Financial Recessions: The Start-up Launch Pad
“To move from the old to what is about to come is the only tradition worth keeping”. Marcus Wallenberg wrote to his brother Jacob in 1946 to convince him to sell the family's interests in the railroad industry and focus instead on founding the airline SAS.
The economy runs in cycles. As challenges arise, old business models are replaced by new ones that are more attuned to current consumer demands. Although most are pessimistic about the current economic situation there are some who are going out creating businesses that we may come to know in future years. These new businesses arise when people see an opportunity to fill a need or a new market develops. For example, when the pandemic started quarantine raised the need to meet virtually for people, schools, and businesses needed a way to virtually meet with online this problem was solved by ZoomInfo.
Even out of crises, successful companies emerge. There are several patterns to watch for:
1) Using technology to make things easier or cheaper
2) Seeing around corners
3) Giving power to the people
Using Technology
Technology companies often provide an easier or cheaper way to do something. So the list of companies that started during financial recessions includes many notable technology companies. For example, in the last recession of 2009 Uber started and succeeded because they helped customers have cheaper and more convenient transportation options. The demand was higher than normal because many people’s financial situations had declined. This meant that they had a more affordable option than buying and maintaining a car but still were able to be mobile. Uber’s multiple platforms including Uber pool and UberX allowed people to choose their level and customize their spending. Nothing is perfect, and although Uber identified an unmet consumer demand and established a market, it currently is not profitable.
Seeing Around Corners
Most successful businesses that emerged from recessions supplied a product or service which helped to solve a problem that started the recession. Due to busy work and home schedules, consumers are spending less time in stores. All-day trips to the mall can be inconvenient in a busy schedule. Warby Parker, an online glass retailer started in 2010 in the wake of the financial crisis, allows customers to “try-on” sunglasses online by using the webcam on your computer. This allowed people who don’t have time to go to a physical shop to try on glasses with the ability to do so from practically anywhere.
Power to the People
Some businesses focus on the goal of empowering people and businesses. This enlightenment-Esque view is notably held by companies like eBay and Square. The problem Square addresses is that people don’t like carrying around cash, but many small merchants from farmer’s markets to coffee shops were not set up to take credit cards. Square developed a product that made it simple and easy for merchants to accept credit cards. This was a “win-win” scenario because the product or service providers were making more money and the customers didn’t have to constantly take cash out of their bank accounts.
Companies that start their life in a recession, may be better prepared to withstand future crises. Due to bleak economic outlook expectations of near-future performance are muted. This makes loans more difficult to acquire, so startups are less likely to take on debt. Small companies with room to grow and low or debt can be a good combination.
One company that exhibits all of the above traits is Shopify. Shopify, an online retail platform helps both small and large businesses to distribute their product online without having to go through Amazon. Shopify customers include some of the world’s largest brands like Allbirds, Bombas, Pepsi, and Unilever to mom and pop stores who have never transacted online.
During our current pandemic, Shopify has helped many small, brick and mortar businesses regain sales by assisting them in creating an online platform for their products. Between March 13th and April 24th the number of Shopify customers spiked by 62% from the previous six week period. This led to businesses being able to recover on average 95% of their pre-pandemic sales. Even better for owners' morale, they gain the ability to rehire those they initially had to lay off.
Shopify has a strong tech platform, and due to its international customer base, it saw the pandemic coming way earlier than most. But what really sets it apart is that Shopify’s platform empowers other businesses to survive and grow.
Just as new companies emerge in crises, the reverse is also true. Each new crisis brings down some firms, hammering even some companies that were successful going into it. Today, for example, many travel and restaurant companies that have been well run and profitable for decades are struggling with unprecedented pandemic.
Three things to watch out for and avoid in your existing portfolio:
The economy runs in cycles. As challenges arise, old business models are replaced by new ones that are more attuned to current consumer demands. Although most are pessimistic about the current economic situation there are some who are going out creating businesses that we may come to know in future years. These new businesses arise when people see an opportunity to fill a need or a new market develops. For example, when the pandemic started quarantine raised the need to meet virtually for people, schools, and businesses needed a way to virtually meet with online this problem was solved by ZoomInfo.
Even out of crises, successful companies emerge. There are several patterns to watch for:
1) Using technology to make things easier or cheaper
2) Seeing around corners
3) Giving power to the people
Using Technology
Technology companies often provide an easier or cheaper way to do something. So the list of companies that started during financial recessions includes many notable technology companies. For example, in the last recession of 2009 Uber started and succeeded because they helped customers have cheaper and more convenient transportation options. The demand was higher than normal because many people’s financial situations had declined. This meant that they had a more affordable option than buying and maintaining a car but still were able to be mobile. Uber’s multiple platforms including Uber pool and UberX allowed people to choose their level and customize their spending. Nothing is perfect, and although Uber identified an unmet consumer demand and established a market, it currently is not profitable.
