The Great Reset

Talk of an economic downturn can be frightening, especially one precipitated by a pervasive health crisis. At times, I’m overwhelmed by the images of countless patients on life-support and the near-endless streams of statistics regurgitating bad news.

Having started in venture at the beginning of two recessions, I’ve seen how the startup industry functions during economic trouble. My second day of work at Charles River Ventures was September 11th, 2001. My first project, analyzing the VC industry, propelled the firm to return more than 60% of its fund to investors, going from a $1.2 billion fund to $450 million. In May 2008, Mike Maples and I founded Floodgate in the midst of the Great Recession. We learned that great founders won’t wait for a better economic moment to start a company.

While we are currently embroiled in personal and professional circumstances unimaginable even three months ago, these very challenges will form the basis of incredibly innovative ideas. In order for the world to move forward, we need our greatest minds to imagine a brighter future and create solutions to make it a reality.

When I analyze our society and novel health situation, one thing is certain: COVID-19 is a paradigm-shifting event, creating massively accelerated social and economic change.

The Great Reset is not just another economic event

Our current situation is unique. It’s not merely a cyclical economic event, nor is it a stand-alone health crisis. What we are experiencing is not just an inflection point: it’s a societal phase-change unlike anything we have ever seen. We face an epic choice of how we move forward, and the decisions we make today will shape an entire generation.

Here’s why: COVID-19 is prompting us to reset many of our most fundamental behaviors. These changes are impacting our financial system, with effects visible throughout our homes, businesses and even the concept of “workplace” itself.

COVID-19 is pervasive

As a global pandemic, the virus itself has spread to nearly every country in the world.

Between February 20 and March 26, 100% of the world’s 20 largest economies implemented government-mandated social distancing. Globally, the number of scheduled airline flights is down 64%. In some countries, like Spain and Germany, flight numbers are down by more than 90%.

Since the timeline for lifting government restrictions is unclear — and even then, scientists are uncertain how the virus will spread — the question lingers: How long will this go on?

COVID-19’s impact is uncertain, long-term and potentially undulating, affecting every facet of our lives. You can’t simply wait it out with the expectation that industries will rebound. In 2001, September 11 felt pervasive, but its economic impact ultimately stemmed from just a single incident and the resulting fear — and that single incident still cost more than three trillion dollars. How much larger will COVID-19 be?

COVID-19 is a behavioral reset

Most people are quarantined with immediate family at home. This behavioral change calls into question everything we do:

  • How do we spend our money?
  • How do we spend our time?
  • And with whom do we spend this time?

For many Americans, COVID-19 is also the first time they’ve experienced shortages of anything — whether it’s flour, hand sanitizer or toilet paper. These will impact our feelings of security for years to come, as well as how we relate to brands. Many conveniences (e.g., Amazon/delivery) are now essentials, while some essentials (e.g., kids at school) are no longer reliable.

These behavioral changes have altered our conceptions of core habits and practices, changes that will continue well after the pandemic ends. For example:

  • Will students ever again take an introductory art class with 400 other students?
  • How will we socialize on a Friday night?
  • Can we ever imagine a family-style dinner packed into a loud, crowded dinner joint?
  • Will we ever cheer on our favorite sports team at a stadium, shoulder-to-shoulder with other fans?
  • How will we relate to strangers? (Have we forever shifted in favor of those who are trusted/familiar/regular in our lives?)
  • When will my eight-year-old jump on a yellow school bus again to go on a field trip with 25 of his closest friends?
  • When will it be okay to hug a friend?

We’re changing some of our core behaviors, often by developing entirely novel habits or breaking new societal ground.

COVID-19 is a financial reset

COVID-19 has shocked our financial system to its core. The U.S. is experiencing its highest unemployment rate since the Great Depression. The localized impact is tremendous. The whole economic swath has been affected, from large corporations and financial institutions to small businesses, artists and contract workers.

