What happens to high-flying startups if the pandemic trade flips?

So much can change in a day.

This morning, news that a trial COVID-19 vaccine candidate had an effective rate of more than 90% shook the financial world. The Pfizer vaccine is reportedly so effective, the company “will have manufactured enough doses to immunize 15 to 20 million people” by the end of the year, according to the New York Times, appears to have given investors the green light to pile back into companies harmed by the pandemic.

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The shift of money from shares that proved popular during the summer is massive and abrupt. Zoom and Peloton are down sharply this morning, while Uber and Lyft are soaring. Indeed, the Dow Jones Industrial Average and S&P 500 indices are up around 4.8% and 3.3% respectively, while SaaS and cloud share are off 3.5%.

Investors are taking money out of companies that were expected to do well thanks to the pandemic and moving that capital into firms that were weakened by the pandemic.

Our question for this morning: what do these changes mean for the economic forces that have broadly favored venture-backed startups? What happens to high-flying startups if the pandemic trade flips? What’s next for insurtech, edtech, fintech and SaaS? Let’s discuss.

Hot sectors, warm futures?

Short-term market movements do not always predict the future accurately, so we should not treat today’s trading as gospel.

That said, it’s not hard to draw some basic conclusions from the trading activity. Here’s what I think we can deduce from today’s stock market activity:

• Corporate software spend growth will slow: The broad decline in the value of software companies today appears to indicate that investors expect slower growth in the future. This is especially sharp in companies boosted by the pandemic itself, and, it appears, less acute in companies that were less helped by the COVID-19 economy. Our read? Investors are betting that growth amongst the companies that most benefited from a switch to remote work, for example, will see the greatest deceleration from recent forecasts. For startups, the lesson here is plain. Go look at your public comps and consider your own valuation likely trading along similar lines.
• Consumer at-home health spend will slow: Peloton is the obvious example here, but more will take related lumps. What’s notable is how strong the Peloton effect has proven — many fitness companies have raised recently on the back of COVID-19 shuttering gyms. Now with the prospect of gyms and other fitness locations reopening, health tech stocks — and startups — have a lot to prove.
• The edtech boom will decelerate: Shares of Chegg are in the toilet today, off as much as Zoom and Peloton. Investors are betting that edtech won’t be in as sharp of vogue come next year. That seems reasonable, given how hated remote schooling appears to be. But not all edtech startups will give up the ghost because of business model diversity. Still, a rapid return to the old ways of life is not bullish for edtech, either startup or public. 
• The fintech wave will slow, but only some: Shares of Square and PayPal are off a few points today, but not much. Investors do not seem to be pricing a fintech collapse. Instead, it looks like a modest deceleration in growth is all that is anticipated at this juncture. This is pretty good news for fintech startups.
• The e-commerce boom will slow, but only some: Akin to fintech, e-commerce stocks are not in that much trouble. Shopify and BigCommerce are each down a bit, and Amazon is off slightly. But there’s little catastrophe in their value today, especially as we head into an active e-commerce-powered holiday season. This is pretty good news for e-commerce-serving startups.
• The enterprise’s digital transformation’s acceleration will slow: Finally, a guess. I am still parsing the stock market, but I would bet $1 that a rapid return to form — at least as far as vaccines and the like — will cause some big companies to pull back planned spend on recently boosted digital transformation efforts to focus on near-term profits. This will harm some companies, with Okta and Docusign losing value today perhaps in anticipation of such a change. But Ping Identity is flat. So, it’s hard to say what will happen here.

Everything is changing. Today the market is trading in preparation for a return to normalcy. Given that the vaccine in question is months from being rolled out, you might find the wagering a bit premature. That is a completely valid view.

But companies are worth the present value of their future cash flows, so when the latter part of that equation changes, the former does as well. For startup investors, the game just got harder as the liquidity market just changed. Let’s see how it impacts Q4 VC totals and who raises capital.

The Peloton effect