🌌 Reshaped #8

Startups and the frozen economy, Amazon into gaming, gig workers, African infrastructures and much more.

Apr 04, 2020

Welcome to a new issue of Reshaped, a newsletter for those who do not want to miss a thing about the huge transformations of our time.

I decided to dedicate a future issue to the topic of democracy after the pandemic. Instead, you will find a brief analysis of how to support startups during this economic shock.

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News

Business and Finance

🛴 Scooter rental startup Bird laid off 406 employees (about 30% of the total workforce) in a concise Zoom webinar last week (The Daily Beast). This is just one of the many mass layoff programs implemented by Silicon Valley startups because of the coronavirus shock (The Information). See the dedicated section below for more information.

📡 After a long negotiation and despite antitrust opposition, US wireless carriers T-Mobile and Sprint have merged (CNet). The new company, which will retain T-Mobile’s name, has now the size and power to challenge Verizon and AT&T, the industry leaders. As part of the deal, T-Mobile committed to investing in 5G infrastructure and blocking prices for three years.

💸 SoftBank will not purchase WeWork stock worth $3 billion because the startup has failed to meet mandatory conditions (Bloomberg). Due to the nature of the deal, this is bad news for former CEO Adam Neumann, whose shares were part of the stock to be bought by SoftBank.

🎮 Amazon will enter the videogames market next month with the release of a shooter called Crucible, competing directly with other Big Tech players like Google and Microsoft (The New York Times).

Gaming is expected to generate more than $160 billion in revenue in 2020, making the business more than twice the size of the global recorded music industry (around $19 billion) and worldwide film box office (around $43 billion) combined.

See this piece by Matthew Ball for further information on the impact of coronavirus on video gaming and the future of the industry.

📈 ESG funds continue to perform better than the wider market also during the pandemic because of the lack of investments in oil and energy stocks (Financial Times).

Science and Technology

🤖 Researchers at the University of Zurich have developed a system of cameras and algorithms that allows drones to detect and avoid obstacles, reducing reaction time from 20-40 milliseconds to 3.5 (The Robot Report).

🧫 Cell therapeutics startup Celularity received authorization from the FDA to start clinical trials on a new cell treatment for COVID-19. The innovative method used by the company takes advantage of so-called “Natural-Killer” (NK) cell therapies derived from placentas (TechCrunch).

🦠 Researchers all around the world are studying wastewater to detect diseases in urine or feces and estimate the total infections from COVID-19 in a particular community (Nature). This method could drastically improve coronavirus estimations and provide better insights on how to manage the pandemic.

🪐 A new study based on trace elements inside Martian rocks shows how Mars could be the result of the collision of two meteorites or baby planets (Popular Science).

🌲 Reforestation has the potential to cool both surface and air temperatures. Despite the latter being less significant, the average impact over the year can be estimated between 0.5°C and 1°C (Eos).

🧊 Startups and the frozen economy

All around the world, startups are living in a conundrum. Coronavirus has generated huge uncertainty in the global market, but founders are somewhat used to it. These companies are built around extreme flexibility and short-term resilience: all factors that scare traditional companies, usually turn out to be the greatest allies of startups and venture capital investors. However, this time is different.

The main difference is that this crisis is literally freezing the economy. When the economy is frozen, three main events occur simultaneously: supply chains are stuck in confusion, investors suddenly become extremely cautious, and consumer demand is reduced to the essential. Most of the concepts and frameworks of the global startup playbook were thought and applied after the 2008 crisis, in a world that was recovering from a financial shock. Despite being plenty of risk mitigation and exit strategies, they lack a clear response to exogenous events with a strong macroeconomic impact. Quick iterations can do almost nothing in a frozen economy because there is no space for appropriate testing.

Of course, there is an exception. Startups providing essential products and services for the frozen economy will thrive. Remote working apps, biotech startups, and some fintech solutions are benefiting from the current shock not only for their increased customer base and revenues, but also for an unexpected acceleration of their business journey and market positioning. After the shock, competitors and new entrants will find it hard to challenge those companies. On the other hand, tourism, transportation, and home rental startups are victims of the frozen economy — and, in particular, of the social distancing policies implemented worldwide. Startups with SaaS business models are also threatened by the shock, as revenues are going to plunge after current subscriptions expire because existing customers will go bankrupt or reduce budgets.

Normally, founders would say that this is the best moment to evolve, pivoting to a new solution capable of addressing one or more essential needs. However, there are two major obstacles to doing so. First, VC-backed startups will need the approval of their investors, who are naturally reluctant to major moves in a freezing global economy (see chart below). Indeed, pivoting is not enough: startups would need to be fast enough to overcome better-positioned competitors in the few essential markets while being capable of generating a quick path towards profitability. It is not a case if new surveillance services with the potential to bring digital platforms to a new level are being monopolized by Big Tech companies. This leads to the second obstacle: if the pivot is assumed to save the company from the frozen economy, risks should be minimum. And it is not the case.

To sum up, the frozen economy set the scene for a startup environment with a few winners in a strict relationship with governments, which have many interests in making the lockdown sustainable by maintaining essential services available. This applies generically to the business domain — not only to startups — and will have enormous consequences on the structure of our global economy in the future. Startups live in a conundrum, especially because they cannot rely on the mainstream playbook they are used to apply and because they lack support from their main sponsors. The latter include not only investors, but also public institutions, big corporations, and the many entrepreneurial networks around the world.