Seeing Around Corners
Most successful businesses that emerged from recessions supplied a product or service which helped to solve a problem that started the recession. Due to busy work and home schedules, consumers are spending less time in stores. All-day trips to the mall can be inconvenient in a busy schedule. Warby Parker, an online glass retailer started in 2010 in the wake of the financial crisis, allows customers to “try-on” sunglasses online by using the webcam on your computer. This allowed people who don’t have time to go to a physical shop to try on glasses with the ability to do so from practically anywhere.
Power to the People
Some businesses focus on the goal of empowering people and businesses. This enlightenment-Esque view is notably held by companies like eBay and Square. The problem Square addresses is that people don’t like carrying around cash, but many small merchants from farmer’s markets to coffee shops were not set up to take credit cards. Square developed a product that made it simple and easy for merchants to accept credit cards. This was a “win-win” scenario because the product or service providers were making more money and the customers didn’t have to constantly take cash out of their bank accounts.
Companies that start their life in a recession, may be better prepared to withstand future crises. Due to bleak economic outlook expectations of near-future performance are muted. This makes loans more difficult to acquire, so startups are less likely to take on debt. Small companies with room to grow and low or debt can be a good combination.
One company that exhibits all of the above traits is Shopify. Shopify, an online retail platform helps both small and large businesses to distribute their product online without having to go through Amazon. Shopify customers include some of the world’s largest brands like Allbirds, Bombas, Pepsi, and Unilever to mom and pop stores who have never transacted online.
During our current pandemic, Shopify has helped many small, brick and mortar businesses regain sales by assisting them in creating an online platform for their products. Between March 13th and April 24th the number of Shopify customers spiked by 62% from the previous six week period. This led to businesses being able to recover on average 95% of their pre-pandemic sales. Even better for owners' morale, they gain the ability to rehire those they initially had to lay off.
Shopify has a strong tech platform, and due to its international customer base, it saw the pandemic coming way earlier than most. But what really sets it apart is that Shopify’s platform empowers other businesses to survive and grow.
Just as new companies emerge in crises, the reverse is also true. Each new crisis brings down some firms, hammering even some companies that were successful going into it. Today, for example, many travel and restaurant companies that have been well run and profitable for decades are struggling with unprecedented pandemic.
Three things to watch out for and avoid in your existing portfolio:
1) Change is constant
2) Avoid the Downside
3) Don’t Sell Low
Change is Constant
Tom Gayner, CEO of Markel remarked at after a recent Berkshire Hathaway annual meeting, “you know I have been hearing about moats at these meetings for decades, two decades ago the moats were Coca Cola and Washington Post. Where are those moats today? Eroded or gone.”
Change is constant in a market economy. During recessions that accelerate, once strong competitive advantage can crumble leaving consumers looking for new solutions. For example, Amazon had been blowing retailers like Walmart out of the water for decades until the pandemic where they totally dropped the ball in delivery and service. This was a huge opportunity for the now-Shopify-powered Walmart who proceeded by executing and delivering much faster than Amazon and although there are some who stuck with the giant (Amazon) many people switched because of the convenience. Amazon still leads in online sales by a wide margin, but Shopify has demonstrated greater appeal to companies dealing with the pandemic and wanting to maintain their own brand and customer relationship.
Avoid the Downside
Many people have gotten interested in investing during this pandemic, day trading has even restarted. However, most do not know what to look for in potential investments. During times like these, the is to follow the Keep It Simple Stupid method. While new business models emerge in recessions, this is not a time to test new investing theories. So what are the basics of safe long term investing? The first is safety; make sure companies have safe and sound balance sheets, one way is to use the Altman Z Score.
Don’t Sell Low
were started and survived financial recessions. In his book “100 Baggers” Christopher Mayer writes that many 100 baggers(Stocks that make you 100x your money) went through 20%-40% drops, however, if you held them through those tough times then you would have a nice return. Also stock can yield higher returns from investing in them during a recession. Usually, during a financial recession most become pessimists and sell which lowers the stock price, however, if the new stock price does not represent the actual value then returns can be made by simply holding until the economy goes back to “normal.”
