Sept. 1, 2020

Are recessions good for startups?

Are recessions good for startups?

Pick your metaphor: It’s always darkest before dawn? The greater the storm the brighter the rainbow? Every cloud has a silver lining?

Anything goes, and that’s because we’ve conditioned ourselves to believe that the best businesses are founded during and in the wake of major recessions and bear markets here in the U.S. It’s a startup trope as common as “down for the cause”—recessions breed good businesses. Uber, Airbnb, and several others serve as evidence. 

But is it all just circumstantial? That’s what we’re digging into today on Business Casual. Given that we’re in a pandemic-induced recession that started, by some accounts, in February, it’s high time we started thinking about what the next Uber or Airbnb might be.

To help us determine 1) whether recessions really do coincide with strong startup prospects and 2) why that is, I’m talking to Christine Tsai. Christine is the CEO and Founding Partner of 500 Startups, which is an early-stage venture fund and seed accelerator founded in 2010.

She’ll lay all the groundwork you could ever need to understand the ways businesses, both new and old, navigate economic downswings. And just as importantly, she’ll explain what being founded during a recession means for a business’s future prospects.

We’re also talking historical precedent from the last recession, the deeply unique qualities of this economic moment in time, and how the relationship between entrepreneurs and investors might evolve post-COVID.

Don’t miss out. You never know when you’re sitting on the next Airbnb. Listen now.


Transcript

Kinsey Grant, Morning Brew business editor and podcast host [00:00:08] Hey, everybody, and welcome back to Business Casual. It's me, Kinsey Grant, and I hope you are ready for a fun one today. With that, let's get into it. [sound of a ding]


Kinsey [00:00:20] I am big on silver linings. If there's not good in everything, there's at least a lesson in everything, right? That's the attitude many, many business leaders have brought into this recession. You'd be looking for the bright side too, if you were one of the 1.85 million businesses in the country that were lost from April to June. So here it is. We hear all the time that recessions are good for entrepreneurs and innovation and startups. That's our silver lining. 


Kinsey [00:00:45] Our evidence? Airbnb, Disney, General Motors, Hewlett Packard, Microsoft, Slack, Uber, and Venmo, just to name a few, are all companies that were started during past economic downturns. Time and again on this show, guests have spoken about the great possibility of a recession, citing the last one in 2008, 2009 as a hotbed for innovation and paths to profitability. But I've got to wonder if it's less about recessions making people more entrepreneurial and more just convenient timing, low interest rates, and readily available labor. That's why I am bringing in today's guest, a veritable expert on startups and fledgling businesses. Welcome to Business Casual, Christine Tsai. 


Christine Tsai, CEO and Founding Partner of 500 Startups [00:01:26] Hi. Excited to be here. 


Kinsey [00:01:29] Well, thank you so much for joining us. I'll give a little background on you because startup expert sounds like a made-up title. [laughter] You are the CEO—it is made up, I made it up. [laughs] You are the CEO and a founding partner of 500 Startups, which is an early-stage venture fund and seed accelerator that was founded in 2010. So you definitely have a lot of background here when it comes to working with and helping to make sure that they succeed—these young companies, companies that are just getting a start. And having been started in 2010, that was just after the recession, the last Great Recession ended. So, I have a lot of questions. I've got a big one that I want to start with. So are you ready to get started? 


Christine [00:02:07] Yes, let's do it. 


Kinsey [00:02:08] All right. Let's do it indeed. So, the big question here is whether or not recessions are good for businesses, for businesses that are just getting their start. And this is from the Cleveland Fed, makes me think that there is maybe two different sides to this story. The Cleveland Fed wrote, "Some believe that recessions have no effect on entrepreneurial activity, arguing that the negative effects of reduced demand are offset by the increased motivation to have one's own business as a protection against layoffs. Others believe that the Great Recession actually brought about an upswing in entrepreneurship as the downturn pushed laid-off workers to pursue their entrepreneurial dreams." 


Kinsey [00:02:44] So, Christine, which is it? Are recessions is good or bad for entrepreneurship? 


