The coronavirus outbreak and its effect took us all by surprise. Nobody could predict it. Who would have thought a few months ago that we were going to stop our lives, our economies, wear masks, wait infront of supermarket lines to get food. Who would have thought that there will be a discussion about government support for Boeing and debate on bankruptcies in the airline industry?
I remember back in November and December 2019, where the most significant concern on the stock market was, will the Chinese and the US strike a trade agreement, or are we going to see more tariffs? In a way, all eyes were on China, however, not on the virus that was lurking in the back, but on the trade negotiations.
The “online” economy is saving the world economy
Here we are now. The economy is frozen, unemployment is rocketing, businesses are looking for liquidity loans, and people stopped hanging out because of social distancing measures. While the internet was essential before this crisis, nobody could predict the critical role it plays today. Almost every business beside the supermarket stores is now functioning because of the “online” economy. The companies that were avoiding online models are now quickly adapting their business model so they can sell some of their goods or services online. In a way, it is much better that this crisis happened now than 10-15 years ago. Now we have companies like Amazon, Slack, Microsoft, Zoom, Netflix that are giving millions of people and businesses the ability to work, keep connected, and in the end to not lose their minds because of isolation. These companies have become the new utility companies, our new necessary infrastructure if you want.
Forget scaling up, can you scale down?
What we are already seeing and what will stay after we beat this virus and overcome this crisis is one thing. Investors will start to look at companies very differently. Irrespective of whether these are established large companies or whether this is small businesses or startups.
The essential question on the minds of every investor will be:
“What happens to your business if the world economy shuts down for three months?”
“What happens to your profit if you lose 80% of revenue?”
And in this regard, the main questions will revolve around the ability to SCALE DOWN.
Yes, you heard correctly. For years investors have been focusing on companies and their ability to scale up their business and achieve high growth in a short amount of time. But now scaling down will be the new KPI investor will want to see. How fast can you drop your costs by 80%?
An investor will be looking for companies able to control costs. Companies with low fixed costs and low capital requirements. Capital intensive business pose a risk. Besides fixed costs, variable costs are going to get a vital check-up as well. The main question will be in how many days can you drop your expenses for 50%, 70%, or even more. Businesses that have a high percentage of flexible, easy to reduce variable costs (not labor costs) are the ones that will be most interesting. These companies or startups will receive a premium in valuation compared to their peers.
Get ready for the new world of SCALING DOWN.
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