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How One Venture Capital Firm Has Positioned Itself In The Midst Of Coronavirus

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How One Venture Capital Firm Has Positioned Itself In The Midst Of Coronavirus

Although the COVID-19 coronavirus has emerged unexpectedly, the idea that a virus could potentially spread into a pandemic and cripple society is not a new one. Bill Gates warned about it in 2015.

And while we, like everyone else, had no way of seeing this specific crisis coming, we, like many other venture funds we’ve spoken to, have been preparing for a market downturn for almost a year by growing our financial reserves and looking for companies that could sustain in tough times. In fact our fund, 13 Ventures, was launched with economic downturns in mind.

The anxiety and panic in New York, San Francisco, and many other financial centers and tech hubs stems from the fear of uncertainty. It’s difficult to predict the impact coronavirus will have on the global economy. The travel, hospitality, event, and entertainment industries are among the most affected by the global pandemic, but this crisis has also exposed financial weaknesses in companies in many industries.

At 13 Ventures, we’ve been preparing for an inevitable recession creating a “stability” portfolio of companies that we believe would grow even in the midst of uncertainty. Now, as the coronavirus hits the U.S., our thesis is getting the chance to play out.

Investing In Products People Use On A Daily Basis

Our strategy has been simple: we’ve invested in consumer-oriented businesses with strong online presences. Our portfolio includes companies that offer innovative products for daily use, such as plant-based foods (Apiterra), feminine hygiene (Tampon Tribe), and chemical-free cosmetic products (LOLI Beauty), all of which are in industries considered safe havens during economic downturns.

The panic buying of basic goods and the emptying out of shelves is a very human reaction to uncertainty. We’ve seen this across the U.S. and the world as a response to the coronavirus and ‘shelter in place’ orders. Panic buying, for example, boosted online sales of organic tampons and female hygiene products at Tampon Tribe.

However, we didn’t expect that the coronavirus would boost comfort shopping. In the first week of that the pandemic began gaining steam in the U.S., online sales of female lingerie and sensual objects by our portfolio company Great Eros have grown eightfold. At the same time, online sessions and conversion rates more than doubled, while average value and orders have grown 30%.

The Need For Sustainable Supply Chains

This pandemic also revealed the vulnerability of some supply chains. To combat this, we’ve been searching for companies with either multiple suppliers or some flexibility to change suppliers if necessary. At a portfolio level, we mitigate supply chain risks by balancing the number of companies with suppliers in Asia with those manufacturing their products outside of Asia or locally in the U.S.

The coronavirus has also reminded us of how fragile our world is, and how, as investors, it is our responsibility to lead, be part of the solution, and make sustainable investments in small businesses. This is why we’re also interested in companies with local supply chains, because we believe in the future some companies will stop relying on global suppliers and instead focus on local production due to its environmental sustainability.

Yes, producing locally might affect gross margins in the short run, but it often improves cash cycles. For example, many Chinese suppliers ask companies to pay at least 50% upfront before production even starts. This may work for multinationals, but for the small businesses in our portfolio, it’s often not the best route. With local manufacturers, startups can have better terms and even pay their suppliers a couple of months after receiving the product.

So what’s next for us as investors? There is still a lot of capital to be deployed and great opportunities in the market. Even in the midst of COVID-19, we are not planning to withhold dry powder, and are actively looking for companies with niche products and strong brands. It’s pretty much in our DNA as investors.

Aileen Chan is the head of strategic marketing and portfolio management at 13 Ventures

Photo by Gabriel on Unsplash

 

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