Christine [00:02:49] I think they're definitely good. We see in past recessions there are so many examples of companies that were founded. Some of the greatest companies were founded during recessions, like you just shared. And I think in terms of why that is, I think it's oftentimes in those dark times, either there's certainly opportunities to capitalize on, and people who start companies during those times, because it's oftentimes maybe seen as a pretty risky time, like, the economy is not doing well and so much in terms of unemployment, but, in terms of entrepreneurship, it certainly takes a certain type of person to want to start a company in a downturn. 


Christine [00:03:28] So I think, as you see, there's a lot of resilience that comes out of that. And because of that, companies can really—certainly can always struggle, but they certainly can also thrive because there's a lot of potential talent that's out there. There maybe aren't as many companies. This downturn might be a bit different, but, maybe there aren't as many people starting companies and maybe that's the last thing on their minds, but as we've seen from the last 2008 recession, certainly even the 2000 dot.com bust, a lot of great companies came out of those times. 


Christine [00:04:03] I think that that's what a lot of early-stage investors, including us at 500—it's certainly something we're keeping an eye on terms of what are some of the great companies that are going to come out of this time. And we're certainly seeing a lot in certain categories as well that's kind of very specific to this downturn. 


Kinsey [00:04:20] And I want to get into all of those, absolutely. I think before we do that, there are two huge factors that are worth considering here. There's, number one, the people who are behind these companies. And number two, the economic conditions under which these companies are started in the first place. Let's start with the people. Why is it that people who start companies in what would ostensibly be a risky time to start a company are the kinds of people that you would want to bet on as an investor? What makes those people good founders? 


Christine [00:04:46] A lot of founders are just, whether it's in tech or just entrepreneurs in general, because as we all know, entrepreneurs are—oftentimes that term is now associated very closely with startups and tech—but anyone who starts a business in a tough time, there's just a lot of things that have become scarce, whether it's capital, jobs, just everybody is distracted and the constraints are much stronger in these times. 


Christine [00:05:12] Entrepreneurs who start companies during tough times—they are doing a lot more with less in terms of the macro environment and what might be going on. Especially if you look at early-stage funding, there's probably a lot on [indistinct] Twitter, where a lot of firms are saying that we're still active, we're doing deals. But, overall, especially at the beginning part of this pandemic, and this downturn, there were a lot of firms that were doing triage and not necessarily increasingly writing new checks. They wanted to first get a sense of how's my own portfolio doing. 


Christine [00:05:49] A lot of that funding that they had was going more towards their existing portfolio rather than new checks or potentially, from the LP side, maybe new managers. Now, it's sort of started to even out. But there's still a lot of caution in terms of, you know, for certain firms, especially certain stages, in investing into new opportunities. As a result, when you look at founders, it's not frothy times by any means. And knowing that, they're still going in and finding a way and still building teams, building product, trying to acquire customers just in much harder times. 


Christine [00:06:26] I think because of that, there's a lot to be said about founders who are doing that despite what is going on in the environment, whether it's kind of cool to start a company, whether it's a good time or bad time. I mean, sometimes you can look at it as anytime is a good time to start a company and anytime is a bad time to start a company. [Kinsey chuckles] I think particularly in these times, founders that are going out and taking that risk, because it is such a huge risk and it is incredibly difficult, there's just kind of a level of courage that you have to do that right now. 


Kinsey [00:06:57] So that handles the people side of the equation to me. Now I want to talk a little bit about the specific market conditions that make it a good time to start a business, to be an entrepreneur, regardless of what you want to do, what you're setting out to solve for. What are they? We talk about low interest rates, labor that you can get probably cheaper than you usually would, reduced competition. What's most important in your view? 


Christine [00:07:19] It's definitely a combination of those things. A lot of things that you mentioned in terms of the low interest rates and in terms of talent, sadly, there's a lot of people that are unemployed currently in certainly not just the U.S., but all around the world. And in terms of certain sectors, potential customers, particularly if it's B2B, there's a lot of more urgency for them to try to find new solutions and innovate. In some cases, they may be in response to a core business dying or that they're getting hit with demand from their customers and they're just not prepared. 


