In this week’s episode, we speak with Erin Griffith of The New York Times about the impact of the pandemic on start-up activity and the VC community.


Jeffrey Freedman: Hello and welcome to the RP Healthcast by RooneyPartners. I am your host Jeffrey Freedman. During this pandemic, there are certain aspects of our economy that have been hit harder than others. For example our restaurants and travel and event companies, a concert and entertainment venues, and countless other businesses that coordinate and celebrate people coming together. They have been devastatingly impacted and some beyond repair. In true, while larger companies are certainly set up to withstand the economic recession much better than their smaller brethren. One area of the economy that has not really been too impacted has been in the venture capital and startup space. The VC companies are flush with cash and they are still making prudent investments. And the newly funded small startups, they are nimble enough to adapt their business model to the changing times, and they have the capital to do it. To talk about this with us today is Erin Griffith. Erin is a New York Times journalist based in the San Francisco Bureau, where she reports on technology startups and venture capital. Before joining the Times, she worked as a senior writer at Wired and Fortune, reporting on topics ranging from self-driving cars and social media, to SoftBank and startup unicorns. Erin, thank you for joining us today. 

Erin Griffith: Thanks for having me. 

Jeffrey: Before we get into our topic today of how the VC and startup community has been affected by the pandemic, I want to introduce you to our listeners. 

Erin: Okay. 

Jeffrey: So, before joining the New York Times in 2018, you were a senior writer in places like Fortune and Wired in New York. Now, what brought you across the country to San Francisco? Was that a completely different scene in terms of the startup and VC community? 

Erin: Yeah. So, I mean, I had been covering the same beat, variously big Tech startups, venture capital, everything in between for I guess almost 10 years now. Before that, I was writing about private equity and finance, but I had been doing it from New York. And so, I thought that it was totally okay to cover the tech industry from New York because all the big executives and all the startups would come through the city and I fly out here often, and all the media was in New York so it worked out. But I will say actually being in San Francisco has made a little bit of a difference, not now in the pandemic when I cannot leave my apartment to go out and meet people and go to events and dinners and demo days, but there is a definite difference in being here and just sort of, tech is kind of in the air. It is like I am soaking it up by osmosis almost. It is definitely different in New York. When I was covering Tech, I would leave work and be out in the real non-Tech world. And my friends would not be talking about what was happening on the internet that day between VCs and I wouldn’t overhear conversations of startups pitching VCs and coffee shops. It was just a very different sort of thing and I had a much more of an outsider perspective looking in, and now I feel like I am really in it. Sometimes I have to check myself and step outside and try to remember that outsider’s point of view because it is kind of the belly of the beast out here. 

Jeffrey: See, you are not just writing about it anymore, you are actually living in it. So, it is a full immersion program for you. That is terrific.

Erin: Yeah. Yeah, it was. I mean now I am kind of like in my apartment. It is a little bit different with the pandemic. 

Jeffrey: Awesome. Now, what attracted me, how I found you actually is one of your articles entitled “Startups raced for the worst, but the worst never came.” And to me, that article was so interesting and enlightening because in the news here, we hear so much about businesses shuttering and the high unemployment rate due to the economic crisis. But in this world you are living in, the world of Tech startups, it does not seem to be the case right now. And so, let us just start talking about this. I want to start from the beginning of the year, even pre-coronavirus. If you could just walk us back there, what did the VC and Startup Industry look like back then? 

