US GDP shrinks 4.8% in first-quarter as companies continue to struggle

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Global trends are creating ever-larger winners and losers. As seven years of future growth has already priced into Zoom’s current stock, General Motors shuts down Maven, Delivery Hero shuts down Foodora and Virgin Australia is up for sale!

The U.S. economy shrank by an annualized 4.8% in the first quarter. The coronavirus led to “rapid changes in demand, as businesses and schools switched to remote work or canceled operations, and consumers canceled, restricted or redirected their spending,” the Commerce Department said in a release. It’s the biggest quarterly drop in over a decade and shows the beginning of an economic slowdown that’s expected to get worse as the coronavirus roils the economy. Economists are bracing for current quarter figures, with some projecting a record annualized decline of about 40%.

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This week yet another startup decided to shut down its operations. Foodora, a subsidiary of Berlin-based Delivery Hero SE announced that it has not been able to reach a level of profitability in Canada that’s sustainable enough to continue operations, so it filed a notice of intention and will exit the country on May 11.

Foodora has operated in 10 Canadian cities over the last five years and has racked up 3,000 restaurants on the platform, despite the stiff competition from Uber Eats, SkipTheDishes and DoorDash. David Alberta said on a press release

“We’ve been unable to get to a position which would allow us to continue to operate without having to continually absorb losses.”

Startups such as Hipmunk and Service shut their doors last quarter after efforts to extend their capital lifelines fell through. Not even the tech giants with massive cash piles are immune from the coronavirus. Google’s parent company, Alphabet, suffered a “significant and sudden slowdown in ad revenue” during the first quarter of the year, said Sundar Pichai, even while total revenue for the period rose 13% to $42.2 billion. Advertising revenue for Google comes from big companies in travel, entertainment, and hospitality. These industries are the hardest hit during the ongoing pandemic.

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Sharing economy also takes the hit: Last week General Motors decided to exit the car-sharing business and shut down Maven. The car-sharing service had struggled for months, long before the pandemic impacted the shared mobility sector. According to various news sources, last year, Maven scaled back and stopped service in nearly half of the 17 North American cities in which it operated. Maven continued to operate in Detroit, Los Angeles, Washington, D.C., and Toronto. As a Maven user, I was satisfied with the quality of their vehicles as compared to Zipcar but their customer service was subpar. There was even an instance when I tried to escalate the matter to senior management but no one really bothered. So, I wasn’t surprised to see when I received this email last week that stated: “After critically looking at our business, the industry, and what’s going on with COVID-19, we have made the tough but necessary decision to wind down our business.” Zipcar ended its operations in British Columbia the same day. This follows on Car2Go’s end to operations in North America at the end of February.

New investments continue for the time being at a slower rate but several startups are going to go under — more than one would expect — because they were going to die anyway (like Maven) and this is a great chance to blame that inevitable death on the pandemic.

Big airlines such as Virgin Australia collapsed last week and Deloitte has already started the process for its sale bid. Macquarie group and Canadian powerhouse Brookfield are jointly contemplating a bid for Australia’s second-biggest airline.

At this moment, most VCs are advising their companies to sustain and prolong their runway using the existing funds for at least 12-16 months to get through the current uncertainty. Investors have shifted their focus from making new commitments to ensure their existing investments are surviving this wave. They are in a damage control mode. This is unprecedented and we have never seen such a rapid decline in employment, overnight shutdown of the economy, and companies winding down. Investors will continue to invest but expect smaller rounds and at a lower valuation. While investors might have the cash to invest, the pullback will trigger a triage mode (as it did in previous downturns), where investments will be in select companies.

Investors are continuously analyzing their investments to decide which of their investments to prop-up with more money, which to let die, and which to fold into another, but in times like these mergers may be a solution to some of the bigger VCs. This may or may not actually help the acquiring company but generally do help the VC who has invested in both. Investors who sit on the board of both companies, big companies are coaxed to acquire smaller failing companies so that the outside world is unaware that the smaller company was, in fact, sinking. Another common word for this kind of nonsensical purchase is that it’s an acqu-hire (buying a company, not for its business or IP but to get the big brains who work there).

If you are counting on contracts in the pipeline to close, you shouldn’t. Most big companies, government clients, and especially small and medium businesses will also go into survival mode. Unless you are supplying a product or service that they consider absolutely mission-critical, you should expect that revenue will be deferred for at least six months and probably longer. If your existing contracts have cancellation clauses, expect that some will be exercised. Always keep opportunities open and ready to pivot. For example, even as GM is closing plants, they are looking at how to make ventilators and respirators. What will customer’s needs be?

In 2008, Airbnb was launched to keep from losing their homes. Or Uber from losing your car. 2001 is a distant fog now but focusing on things that saved immediate money for companies seemed to really work. So what’s true for this period? Does distancing mean more telecommuting or home entertainment related startups arise?

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