Consumption is drastically down, causing the biggest demand shock any of us have ever seen. We’re also witnessing the greatest central bank and government intervention of all time. We have effectively put the economy into a shelter-in-place-induced coma. Some questions that arise:

  • When will we be able to resuscitate the economy, and how quickly?
  • Will our recovery look V, U or L-shaped? Will the multifaceted stimulus, grants and loans provided by the Fed be sufficient to drive the economy back to stability?
  • With a growing deficit, record spending and a shrinking economy, how will we bridge the gap? What concessions will need to be made and will we have the courage to make them?
  • How much will the reopening of the economy bring back consumption and economic activity? Will the reopening create a resurgence in the spread of COVID-19, requiring yet another shut down?

COVID-19 is a business reset

If you had product-market fit in January, you might not have it in June. This is true of both startups and Main Street businesses: gym chains, restaurants, movie theaters and live performance venues won’t return to their former product-market fit in the coming months. Any businesses requiring in-person interactions must adapt to the current reality (or our society needs to develop new, socially distanced behaviors to support their business models). Gabrielle Hamilton wrote a particularly poignant piece about this dilemma for the restaurant industry.

Tech companies are not immune to these changes either. For many, their core customers or their customers’ customers are severely impacted by these transformations. We have also taken a hairpin turn from a growth-led economy (fueled by multi-billion-dollar growth funds) to a profit-first sentiment in which the best companies will outlast (not outspend) their competitors. The companies that emerge on the best footing from these difficult times will be the ones that provide real value with viable economics to customers willing to pay.

For many companies, this is a fundamental reset, a return to the basics of what it is to make money.

COVID-19 is a workplace reset

Workplaces have undergone a forced paradigm shift that parallels the one businesses have undergone. Over the last decade, we have embraced the open and shared workspace. However, as personal health concerns arise, the look and feel of our workspaces, as well as with how people will operate at work (full teams or partial teams, full-time or part-time, commuting, etc.) remains an open question. The resulting rise in remote work is one obvious, tangible change.

But in a broader sense, we’ve reset what we’re working on as individuals and organizations reevaluate their priorities. Whether it’s the pace at which it’s possible to work when combining work with homeschooling or dealing with the stresses of our current reality, we are being forced to focus on the essentials of work. Being busy is being replaced with an effort to be effective. We’re resetting workplaces, replacing them with structures that will become the new normal.

Massively accelerated change

Even amidst the terrible news and life changes, huge opportunities exist within this Great Reset. With such a shock to the system, inertia no longer explains why things are the way they are. We’re now explicitly asking questions that have been lingering in our psyche for years, such as:

  • Do we need to educate our children the way we do today?
  • Are we investing in a future we want to see?
  • Are these the people with whom we want to live or work?
  • Are we spending our time and resources the way we should?

These questions are manifesting incredibly rapidly, transforming our world in the recent weeks to incorporate changes that usually would take years.

Some of these activities are permanent improvements over the previous, in-person models (e.g., telemedicine, digital fitness) while others are highlighting the need for human interaction (e.g., real estate transactions, elementary school education). Some of these changes will continue after COVID-19, while others will return to baseline.

Among the many shifts society is experiencing, we’ve highlighted two for analysis in this article: consumer spending and communication.

Consumer spending shake-up

COVID-19 has changed consumer spending unlike any event in recent history.

In general, consumer spending habits don’t change. Over the last 20 years, the share of wallet spent across different consumer categories is incredibly consistent. Consumers rarely shift their spending from one category to another, and they certainly don’t do it in a short period of time. It’s also exceedingly rare for a new category of spending to emerge.

COVID-19 has dramatically shifted consumer spending. In response to the uncertainty, American consumers are proactively reducing their spending. Within categories, consumers are switching to new brands where they previously showed brand loyalty (like grocery stores) and indicating these switches may stick. Between categories, consumers are significantly reducing their spending on in-person experiences (concerts, travel, etc.) and spending more time online (watching videos, engaging in online fitness, etc.).

Digital content is also seeing a resurgence, with millennials, Gen X and high-income earners spending more time on TV and news, while Gen Z consumes more video content.