Erin: Yeah. I mean in January, it looked like the unicorn bubble was finally going to crash. For the last decade, all of these highly valued, well-funded, unprofitable Tech startups have just been growing, growing, growing and going up, up, up. And every year, it seems like there is this prediction of like, okay, well, this is a bubble and now it is going to burst. In January, after Uber and Lyft last year had disappointing IPOs, after Wework, the mother of all unprofitable, well-funded unicorn startups failed to go public spectacularly. Everybody was kind of looking around and saying, “Okay, this is the end.” Now the austerity is in, we need to sort of pull in the reins. Startups were doing layoffs, investors were wanting to see profits which was sort of a new phenomenon for some of these founders, and everyone was kind of thinking, “okay, this is a reset.”, and that was way back in January before the pandemic. And then, the pandemic arrived and it just was panic among all of the startups who are already worried about, okay, how are we going to get profitable? Maybe the money is finally going to dry up. The good times are over. And now on top of this, the entire world is collapsing. We do not know what is happening with the economy. We do not know if we, for some companies, if we even have a business anymore. And so, it went from uncertainty and a little bit of fear and nervousness, and lowering the risk to just straight-up panic. And so in March, that was when we saw some venture capital firms were sending these memos out to their portfolio companies saying things like, “Prepare for the worst. This is the Black Swan event. Make the cuts you need to make. Raise emergency funding if you can.” There is so much uncertainty that everybody was just sort of scrambling and trying to figure out in survival mode. So, that got us to march and I guess I will stop there. 

Jeffrey: Yeah, that is perfect. I mean for our listeners to remember back then, San Francisco was one of the first or if not the first city in the nation that had a lockdown, right? 

Erin: That is right. Yeah. We beat New York by a few days. 

Jeffrey: So, when the pandemic started to take hold, San Francisco shut down. And as you said, this Black Swan event, everybody was thinking about or worried about. You wrote about, you know, you had an article entitled “Startups are Pummeled in the Great Unwinding”, right? That is a terrific term, the great unwinding. You wrote about companies like Getaround and also some larger companies like Airbnb. So, what do you mean by the great unwinding? What was going on with these two companies? Let us talk about. 

Erin: Well, yeah, that was exactly what I was kind of referring to is like there was just a sense of panic. I mean startups every day were announcing layoffs and there were tens of thousands of workers who were just very suddenly cut. I mean startups spend a lot of time and energy trying to recruit the perfect employee and these like rockstar engineers, and all of a sudden they are just cutting across the board because they are not sure, no one was sure what was going to happen to the economy. And a lot of companies woke up to having no revenue. Like if you look at a company like ClassPass, they provide an online platform for people to book fitness classes, and there’s no fitness classes anymore. So, their revenue just disappeared almost overnight. And if you look at companies that are selling tickets to concerts or sporting events. So, there was a chunk of companies that were just absolutely screwed. And travel is one of them. So, Airbnb, no one could travel. They lost a billion dollars in cancellations in a matter of a few weeks. And so, this is just kind of like hair on fire panic for a lot of these companies. On the flip side, there is a portion of companies that were poised to really benefit. Suddenly, there is a huge demand for Zoom, as we all know. Suddenly, EdTech and online learning tools were in high demand. Suddenly, Telehealth companies were scrambling for ways to figure out how to help doctors see people who should not be leaving the house and going to the doctor. So, there was a group of companies that were poised to benefit. There was a group of companies that were absolutely devastated. And then, all the rest in the middle were sort of muddling through and trying to figure out, okay, are we going to be on the right side of this pandemic? One of the companies that happens to be lucky enough that our tools are in demand or “are we going to be one of the victims of it?” So, companies like ClassPass, they quickly tried to pivot and like, “All right, let us build an online platform for yoga instructors to sell their class to do live streaming classes.” I am not sure how well that, hopefully that has kept them in business. I do not know if it is going to be as big as their original business company. In Airbnb, you know, sort of had to raise emergency funding. They had to lay off almost 2000 employees. They moved their experiences product which is like kind of activities to virtual. So, people are offering virtual experiences now. So, everybody kind of scrambled to get on the right side of the virus. A lot of people raise emergency funding. A lot of companies took out those PPP loans to keep themselves alive. So, there was a lot of sort of jockeying for position and cutting. As it turns out maybe some of it was a little bit premature or some of the expectations about what was going to happen were a little harsher than what actually did happen. 

Jeffrey: Right. I mean absolutely, you know, you brace for the worst and they had certainly a knee-jerk reaction in certain instances. But it is also interesting, companies like Airbnb are probably large enough to withstand this type of pause in their business, but it certainly puts their customer service to test. And they had a billion dollars in bookings that they had to return, correct? 

