2nd Newsletter (Week of 5/18)
Welcome back to EVCA's growth vertical newsletter! EVCA is a non-profit dedicated to supporting the emerging (pre-partner) venture capital community. Feel free to visit our website: https://www.evca.org/. Twice a month we'll be looking at the latest news and trends in growth investing in a fun and interesting way, while also helping you get to stay on top of what’s going on in the EVCA community. Subscribe to our newsletter here if you're new!
Updates on COVID
The total number of COVID-19 cases have gone over 1.5 million and the death toll is expected to reach 100,000 by the end of next week
Dr. Anthony Fauci recently gave an address in the Senate stating that reopening the country too soon will lead to “needless suffering and death”.
These diagrams from this recent WSJ article, portray what economists are saying potential recovery curves may look like. Policy makers are expecting a swoosh-like or painfully slow recovery in the US and Europe with economies not returning back to 2019 levels of output until late next year or beyond.
A premature reopening could lead to the resurgence of the virus again in the fall and one of the worst case scenarios, a W-shaped or jagged recovery curve.
According to the U.S. Bureau of Labor Statistics, the unemployment rate has already risen to 14.7% with non-farm payroll employment falling 20.5 million in April.
Public Software Earning Season Update
Q1 and Outlook Takeaways
Over the last 3 weeks, the majority of software companies have reported Q1 earnings. As growth investors, we often use public comps as benchmarks for valuation and scaling metrics so let’s take a look at what these high growth public software companies are saying about the impact of COVID.
Q1 was a roller coaster. Jan/Feb was strong across the board but March had extreme variability as shelter in place orders rolled out across Western geographies. April started off rugged for everyone, but optimism has slowly crept in. Some are now calling the bottom, and the public markets are buying in as local economies begin opening and many have found an efficient stride in the new WFH routine.
Enterprise software overall had a strong performance, with the majority of companies beating reduced street estimates. Retention was relatively healthy with end customers relying on software for remote work (the exception being SMBs which were an area of weakness). Q1 new bookings were buoyed by a healthy Jan/Feb given Q1 is traditionally a sales heavy season for software. On the outlook, over half of reporting companies guided Q2 below consensus and almost all lowered or withdrew full year guidance. Many projected a positive tone and long term outlook as remote work is accelerating digital transformation and adoption of new software in all industries (likely the largest single driver of the street’s positive reaction to Q1).
Some interesting observations from different sub-categories in enterprise software. Business critical applications (Atlassian, Slack, ServiceNow, Ringcentral, etc.) as well as infra /security tools saw a major surge in demand during Q1 as companies need the right tech stack to transition to work-from-home. Microsoft, Amazon and Google all talked about the accelerated digital transformation - Microsoft said they saw 2 years of progress made in 2 months - this is really significant and can have lasting impact on software spending post COVID.
On the consumer side - high variability by sub-sector but overall strong performance vs reduced street estimates. With consumers stuck at home, they are spending more time online and shifting spend to e-commerce. Netflix and Facebook both saw a surge in engagement (thanks but no thanks Tiger King) but there was a mixed shift in ad businesses - more impressions but lower advertiser demand. Data from commerce related companies (Amazon, Paypal, Shopify, Peloton, Carvana) shows that consumers seem to still be actively spending, and not just on essential products but large discretionary items too (like those $2k Peloton bikes). This is an interesting area to track going forward as unemployment continue to rise. Travel is the worst impacted of consumer sectors, but top companies (Uber, Lyft, Booking) are calling the bottom.
Broader Market
73% of S&P 500 market cap has reported Q1 earnings so far, and 20% of companies missed consensus estimates by at least 1 standard deviation, the highest rate since Q4 2018. However, the S&P is only down 10% YTD. Partially we have seen a disconnect between wall street and main street - and this is exacerbated by the concentration of the 5 largest tech companies in the composition of S&P 500 (grew from 11% in 2015 to 20% today). Speaking of disconnect with reality - most of the high growth SaaS companies have rebounded since the market trough and are now trading close to 52-week highs.
These tables from Aswath Damodaran (that finance prof at NYU Stern School of Business), break down the equities market by tracking the change in market cap of individual companies on a week-to-week basis. It's clear that healthcare, consumer staples and technology have been the best performing sectors while financials have trailed behind with a -25.97% change in market cap. Delving deeper into specific industries, unsurprisingly, air transport (-36.77%), oil & gas (-35.87), and aerospace & defense (-34.39%) have been the worst performing. On the other side of the spectrum, precious metals are up 7%, followed by healthcare information and technology which recorded a -0.02% net change.
