BEACH (Booking, Entertainment & Live Events, Airlines, Cruise Lines & Hotels & Resorts) stocks have taken a hammering with the Covid-19 crisis. More than $332 billion in value have evaporated over the past month, according to this analysis. Booking Holdings has seen a 37% drop, Expedia Group an even bigger one at 53%; worldwide, airline revenue is estimated to fall by as much as $113b in 2020.
If the giants are at risk of falling, what does it look like for startups? At WiT Virtual, two venture capitalists shared their perspectives on how the travel and startup landscape will evolve as a result of Covid-19.
Looking at the travel industry broadly, Hian Goh, co-founder and partner, Openspace Ventures described travel as “a bad product-market fit situation right now.”
Kuo-Yi Lim, managing partner, Monk’s Hill Ventures remarked, “travel gets slammed the hardest and most immediately… not just regional and long-distance, but within countries themselves.”
In such a period of uncertainty, it is difficult to determine who the winners and losers will be. However, the general outlook is that once the dust settles, the strong will get stronger and the weak will get culled in almost all sectors – travel or otherwise. “It’s not unlike the virus’ effect on the population,” said Lim, “vulnerabilities will show up very clearly.”
“I generally think no one is going to get stronger because it’s a systemic situation… the only situation where someone gets stronger is because of mortality… because competition decreases,” argued Goh.
Using the example of rival super apps, Gojek and Grab, Goh said, “they’re not fighting anymore” suggesting that they are more focused on ensuring their own survival than battling over market share. Competition will come back after the crisis, he predicted. “The [players] who survive the crisis will be weakened but if they have a field where it is less competitive, that’s where dominance grows.”
Meanwhile, some sectors are simply too big to let fail, the airline sector being a particularly salient example. CAPA warned that most of the world’s airlines could be “bankrupt by the end of May” without government and industry intervention.
Both investors were clear that while intervention may be necessary, not all airlines should necessarily get equal support. “If an airline is badly run, the health of the airline isn’t going to increase after a crisis like this anyway… that’s where it’s possible that government intervention isn’t helpful,” adduced Goh.
Meanwhile, airlines with a stronger overall track record, they said, should be more deserving of government bailouts, a moratorium on mortgage payments or similar. They used Singapore Airlines as an example of “a product everyone loves that is currently facing shutdown”. The airline is currently aiming to raise $15b with the support of Temasek Holdings (which currently owns 55% of the airline) by issuing new shares to current shareholders to raise $5.3b, mandatory convertible bonds to raise roughly $9.7b, and Temasek pledging to buy up all remaining shares.
“SIA is a strategic asset to the country… in this situation where it’s really out of their lap, governments are going to try everything to save them,” said Lim.
Startup survivability
Of course, not every business gets the privilege of full-fledged government bailouts, least of all startups. Lim estimated that under current circumstances, startups need at least 12 months of runway if the business is to survive this pandemic.
The brutal reality, he explained, is that “we’re going to be in this for a while… it’s about hunkering down and literally cutting costs. Unfortunately that may include the need to lay people off… be as bare bones as necessary [to survive].”
Comparing the current scenario to the global financial crisis and the dot.com bubble, Lim emphasised that these dark moments force entrepreneurs to really focus on the fundamentals of the business. “You don’t have the luxury to do too many experiments or use capital to fuel growth [beyond] what is the core product of your business.”
If that simply isn’t possible for the time being, Lim added, “There is no shame in needing to pivot to keep yourselves paid or to stay afloat.” Survival mode means doing whatever it takes.
Investors also have a role in lending support to companies within their portfolio, but not necessarily in the form of cash. This includes the need to review business plans, take accurate projections where every company stands, and potentially renegotiate term sheets.
“It’s almost a force majeure in some cases,” said Lim. The conditions when the original proposals were made will likely be entirely different and both sides of the deal will need to adapt.
“If you stick to the valuation expectation you had before the crisis, you risk struggling to make money at the next round… pricing is always a dynamic thing,” stated Goh.
Investors are still browsing for the next big thing
Perhaps against expectation, Lim stated that VCs are still looking for opportunities to invest. Specifically they are looking for companies that have the potential to succeed within the context of the current situation. “As a VC, we’re looking for things that can grow in this environment, as opposed to [providing] capital to survive.”
Pre-seed startups may be in an early enough stage for active investors to take a look at, though they must ask themselves about: timing – is it the right time to do what you want to do? And what is the cash for – to achieve certain things, or to simply keep the company going?
However, the paralysis of travel does make fundraising far more challenging. “VCs are going to be busy dealing with their portfolio companies, and it’s very difficult to make investments without meeting you… doing due diligence is harder, unless [investors] have local resources [they] can tap on quite regularly.”
Watch the full conversation here.
Image credit: Getty Images