Erin: Yeah. They were not sure if they would be able to cover that. They had to raise emergency funding and then they were able to give some of that to their host, but did not really cover all of it. But, yeah, I mean I think businesses across the board not just in Tech have sort of experienced this, but Tech startups are super vulnerable in this instance. They generally were not profitable to begin with, their position for growth. So, they are hiring ahead of what they need and they are basically designed to expand quickly. And so, when you are a startup that is overnight shrinking, that makes it really hard to get investors interested in your business even though VCs do not want to invest in a business that is flailing and trying to stay alive. They want to write checks for a company that is like thriving and growing. And so, it really creates this kind of dangerous death spiral for companies. And so, I think a lot of people expect that to happen. But in fact not that many businesses went bust. There has been a sort of a handful, but a lot of startups fail. That is kind of like part of the game. And so, I would not say it has been more than what you would expect in normal times. Some of the companies that were maybe already on the cusp or struggling for other reasons have failed, but in general a lot of them made cuts and now they are kind of chugging along. I would not say they are out of the woods yet, but they are seeing pretty solid recovery. Airbnb being the main one, you know, they have said their business has now bounced back to pre-pandemic levels. People are not traveling internationally. They are not doing business travel, but they are booking a cabin in the woods to get away from their tiny city apartments. 

Jeffrey: Right. So in your recent article, you labeled this and I will quote you if I can, a surreal disconnect between Tech startups and the broader economy. 

Erin: Yeah. 

Jeffrey: I mean that is pretty colorful. So, now you are basically, I mean, why don’t you explain what you mean further about that? Like you just mentioned Airbnb, but what about some other companies like Getaround? 

Erin: Sure. I mean, it is Getaround was one that they started the year, they were nervous about having expanded too quickly. And so they had made one round of cuts before the pandemic. And then when the pandemic came there like, oh boy, this is going to be even worse. They made another round of cuts. And then they realize, wait a minute we are on the right side of this. People do not want to take public transit because of the virus and so they are more interested in cars and we rent cars so we are actually in demand. And they saw demand kind of ticking up in May and then they brought back a bunch of their company employees that they had furloughed. And now they are outpacing where they were last year. And so, there are some companies that have found themselves in that position. And, yeah, it is a little bit surreal because I get pitches every day from startups saying things like, “We have grown like 50% in the pandemic and we are actually thriving”, and they want to tell this counter-intuitive story, but it is actually very common. I am getting tons of these kinds of pitches and it is just really delicate because it comes off as a little bit tone-deaf because there are millions and millions of people who are out of work right now. All of our small businesses are poised to go under. Our entire economy is teetering on the edge and economists have said we are in a recession already. This is like there is bad stuff out there. And so for the startup world to be thriving and for venture capital to be still flowing almost at the levels that it was in a boom time last year. It just feels like I am in a bubble. I mean, like I mentioned earlier that I do feel the Tech industry does live in a little bit of a social bubble and that is sort of one example of it. I think the companies are sort of aware of that, but it is just very weird to report on this on people like, “we are doing amazing. Look at us, we raise this huge round of funding at a higher evaluation and we are expanding faster than ever.” You know, I do not fault them. They see an opportunity and a lot of companies are being genuinely helpful at this moment because we need technology and it has accelerated the adoption of technology for a lot of people. But it still feels very very weird. 

Jeffrey: Right. And it is surreal. So, I mean, your words are proton. So, one of my first bosses ever always told me, “You always invest in the jockey, not necessarily the horse”, right? So, that means that the leadership of these startups that is what a lot of the VCs are investing in is the people in the quality of the management there. Another expression, I think my parents even always told me, necessity is the mother of invention, right? So, in this time of oh my God plan A did not work. What is plan B? And you tell a bunch of different stories about companies adopting, right? So, you told us two of which, you know, I wrote down a company called ActivityHero and a company called Envoy, and how they had to adapt their business models to meet the present reality. Do you think, for one tell us a little bit about it? And then do you think these new business models are going to stay for the long run or they are just a quick salve till they get back into whatever normal means and it can get going on their original business plans? 

