How does this effect staying at hotels or Airbnbs from both a cleanliness and foot traffic perspective? What is the ripple effect on the Airbnb economy that emerged over the past 5 years and the “super hosts?”
While COVID-19 has been challenging for everyone if viewed as an opportunity as opposed to a challenge it could be a forcing function to make some very hard but needed changes including
· Modernization of government infrastructure / healthcare / education / benefits
· A focus on retraining of the job force for the economy of 2050 not 1990.
· Increased adoption of digital banking
· Domestication of Supply Chain and Upgrade of Critical Infrastructure including a “New New Deal” with a focus on public-private partnerships.
What’s clear is the near future will seemingly look very different than the recent past which is something that only happens around significant domestic and global catalysts. How we chose to react to the crisis will say a lot about the direction of not only the economy, but society over the next several years. Let’s hope we get through this as thoughtfully as possible.