Disease spread opens up business innovation opportunities

What does the pandemic mean for entrepreneurs and startups? To answer this, Troy Henikoff, a venture capital investor and adjunct lecturer at Kellogg, starts by dividing businesses into two categories: those that have COVID headwinds—think restaurant suppliers whose customers are struggling to survive—and those with COVID tailwinds—think telehealth technology firms that have never seen more demand. But that doesn’t mean that startups with headwinds are doomed. Instead, entrepreneurs must harness the innovative spirit that drives them and adjust to the moment. “True entrepreneurs are taking the situation they’re in, the cards they’re dealt, and figuring out where the new opportunity is,” says Henikoff, managing director at MATH Venture Partners. He points to 2ndKitchen, which his firm has invested in. Before coronavirus, 2ndKitchen helped pair bars without a kitchen with nearby restaurants so that bar patrons could order food without leaving the watering hole. Today, the company has pivoted to setting up shop in the lobby of large apartment buildings and providing restaurant meals to residents. Henikoff was one of three Kellogg faculty members offering insights into the future of entrepreneurship in the era of COVID-19 on a recent webinar from Kellogg Executive Education. He was joined by Linda Darragh, executive director of Kellogg Innovation and Entrepreneurship Initiative, and Sara Moreira, an assistant professor of strategy. Moreira has researched business creation and innovation during recessions, and explained that, overall, fewer businesses are started during recessions. And the ones that are start smaller than those formed during boom years. “This may not be super surprising,” she says. “The surprising part is that years later, I’m talking about 30 years later, we can statistically identify a difference in size between a recession-born business and a boom-born business.” The good news, however, is that recession-born businesses tend to be more productive, as measured by revenue per employee. And startups during a recession tend to be grouped into industries that rely heavily on innovation. Where will this innovation come from today? Darragh says it’s all about how COVID-19 will change our long-term behaviors. That covers everything from working remotely to not wanting to touch anything in public. “A crisis creates a change of behavior, which generates new opportunities,” she says. When previous patterns of behavior are no longer possible, she explains, people become desperate to try something else. “We can statistically identify a difference in size between a recession-born business and a boom-born business.” - Sara Moreira In the last financial crisis of 2008, society’s growing distrust of financial institutions led to startups like Venmo and Square. Today, Darragh expects to see innovations in a wide range of industries. For example, healthcare innovations will likely address both drug development and telehealth delivery. There will likely be new types of automation in manufacturing to allow for social distancing between employees. And, for supply chains, she anticipates more real-time monitoring, so companies can manage customer expectations in the event of disruptions. She also hopes to see innovation applied to social-justice movements in the form of startups that can help recruit more diverse workforces. “There’s got to be a better mechanism to identify great talent,” she says. From a research standpoint, Moreira is interested in seeing what types of companies end up shuttering due to the recession. Downturns generally have a “cleansing effect” on the economy, with less productive firms exiting the market, and newer, more productive ones opening and hiring some of the newly available talent. “What I really hope not to see is firms that have big potential, and eventually the [COVID-19] crisis made them [exit the market],” she says. Henikoff says that investors are already searching for those startups that are positioned to flourish in a post-COVID world. He’s seeing companies with COVID tailwinds having “preemptive rounds” of fundraising. Investors are approaching startups and saying, “’I know you’re not planning on raising for 12 months, but I want to preempt that round. I want to fund today,’” he says. “And what they’re really saying is, ‘I have FOMO. I have fear of missing out. I want to get my money into your company because it’s going to grow so fast and I want to get it in now. I’m willing to take the additional risk because I see the future.’”