Investment Ecosystem Survey
We're still collecting data on how the on-going pandemic has affected the investment ecosystem. We'd love to hear your thoughts and to learn more about how your work has changed. Help us out by filling out this quick survey (only takes ~2 minutes) and we'll share the results in our upcoming newsletter!
Break Time!
Food for Thought…
What will gyms, movie theaters, salons, and other institutions look like post-COVID? These transparent barriers in a Hong Kong restaurant enforce social distancing measures and serve as a simple barrier when dining.
AMA
For this week’s AMA, our two vertical leads, Jeremy & Russell, asked each other 3 questions. See their questions and responses below:
For those who haven’t tried strawberry picking, you should definitely add to your list
Jeremy Zhu
You’ve lived in China, Philly, and LA before coming to the Bay Area. What’s your favorite thing about each place?
I’ve moved around quite a bit so far. I was born and raised in China (in a city called Yantai, think Jersey Shore equivalent of China where east coasters go for beach vacation). China for me means family and being home. At 15, I went to a boarding school in the suburb of Philly before going to Penn for college. Philly is awesome and very underrated - great food and bar scenes while being very affordable (hmu if you ever go and want recs). After college, I moved to LA and had my good share of Hollywood fun (in all the spare time I had outside of banking ofc…). I’m a huge car nerd and LA’s car culture is probably the best in the country - my commute felt like going to an auto show everyday. Lastly Bay Area, I love the variety of outdoor activities it has to offer and can’t wait to be outside again after COVID.
What are some fun activities that you’ve been doing during shelter in place?
The big one for me is that I started studying for the Level 1 Sommelier exam - aside from reading the theories, I’ve been doing a lot of tasings (at home). I’d love to know if anyone here wants to study together or do wine tastings after COVID!
If you could have dinner with anyone (past or present), who would it be and why?
Gordon Ramsay. I love food / cooking / finding great restaurants / any cooking shows. Gordon’s extremely expressive personality would make him such a fun guest to dine with...If anything, I just want to see his face when a dish doesn’t meet his standard
Do you know where Russell is in the above picture? Send us your city guess by replying to this email (growth@evca.org)!
Russell Yue
Something that few people know about me is…
When I was a kid, I really wanted to be an actor. In first grade, I auditioned for several roles and was selected to be in commercials for Kellogg’s Frosted Flakes and Johnson & Johnson, but I ultimately decided against pursuing these. Instead, today I’m an avid movie and TV series watcher. Some that I’ve watched/rewatched recently during shelter in place: Crash Landing on You, Hotel Mumbai, Good Will Hunting, and UP. Send me recs if you have any :)
If you weren’t in venture / finance, what would your ideal job be?
I’d love to be a professor. In college, I was a teaching assistant for several finance and accounting classes, which sparked my interest in teaching. One semester, I had an Intro to Accounting student come to my office hours after failing the first midterm, and I told him it might be best to drop the class and retake it next semester. But he decided against it and came to all of my office hours afterwards. During the next exam, he not only set the curve across 150+ students but got a perfect score, which had never happened before for that professor’s class. It was amazing and somewhat surreal to be part of this student’s journey. Working closely to help students and watching them succeed has been one of the most rewarding parts of my college experience, and I’d love to relive this someday.
If you could magically pick up a skill tomorrow, what would it be?
It’d be super cool if I could learn how to speak Spanish. After living in LA for 6 years, I’ve always wanted to be able to chat with the staff at my favorite taco truck in their native tongue. Until then, English and Duolingo it is!
Feel free to reach out to Jeremy (jeremyzhu@capitalg.com) & Russell (ryue@higcapital.com) directly to get to know them better. Next week’s AMA will be featuring our two EVCA Fellows, Alex and Shaurya. Stay tuned!
Thanks Everyone!
-EVCA Growth Team
Jeremy Zhu (jeremyzhu@capitalg.com)
Russell Yue (ryue@higcapital.com)
Alexander Lin (alexlin1@stanford.edu)
Shaurya Mehta (smehta12@stanford.edu)