Sailing through rough patches
Many of the core ideas of safe investing are the same ideas that can be used in establishing what to look for in companies during economic rough patches. Despite the common belief that recessions are the time to “quarantine” financially speaking until it passes, however many entrepreneurs have found it to be a prime time to start their ventures. However, it does not mean that just any business can make it, their business model and structure plays a major role. Crises also pose challenges to existing firms, even ones that were considered safe going into the crisis. Review your portfolio to make sure your companies can make it through to the other side. The future continues to be unpredictable.
2) Avoid the Downside
3) Don’t Sell Low
Change is Constant
Tom Gayner, CEO of Markel remarked at after a recent Berkshire Hathaway annual meeting, “you know I have been hearing about moats at these meetings for decades, two decades ago the moats were Coca Cola and Washington Post. Where are those moats today? Eroded or gone.”
Change is constant in a market economy. During recessions that accelerate, once strong competitive advantage can crumble leaving consumers looking for new solutions. For example, Amazon had been blowing retailers like Walmart out of the water for decades until the pandemic where they totally dropped the ball in delivery and service. This was a huge opportunity for the now-Shopify-powered Walmart who proceeded by executing and delivering much faster than Amazon and although there are some who stuck with the giant (Amazon) many people switched because of the convenience. Amazon still leads in online sales by a wide margin, but Shopify has demonstrated greater appeal to companies dealing with the pandemic and wanting to maintain their own brand and customer relationship.
Avoid the Downside
Many people have gotten interested in investing during this pandemic, day trading has even restarted. However, most do not know what to look for in potential investments. During times like these, the is to follow the Keep It Simple Stupid method. While new business models emerge in recessions, this is not a time to test new investing theories. So what are the basics of safe long term investing? The first is safety; make sure companies have safe and sound balance sheets, one way is to use the Altman Z Score.
Don’t Sell Low
were started and survived financial recessions. In his book “100 Baggers” Christopher Mayer writes that many 100 baggers(Stocks that make you 100x your money) went through 20%-40% drops, however, if you held them through those tough times then you would have a nice return. Also stock can yield higher returns from investing in them during a recession. Usually, during a financial recession most become pessimists and sell which lowers the stock price, however, if the new stock price does not represent the actual value then returns can be made by simply holding until the economy goes back to “normal.”
Sailing through rough patches
Many of the core ideas of safe investing are the same ideas that can be used in establishing what to look for in companies during economic rough patches. Despite the common belief that recessions are the time to “quarantine” financially speaking until it passes, however many entrepreneurs have found it to be a prime time to start their ventures. However, it does not mean that just any business can make it, their business model and structure plays a major role. Crises also pose challenges to existing firms, even ones that were considered safe going into the crisis. Review your portfolio to make sure your companies can make it through to the other side. The future continues to be unpredictable.
Twitter - @LookoutInvestor
Closing Notes
For those who would like to do research into other successful businesses started in recessions here is a list of many household names that emerged from economic hardship
List of Companies:
Procter & Gamble(1837)
General Electric(1876)
General Motors(1908)
IBM(1911)
Disney(1929)
Tollhouse Cookies(1933)
Hewlett-Packard(1939)
Burger King(1953)
Hyatt(1957)
IHOP(1958)
Trader Joes(1958)
FedEx(1971)
Electronic Arts(EA)(1982)
Netflix(1997)
MailChimp(2001)
AirBnb(2007)
Groupon(2008)
Square(2009)
Uber(2009)
Venmo(2009)
Warby Parker(2010)
Launched Close to Economic Recessions:
Apple(1975)
Microsoft(1975)
Google(1998)
Sales Force(1999)
Facebook(2004)
Companies that went public during our current recession(2020):
VROOM
ZoomInfo
Warner Music
Otis Elevator
For those who would like to do research into other successful businesses started in recessions here is a list of many household names that emerged from economic hardship
List of Companies:
Procter & Gamble(1837)
General Electric(1876)
General Motors(1908)
IBM(1911)
Disney(1929)
Tollhouse Cookies(1933)
Hewlett-Packard(1939)
Burger King(1953)
Hyatt(1957)
IHOP(1958)
Trader Joes(1958)
FedEx(1971)
Electronic Arts(EA)(1982)
Netflix(1997)
MailChimp(2001)
AirBnb(2007)
Groupon(2008)
Square(2009)
Uber(2009)
Venmo(2009)
Warby Parker(2010)
Launched Close to Economic Recessions:
Apple(1975)
Microsoft(1975)
Google(1998)
Sales Force(1999)
Facebook(2004)
Companies that went public during our current recession(2020):
VROOM
ZoomInfo
Warner Music
Otis Elevator
Twitter - @soreninvesting
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