How Key Sectors Might Fare During a Post-COVID Recession
Venture capitalists often speak about pattern recognition as a tool for investing. So, it’s not surprising that as we consider the post-COVID economy, we reflect on previous recessions to inform our predictions about how various asset classes and business models might perform.
During the last recession, many prominent technology categories such as social media, SaaS, and marketplaces were in their infancy. While the near-term comparisons aren’t perfect (lockdowns have created unique distortions not present within normal recessions), prior data may offer a hint as to how various categories will perform.
From March 2008, through the beginnings of a market recovery in late 2009, I’ve charted the performance of various equity indexes versus common venture capital categories.
As you can see, media and cybersecurity had mild declines, falling less than 20% from their near-term highs, while the more nascent eCommerce industry fared the worst.
I’ve summarized the performance of various sectors in 2008–2009 in an attempt to inform the future. While there are a few lessons to apply, the world looks very different today.
- Cybersecurity: In 2008–2009, CISOs did not have the sprawling selection of tools available today. Generally, companies relied on firewalls, anti-virus scanners, and VPNs for remote employee access. It was not prudent for CISOs to stop buying or maintaining the select few defenses at their disposal, and the overall cybersecurity sector was resilient. Today, most CISOs want to consolidate the tools that they have across the organization; this recession gives them the perfect excuse. So, while I’d expect core security providers (such as Palo Alto Networks) to fare quite well, long-tail vendors may see sales decline.
- Media: When consumers tighten their belts, travel and other major expenses are the first to go. A television subscription is a cheap way to stay entertained, and unlikely to be cut. Quarantined consumers drive skyrocketing Netflix/Roku usage, but even after lockdowns subside, media companies tend to outperform during a recession.
- SaaS: In 2008, the five publicly-traded SaaS businesses I analyzed were resilient. Today, the sector is much larger: There are thousands of SaaS companies and more than 50 publicly-traded SaaS companies selling to enterprises around the world. Much like cybersecurity, the lessons we draw from the previous period may be limited. It’s unlikely customers rip out Workday, but as companies reduce spending, they will make hard choices, and any software considered “nice to have” vs. mission-critical may be cut.
- Payments: In 2008–2009, as consumer spending fell off significantly, payment processors suffered. Today’s period, however, adds an interesting wrinkle, as the shift from physical to digital payments has more than offset declines in consumer spending. As the economy opens back up, however, I would expect headwinds for most businesses that don’t have a digital strategy.
- E-commerce: In 2009, when overall retail spending dropped, eCommerce’s growth slowed as well (1). Today, with retail stores largely shut during the pandemic, activity rapidly shifted online. Online shopping will continue to benefit at the expense of brick-and-mortar, offsetting overall spend declines and creating tailwinds for eCommerce companies and platforms.
While we can look for clues about category performance from the last recession, the unique nature of a pandemic-induced recession makes these analogies imperfect at best. New categories and rapidly shifting consumer behaviors will create a broader divide between winners and losers. I would love to hear how you’ve adjusted your expectations in response to the sudden shift in dynamics driven by COVID.