Erin: Yeah, I think it kind of varies across the board. I mean, I picked these two companies but there were countless other examples that I could have used. ActivityHero, they are kind of a booking platform for kids summer activities, mostly summer camps. And all the summer camps got cancelled and so they suddenly had no business, and they were worried they would not make it through the year. Then they started pushing their activity providers to offer online camps and they also advised them to kind of up the prices because parents are suddenly having their kids at home now and they are desperate for something for them to do because they still have to work. And so, there was a huge demand for that kind of thing. And so, that ended up being a pretty successful pivot to them. I think ActivityHero ultimately wants to get back to in person. Their philosophy is that they believe that in person activities are better than online having kids stare at screens all the time. But now they are planning to use their online expansion to help them move into more cities when things do return because now they are in a few cities and this is giving them a much bigger, almost a global audience. So, it will help them expand faster. That is the hope. Envoy is an office sign-in company. Like when you go into an office to see if there is a little iPad you need to sign in. They run those for a lot of the startups and Tech companies around the valley and elsewhere. Obviously people are not going into offices and companies are trying to cut costs. And so, that is one obvious place that you could cut but they quickly learned that people are eager to get back into the offices, some people are. They either have a small apartment or they need to get out of their house for whatever reason. So, companies were letting people come back but in limited ways. So, they realize they could help companies manage that by making and while businesses are trying to add dividers and do construction to space desks out to make them safer. That means there are a lot of construction people coming and going. So, they were helping companies to manage that to make sure that there is contact tracing in case someone gets sick. So, they sort of position themselves to be useful even in a moment when their business does not seem like there is a lot of demand for it. And they said that that really saved the business and stopped people from canceling. So, I do not think that they are long-term. I believe this is, you know, they are the key to their growth and their core business stays the same but it at least helped them to survive. That is one thing that is kind of fun about covering startups is that there are small businesses. They do not necessarily have a lot of bureaucracy. They are able to move very quickly and they are very adaptable. Sometimes that means in a moment of an emergency like this, they are very well-positioned to take advantage of the moment. So, those were two examples but there are probably countless others like that out there. Any company that sort of found themselves in a position where maybe their services were not in as high demand is trying desperately to change that. I think that is just sort of natural. Some make more sense than others. I have seen some examples where I am like, yeah, I do not think that is going to work for you. But you know a lot of travel companies in particular. It is like if you are a company that is offering business travel booking, there is just not going to be a lot of business travel for a while. Other things like that that I think will take a very long time to return but, you know, they have to try. 

Jeffrey: Yeah, absolutely. All right, so let us take a step back and talk about the overall venture capital market right now. The Wall Street Journal this week put out statements that venture funds a master record setting one billion dollars in the first half of 2020. That is a hell of a lot of zeros and incomprehensible. Are they just creating war chest? I mean what is going on in the VC world or deals getting done or investors just sitting on the sidelines and waiting to see how this shakes out? 

Erin: Yeah, deals are definitely getting done. There has been for the last several years, just every single quarter, every single year the VC firms set new records for how much capital they are amassing because the stock market is at such a high interest rate or at such a low. High-risk venture capital is very attractive. And that just continues to be the case even though the opportunities seem somewhat limited. I mean, how much money can Tech startups really absorb? I guess the answer is probably infinite because they are not going to turn it down. But a lot of the deals that we saw, I think this year since the pandemic, a lot of the money is being concentrated in big late stage companies that can absorb a really big check. So, it is kind of like going to the winners. Like you saw Robinhood which has seen a lot of stock trading apps, which has seen a lot of use in the pandemic because people are just bored and day trading and playing the stock market I guess. They raise eight hundred million dollars across three different rounds in just the last few months. I mean, that is kind of crazy. But investors just keep writing them checks. And so, these like “winners” are really like magnets for capital now. We have seen a little bit of a fall-off in the number of deals for the early stage companies. It has been a little bit harder particularly if you do not have a network or you have not been able to go out to all the VC parties and smooch and get those connections, and you do not get to meet someone in person for the first time while you are pitching them so they do not get a sense of who you really are, or you are pitching over Zoom. I think that has been a little bit trickier, but I think the VC world is trying to figure out how to adapt to that and maybe that will bounce back unclear. A lot of people are seeing new opportunities, all these laid off started workers could be working on new companies as we speak. But in general, the VC world has been fairly active and some deals have been very very competitive. And that the stock market is hitting new highs. Companies are able to go public. There is a real disconnect there too. And the VC world often tends to kind of follow, private markets tend to kind of follow the public markets. So unless there is a massive crash there, I do not think valuations and funding raise is going to fall off too much. 