While no one knows the exact outcomes, these changes raise important questions as we seek to better understand what the future could look like:

  • What new consumer categories will open up?
  • What will replace the in-person experiences that consumers previously spent money on?
  • As content consumption increases, will consumers finally be willing to pay for digital content?
  • Will consumer fitness move outdoors and/or online? Will additional hardware or software emerge to capture that audience (à la Peloton)?
  • After changing notoriously sticky behaviors (e.g., changing brick-and-mortar retailers & grocery stores), will these new behaviors stick or shift back after COVID-19?

The VCs and founders who successfully answer these questions will adjust to this Great Reset while others flounder.

Communication shift

COVID-19 has caused mass adoption of communication tools that were previously resisted. Zoom, for instance, has introduced video communication to a segment of the population that was previously reticent to embrace it. Video conferencing has become commonplace for more than workplace meetings. Now, its uses range from elementary school education to senior citizen fitness classes. My 73-year-old mother asked me how to operate Zoom so she could log onto her Zumba class for seniors. A mere month ago, she would have questioned my sanity had I asked her to get on a Zoom with anyone, least of all her Zumba instructor!

While questions still remain around ease-of-use or interface design, video conversations are now an integral part of online experiences. Looking forward, how will these new modes of digital communication change the fundamentals of human interaction?

  • Will Zoom create a developer-oriented ecosystem like Salesforce, where venture-scale business can be created, or will they operate more like Twitter, ultimately suffocating all developer efforts?
  • What applications will enable new communities? Which ones will scale?
  • Will additional apps incorporate video-chat features? Will this happen on Zoom or another platform?
  • Will increases in communication cause permanent decreases in travel?
  • Will other forms of digital communication (e.g., voice-first) take off?

The communication shift goes beyond the integration of Zoom into our lives. Who we speak with now has fundamentally been affected by the pandemic — we’re reviving old connections, regularly calling family members and even sheltering-in-place with relatives we haven’t seen in years. Some of these new or rediscovered relationships will become important parts of our lives in the new normal. How will these relationships differ from the ones we’re developing while Zooming over dinner or from our home offices?

While I’ve been out of the dating circuit for too long to have any credibility speaking on this topic, it also seems like this particular element of our social lives has seen a pretty large disruption. The motherly side of me hopes that we are undergoing an anti-Tinder moment in which people are rediscovering the joys of getting to know each other as part of the dating dance. Will we return to a “swipe left or right?” world of transactional dating, or will relationships hold more meaning in the new normal? Which apps will appeal to Gen Z to help them find these desired connections?

In some ways, the buzzy new app Clubhouse (the digital Soho House for the technorati) may give us a taste of how new social connections might be increasingly based on ideas and conversations. A friend mentioned that it feels like entering a favorite bar where people have common professional interests and you can listen in on interesting conversations. I wonder if this can translate beyond professional interests — that’s the kind of bar I’d like to hang out at, especially today when everything feels professional.

These changes have profound societal shifts. Those who separate the temporary from the permanent will be the most helpful as we direct our effort and resources to the tools we will need.

Looking forward

As venture capitalists, we’re always looking for inflection points, and COVID-19 has created many. In addition to the impacts on spending and communications, we’re also curious about these other shifts and what role technology plays in building abundance in a world full of disruption. The following are just a few.

Business model shifts

Business models have changed across the board. For a demonstrative example, look at healthcare, food and travel:

  • As telemedicine improves, along with the integration of everyday hardware to patient health monitoring, doctors can increasingly observe their patients at home. Hospitals — which are currently losing millions every day — can’t sustain this change. They’ll need a new business model for the long-term. How can telemedicine and other technologies enable people living anywhere to get the care they need while providing doctors and hospitals a sustainable business practice?
  • Similarly, restaurants have been operating on razor-thin margins for a long time. Given social distancing, are restaurants really destined to become mere cloud kitchens that provide food for delivery to be eaten at home 15-30 minutes later? Or are there ways, even with reduced clientele, that we will once again hear the pop of a champagne bottle, inhale the heady scent of spices simmering, overhear a quiet conversation from a nearby table or be welcomed warmly by a waiter who knows your son’s favorite dish? I hope for the latter, but it seems something will have to change above and beyond our current restrictions to enable restaurants to recapture the social value they provide our community (in addition to the economic one).
  • Airlines, whether legacy carriers, regional carriers or low-cost carriers, have universally felt the pain of a complete halt in the demand for their product. It’s unclear if business travel will ever return to previous levels and whether consumers will henceforth choose a car over a regional jet. As one of our CEOs said, “COVID broke travel. When we put it back together, it may never look the same.”

