The COVID-19 infectious disease, caused by the SARS-Cov2 virus, represents an unprecedented threat to our economy and way of life. Never before has the modern world quite literally stopped in its tracks to avert a global disaster in the making. While the effectiveness of actions to stop COVID-19 spread continue to be discussed and challenged, there is little debate that we will carry the scars of the pandemic for some time to come.
From a business perspective, actions needed to halt the pandemic’s spread have unfortunately resulted in a big “reset,” where almost all sectors have seen decline in revenue and many are considered permanently damaged. Here I break down the impact in distinct, manageable groups to better understand the severity and magnitude of the problem. We will subsequently focus on science-based startups.
While nearly all businesses have been impacted, effects of the pandemic on companies can be classified as: transient (Group A); significant (Group B); and lethal (Group C). This classification applies both across and within sectors. Transient effects can be best thought of as a pause, or a bad period (perhaps a bad year), from which a business will eventually recover, provided the underlying need remains intact (E.g. Amazon). Businesses that are significantly affected (Group B) are less likely to recover fully, or may not recover at all. For instance, the airline sector may eventually recover to full capacity, but other businesses that rely on discretionary income and involve crowds, such as movie theaters, may not remain sustainable. Businesses that are lethally impacted are those that may be unable to remain solvent due to loss of revenue or dramatic change/loss of demand (E.g. restaurants, retail).
The same criteria can be applied when evaluating science-based startups, a narrow category of businesses that offer scientifically derived solutions to existing market needs or problems. Google at its heart is a science-based startup, developed on the strength of advances in computer science, namely a new computational algorithm that performed better than existing algorithms (see Brin & Page,1998). Science-based startups can and do exist in all sectors, and while science and technology go hand-in-hand, not all tech startups are science-based startups, and vice-versa. Some med-tech startups, for instance, may not be science-based, but may aim instead, to say, reduce inefficiencies.
Even within the science-based startup sector, companies that address clearly defined unmet needs (drugs against neurodegenerative diseases, for instance), will likely be transiently affected (Group A). In fact, given investors are plentiful when choices are few, it is likely that Group A businesses will see an increase in investor interest. As a rule of thumb, new ideas related to food, clothing, shelter, health and wealth represent evergreen areas that are always ripe for investment.
As opposed to the Group A cohort, Group C startups may fall victim to the pandemic and circumstance. A number of ideas that seemed good just a few years ago appear to be quickly turning irrelevant (E.g. biofuels). Further, business-consumer appetite within some sectors may change overnight if there is contraction in revenue (E.g. Adtech, Marketing).
For investors, Group B startups are the ones to watch, more so because they may appear to be on the right track by offering pivots, changes and “COVID solutions,” but in some cases the pandemic may just be the beginning of the end. An important distinction is the nature of the change or pivot; many companies and even well-funded startups may venture into new areas such as infectious diseases, but this does not change their original business model . A COVID-specific solution will melt away the minute a good drug/vaccine is announced. The diagnostics sector here provides good case studies. A newly developed scientific method or protocol may be able to detect the SARS-Cov2 virus within minutes or seconds, which is a great achievement, but will this solution supplant existing medical pipelines and setups? Is viral DNA so widespread in blood that a pinprick solution is relevant? Which is more desirable: an “add-blood-see-color-change” type test, or one that relies on an electronic device, needs a smartphone, and outputs a probability score as a result? These and other questions should form the basis of evaluation as investors reassess their portfolios. Immediate short-term gains may look attractive, but long-term solutions that integrate with existing medical infrastructure and serve to expand and enhance service are better bets.
This brings us to the big question: where are the real returns? Can we break out of covid play? Real returns are where startups and ideas address fundamental questions and needs that are apparent but overlooked. To stay within the realm of infectious diseases, how many times have you heard the phrase “it’s something viral”? We know the influenza virus circulates every year. Which other viruses circulate every year? Forget esoteric diseases in far-away countries, what about the niggling colds and infections that sweep the US seasonally? Interestingly, we do not have an accurate and comprehensive census of viruses (foundational knowledge) that regularly dent your quality of life. Physicians may argue this information is non-actionable, since there are no antivirals to prescribe. But this represents a chicken-and-egg situation; your doctor would certainly prescribe something, if available, to help you get rid of your infection and discomfort. In the context of millions of potential cases, developing a therapeutic that may one day provide relief for a common malady suddenly starts appearing worth a shot. You may not think much of Vicks, the omnipresent Proctor and Gamble brand providing cold, flu, fever and sinus relief remedies, but note that it became a billion-dollar brand in 2012.
The “COVID reset” has given us an opportunity to better understand and identify true value as we invest to move our society forward. The reset has also sharply highlighted the need to address fundamental, rather than transitional needs. Even though the situation appears apocalyptic, it should be thought of as akin to a forest fire: there is widespread devastation, but it clears the way for new growth.
Dr. Shailesh Date is the founder and CEO of LRC Systems.