As a consequence, while their startups are cutting staff and losing value, founders and investors are lobbying for the inclusion of their companies in public aid schemes, both in the US and the EU. At the moment, many of those schemes are not available to startups, mainly because many of them have not made profits yet. In the US, VC-backed startups also have another disadvantage: they cannot get funds allocated to SMEs because the total number of their employees is calculated by counting all workers of the VC and its funded ventures.

At the moment, European countries are responding to this issue with various support measures. Consistently with previous announcements, French President Emmanuel Macron has allocated a €4 billion liquidity support plan to help startups go through this crisis. In the UK, many called for a runway fund to support startups meeting certain requirements.

Figures in London’s tech community are pushing for a new “runway fund” managed by U.K. state-owned lender, the British Business Bank, to give start-ups enough time to survive. The idea would be to issue convertible notes that convert into equity once a firm next raises capital.

But how do we make sure that these measures will impact positively on the economy instead of simply providing liquidity to VC-funded startups? There are three relevant perspectives to take into account.

First, as Erin Griffith points out in The New York Times article mentioned above, we should always remember that startups are profit-seeking organizations built to scale as rapidly as possible to reward founders and investors. Because of that, they usually lack enough organizational structure to sustain shocks. Mass layoffs occurring during crises show that job security is very low — something that those working in startups know well and, to some extent, enjoy — and governments are already spending to sustain unemployed workers. So why should the public sector help startups that have already cut their workforce stay in the business? Reduced costs due to layoffs should cover the missed revenues caused by coronavirus. This is the first parameter to distinguish between pure profit-seeking ventures and more virtuous startups — that is, those that invested part of their funds in making their business more sustainable and their organizations more resilient.

Second, we should stop associating automatically startups with innovation. Some startups are innovative, others are not. Some provide innovation that could generate progress for humanity, others only care about conquering a market. Some others also do business to the detriment of society. Researchers have written tons of papers about the effects of the abuse of home rental solutions on urban areas. It is fundamental to identify startups that develop innovative solutions and support them so that their efforts do not go wasted. Likewise, we should identify zero-sum and potentially dangerous ventures and ask ourselves if it is in the interest of the public sphere to support them.

Third, the business model of many startups is based on investors taking risks and sharing rewards. However, as already mentioned, seed investments have already fallen significantly in the first quarter of the year. A more cautious investment approach is normal, but the current situation goes far beyond: it shows that many investors renounce to support their backed startups at the very first sign of exogenous risk, asking the government to provide enough liquidity. They probably forget that, in such a way, they are transferring to the public sphere two risks — the standard risk associated with startup investments and the one due to the current shock. Again, we are in front of a pillar of neoliberalism: the financial sector cannibalizes rewards but asks taxpayers to cover losses.

According to Sequoia, coronavirus is the black swan of 2020. This is false: the risk of pandemics was very well known around the world by policymakers, investors, business leaders, and academics. And, most of all, it cannot be an excuse to renounce to take responsibilities towards funded ventures. Governments should support startups in this difficult moment, but they should follow three simple rules:

Prevent predatory ventures from accessing public funds because they would be used to protect profits instead of workers;
Favor innovative startups through public guarantees and greater public involvement;
Pretend that VCs contribute to the support measures as far as they can and that future rewards are shared with the public sector and local communities.

Alternative perspectives

🚑 In an excellent article published in The New Yorker, Keeanga-Yamahtta Taylor claims that Medicare for All, one of the key points of Bernie Sanders’ Democratic campaign, is now necessary to fight the COVID-19 emergency. In front of extreme measures such as the $2 trillion aid package, there is no excuse left not to adopt a more equal and fair healthcare system.

The case has never been clearer for a transition to Medicare for All, but its achievement clashes with the Democratic Party’s decades-long hostility to funding the social-welfare state. At the heart of this resistance is the pernicious glorification of “personal responsibility,” through which success or failure in life is seen as an expression of personal fortitude or personal laxity. The American Dream, we are told, is anchored in the promise of unfettered social mobility, a destiny driven by self-determination and perseverance.

👑 According to Peter Dreier, it makes no sense to say that there is a tradeoff between saving the economy and saving human lives. In an article published on Public Seminar, he makes the case for extraordinary measures that go beyond economic stimuli and include strong state intervention.

In these extraordinary times, we need our elected officials – all of them — to take extraordinary actions, and it will take more than money. Both the federal and state governments have the authority to limit price-gouging by businesses. Companies that jack up the prices of essential items – hand sanitizer, masks, toilet paper, etc — should be fined and jailed. There should be temporary emergency national rent control and other price controls, like there was during World War II. States should impose eviction and foreclosure moratoriums.

🔨 By dividing the workforce into four distinct categories — doctors and medical personnel, online retail workers, people producing physical goods, and professionals — economist Branko Milanovic provides an original contribution to design better economic policies that focus on increasing the availability of healthcare staff and supporting factory workers, the most impacted category.

Their incomes will be severely impacted by the epidemic. They are likely to lose their jobs, and many will be left without any resources. Do you want them to be impoverished and let loose to roam the streets in search of jobs? No, policymakers’ interest should be to preserve as much as possible of their income while encouraging them not to work. In other words, these are the people who should be the main focus of policymaking: you do not want them to fall below some income threshold (both for humanitarian reasons and the broader social interest), and you also do not want them to work in order to slow the rate of new infections.

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