Clearly this is only a small list of the business models that we know will have to change. Which ones are most pressing to you?

Demographic-level shifts

Population-wide government mandates (like shelter-in-place) have prompted the same behavioral changes across different demographic groups. When those restrictions are lifted, however, these different groups will each respond in their own unique ways. For example:

  • How will vulnerable populations respond differently from the general populace? (e.g., when will groups with varying levels of risk tolerance again be comfortable taking public transportation or flying?)
  • In 2019, net worth for Gen Z and millennials was decreasing dramatically, mainly driven by increases in student debt. This economic burden was causing people to delay life milestones. With the increased financial burden from COVID-19, will they delay their life milestones even more?
  • COVID-19 has had a dramatically different impact on rural and suburban regions versus urban centers. If recovery looks different for these regions, how will it impact both the economy as a whole and the different groups’ outlook on the future? Further, will Gen Z, which was largely moving to urban centers, now change their plans?
  • Due to chronic health conditions and social factors, Hispanic, African American and other minority communities have been disproportionately impacted by COVID-19. What will be the resulting consequence over the next 18-24 months?

A health crisis that actually impacts the look and feel of a community on the scale of COVID-19 is completely new. What other demographic shifts do you see?

Regulatory shifts

The governmental stimulus in response to COVID-19 is larger than any previously, including a never-before-seen direct-to-taxpayer transfer. Many countries and cities are on lockdown to prevent the virus’ spread. These changes are having profound effects on our regulatory systems, with many specific effects to be determined.

The novel areas of government regulatory action prompted by COVID-19 include:

  • Direct financial intervention, raising questions including: Who gets assistance? Who doesn’t? And how does it change their view of the government?
  • Business shutdown, wherein some businesses are permitted to be open and others aren’t. (For an example of an impassioned response, see Elon Musk’s comments on Tesla’s forced closure.)
  • Intervention in corporate business models, including both bailouts and restrictions on private sector business models (such as New York City’s caps on delivery service fees).
  • Taxation changes to make up for losses caused by COVID-19 (which some San Francisco companies are predicting and proactively moving out to avoid).
  • The federal government’s financial deficit itself, which includes a loss of tax revenue, record-high deficit and government spending on a level we have never seen.

In the future, consumers will certainly be more familiar with government financial intervention and mandated stay-at-home orders (and therefore likely to be either more comfortable with both or stridently distrustful of government policy in general). COVID-19’s other regulatory effects remain to be seen.

Shifts in work

Let’s be honest. The future of work is here today. Our economy is unstable during COVID-19, but the dangers it highlights may go beyond this temporary time. For instance: COVID-19’s impacts are disproportionately impacting service industry workers (compared to, say, knowledge workers). As education goes online, we’re finding a similar effect: broadband access and endpoint devices aren’t universal — in fact, they’re quite expensive — increasing the digital and wealth divide. Will COVID-19 increase these divides, or will it prompt structural changes to even out the opportunity gap?

By April 26, more than half of all Americans under the age of 45 had lost hours, been laid off or were furloughed. Even if U.S. manufacturing increased, many of these people wouldn’t simply get factory jobs. What will employment look like for this large swath of the economy after COVID-19?

Increased opportunities

COVID-19’s changes are pervasive and permanent, but the people who create companies in this time can still have impact. Many great companies — including Lyft, Twitch and Microsoft — were founded during recessions. Lyft’s impressive growth was partially fueled by a spike in the number of people who were out of work and needed a gig job to get by.

We’re entering a new paradigm, and that brings possibilities. Now, founders, is the time to build.