Jeffrey: Right, I mean, all right. So, everybody hates this but it is the proverbial crystal ball question, right? So in the future, you know your thoughts, so you mentioned a few things. A few market dynamics going on. Deals are getting done but they are being done more towards the winners like the Robinhood, you know, following on capital. When that happens, as we know, that just raises the valuations of these companies. And Robinhood, the valuation was some crazy billions of dollars. 

Erin: Eleven point two billion.

Jeffrey: Eleven point two billion dollars, right. The VCs invest for their goal as exit strategies most of the time as IPOs. Thank goodness the market for these guys keeps going up, up, and up. But what can the exit be? And how if there is that much competition and these valuations are just going higher and higher, does this make sense? And what are the rest? 

Erin: Well, I have learned over the years of covering this industry that those kinds of questions actually do not even matter because it is not a rational industry. They are investing for crazy unpredictable irrational growth. And then afterward, they can say I predicted this. I am so smart. I knew all along. But they want a Facebook or a Google. They like something that is just completely rare but hundred X their investment and it is so hard. There are so many factors that go into what makes a company a Facebook versus a Friendster that it is really, really, really, really hard to know. So, would that whole caveat, I guess I am constantly amazed by companies’ abilities to exit. To raise at a higher valuation. To get that valuation, they go public to get that stuff pop and they go public. I think last year we did see some tempering of that was Uber. I mean, Uber had been talking about going public at a hundred billion or maybe even a hundred twenty billion valuation. And then they ended up sort of going a little bit under their last private valuation in the stock has sunk ever since because they just lost so much money. So, it does show you that there is some rationality in the private markets and that public markets investors do care a little bit about the path to profitability and business fundamentals. But, I do not know, I kind of had to throw my hands up sometimes because sometimes I am like I just do not get it or I miss something. It is an irrational industry. 

Jeffrey: I mean, you mentioned Uber. That was a great example, but we work. Wasn’t that long ago? 

Erin: Right. And we were sort of like I had mentioned the kind of pinnacle of this like, okay, money-losing irrational growth at all costs, sort of cult to the founder, founder control tech company. And so like, you know, once we work crash everyone was like, ha ha ha, it is over now rationality, but it is some we are still seeing a little bit of that. We are still seeing companies with founder control, with huge valuations that seem very overvalued. And investors are more excited than ever because they believe that, for some of these companies, because they believe that the virus is actually speeding up the acceleration of tech adoption like a few have a video streaming company. You might have a lot more leverage now to get movies as their release as opposed to having to wait for them to go out of the theaters. There are a lot of examples of things like that where disruption was really accelerated because of the virus. And so, investors see that and it is definitely easy to just miss because of how expensive it is and that is why I am not an investor. But, yeah, I have seen the argument made a lot and people are optimistic about a lot of these things. So, yeah, I am not going to be one to dismiss it because I have been wrong before and no one likes a Cassandra. 

Jeffrey: Well, that is great. Erin, thank you so much. This has been informational, educational, and entertaining, and fun so thank you. 

Erin: Well, thanks for having me.

Jeffrey: We hope you enjoyed this week’s podcast. If you have any questions, comments, or future story suggestions, please reach out to us on social media. Thank you, and we hope you enjoyed the RP Healthcast.

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