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A Silver Lining in a Very Gray Cloud

As we write this blog in mid-November 2020, the world remains gripped by the COVID-19 pandemic, with the latest virus wave poised to once again test the ability of healthcare systems to cope. The U.S. intently watches political developments following a polarizing presidential election. The precise economic and social impact of the pandemic remain difficult to predict, but it seems very likely the direct toll will continue for months, and that secondary impacts will be felt for years. Clearly, the pandemic is highly detrimental for society and for many individuals.


While trying times create disruption on many levels, they also force us to look for new ways to overcome obstacles, thus accelerating innovation. Over the last several months, we have already seen many startups rise up to the challenge to develop creative solutions. The current environment presents a great opportunity for entrepreneurs and investors to ride a wave of transformational growth over the coming decade.


Periods of disruption have historically produced marquee startups and funds because newcomers are nimbler than incumbents and are better suited to take advantage of rapid changes in markets, and to create and harness new opportunities. Because COVID-19 has introduced such dramatic disruptions in so many markets and geographies, we believe these opportunities are greater now than they have been during prior periods of disruption.

COVID-19 has disrupted multiple major industries including travel/hospitality, commercial real estate, transportation/mobility, entertainment, healthcare, retail, and more. These disruptions are likely to create secondary and tertiary waves that will take years to ripple through other industries connected through related supply chains, customers, funding sources, etc. Furthermore, these disruptions are not strictly geographically contained – these are by and large global disruptions whose direct impact will wax and wane but will likely persist for another 12-18 months, and whose impacts will be felt for years and even decades.

Most large companies are simply not well designed to handle major disruptions quickly. Many have large, relatively fixed cost structures – real estate and office space commitments in expensive cities, labor forces hired over decades and designed to operate under the “old” now-challenged paradigm, supply chain and distribution relationships and commitments that may be hard to break but may no longer function as anticipated. Corporations can and will make changes, but those changes will take time. That renders many of them vulnerable to competition and displacement, especially as they devote time and resources toward navigating potentially significant structural changes.

Startups have less baggage. Dozens of them target each emerging opportunity and are designed with the rules of the new paradigm in mind. As always, most will fail – but the few that predict the new paradigm correctly and execute well will be positioned to steal market share from incumbents or to invent and capture whole new markets. Simply put, massive upside is more accessible to startups during these transition periods.


Plus, startup inputs are cheaper during periods of disruption – talented people get laid off and are willing to change jobs and take on more risk.


Unemployment rate, seasonally adjusted, October 2018 – October 2020 Bureau of Labor Statistics

Although unemployment levels have dropped since hitting record levels in April, we are likely to see continued disruptions in the labor market, including increased labor mobility as workers shift from struggling to growth industries.


In this particular disruption, people are forced or inclined to work remotely – removing office space cost altogether for many new businesses and rendering new talent available that lives outside major business areas like Silicon Valley, NYC, and Boston. According to a study by The Brunswick Group, 41 percent of 18- to 34-year-old tech workers surveyed said they planned to leave the Bay Area in the next year.


From an investor’s standpoint, valuations typically stabilize and may even fall during periods of recession, making deal terms more attractive.


Valuations declined in the aftermath of the Global Financial Crisis.


So far in this recession, we have seen deal inflation jump at later stages while remaining flat in seed-stage deals.

Source: KPMG Venture Pulse Q3 2020 * As of 9/30/2020


Simultaneously, dozens of exciting new technologies are now or soon will be reaching states of relative maturity and market adoption, significantly increasing the possibilities for innovative disruption and massive growth. As but a few examples, compare the state of technology today to that of even 5 years ago in fields as significant as AI, data analytics, edge computing, 5G & pervasive bandwidth, high-CPU cell phones, battery technology, electric and autonomous vehicle technology, IoT, blockchain, or augmented reality. These new technologies underlie the products of many startups that are emerging now and will help establish their competitive advantage over slower-moving incumbents.


5G is expected to reach 100 million mobile connections in early 2023 and will become the leading mobile network technology in the country by 2025, with more than 190 million 5G connections.


Over the last decade a surge in lithium-ion battery production has led to an 85% decline in prices, making electric vehicles and energy storage commercially viable for the first time in history.


Finally, traditional investments may not offer their typical allure during periods of recession. With interest rates likely to remain low for the foreseeable future, bonds are likely to underperform. On average, public markets seem unlikely to generate the same relative returns for the next 5 years as they have over the last 5 years. Commercial real estate seems likely to be a riskier-than-usual asset class, at least in the near term. Private equity has strong promise but it is also flooded with capital at the large end of the market and there is strong competition for quality assets. All of this makes early-stage venture a very logical and smart choice for investors – potentially offering a silver lining within an otherwise dark cloud.


  1. The upside for startups is significantly higher and more accessible during periods of disruption

  2. The costs for startups are significantly lower and talent is more available during periods of disruption

  3. The price to invest in startups is the same or lower during disruption as compared to “normal” times

Ergo: early-stage investors have the opportunity to invest at lower (or flat) prices in startups that will spend less money to go after larger-than-typical opportunities.

That is why recessions tend to produce so many major startups – and so many successful funds. During the Global Financial Crisis, we saw the rise of Uber, AirBnB, Slack, Lyft, Pinterest, Twilio and many other similarly successful startups.


Source: Pitchbook data


And this proliferation of winning startups translated into higher IRR for early-stage investors during the global financial crisis.



We believe this is one of the best opportunities in recent history to launch startups, and to invest in them – and we look forward to working with this generation of high-impact founders to improve life and society.


Also check out the podcast I held with Sal Daher on Angel Invest Boston that covers similar topics: https://www.angelinvestboston.com/john-harthorne-vc-why-invest-now

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Some photos are courtesy of MassChallenge