Christine [00:07:56] And so all of this does create a pretty good environment for certain types of startups to be able to engage and get new business, really test out their products and hire talent. In terms of raising money, I think also in some ways, it's challenging, right, because as it always is, fundraising is always challenging. But, especially in this environment, where you don't have that in-person interaction the way that many are accustomed to, especially at the early stage you're investing in the team. So a lot of those things are being figured out. 


Christine [00:08:32] But I think, for early-stage founders, in some ways there are also the investors are trying to figure out how to write checks and invest in companies with that parameter without being able to meet companies in person. It's over Zoom, over a phone call, and just like really try to get capital into these companies. I think that there's many ways, of course, in which this is a tough time. But I think given where the markets are and especially within each sector, it does, in some ways, make it kind of opportune for companies to get business and grow. 


Kinsey [00:09:11] Yeah. I can't imagine that it's easy to woo a founder or even an investor over Zoom. It's just a very different, different process. 


Christine [00:09:18] Yeah. Yeah. [laughs] 


Kinsey [00:09:19] So Christine, I wonder if it's just that, when we're in a recession, we're getting companies that are maybe stronger or are there actually more companies being started? Do we have any way to measure the startup, I don't know, founding or is there a number that we can put on this? Or is it just that the businesses that are being born are just stronger businesses because of these conditions that happened during a recession? 


Christine [00:09:44] It's a good question in terms of, is it the quality or their quantity or maybe it's a bit of both. So I actually don't have that on hand in terms of the number of companies being started in the last few years or, sorry, the last few months. [Kinsey laughs] It feels like a few years. [laughs] But it is something that, from our perspective just on the ground and seeing companies that are coming our way through deal flow and applying, I would say the numbers are certainly consistent—in some cases, if not more—in terms of companies that are at least seeking funding now. 


Christine [00:10:19] That doesn't necessarily mean that those are obviously companies that are looking to raise money. There's certainly a lot of companies that haven't gotten to that point yet or they're bootstrapping. But I would say that it is definitely going to be, hopefully the quality that companies, like they're the stronger companies or kind of what we spoke about earlier, but in terms of the number of companies being started in this time, I mean, it probably already was a trend anyways in the last few years of more companies being started, largely because it's easier to start a company every year, whether it's because of the infrastructure, more people are attracted to it, entrepreneurship is seen as more attainable or accessible. 


Christine [00:10:57] It's in some ways kind of, quote, mainstream, but especially during this time, I think it's something that I think we'll start to see throughout the next few months in terms of how this year compares to year over year compared to other years. But I think that it will continue to be seen as a path, more likely path for others. And hopefully, especially as we've seen here in the U.S. with a lot of the racial injustice and there being just a lot more attention shown on the lack of funding, the lack of investors, that it's seen as a path for all different types of founders, whether they're underrepresented or not in Silicon Valley. 


Christine [00:11:37] That's certainly has been increasing, especially as it relates to female founders, underrepresented groups. And I think that's something that will be quite exciting, especially out of this year. 


Kinsey [00:11:49] Right. I think it's so compelling that we have had these sort of dual crises going on, at least here in the U.S. during 2020, that number one, there has been this global health crisis. We are in a recession because of it. People have called it the Great Lockdown Recession and, at the same time, we're dealing with facing head-on this systemic injustice in the United States when it comes to race and representation. Do you think that we would have seen that trend toward investing more in founders who typically had been underrepresented without this recession? Did the two have to happen at the same time or would this have happened regardless? 


Christine [00:12:25] I sense that it would have happened anyways, but this has just really accelerated it, similar to a lot of the other sectors or kind of other areas that the trend was already going in that direction. So, as it relates to, say, a specific sector, because this is just so unprecedented, the change in the demand and the urgency around that change happening has just been accelerated in the last few months because of COVID and other issues. 


Christine [00:12:54] And as it relates to underrepresented founders, either starting companies or getting access and getting funding, optimistically, I believe that it was starting to go in that direction. But at what pace, I think, is the question. I think that there is a lot of eyes on everything that has happened in the last few months, really being nothing new. I think there was a lot of shock, especially around George Floyd and just all of the atrocities that are happening in the U.S. and all around. 


Christine [00:13:23] But certainly if you talk to Black colleagues or others, they'll say this is nothing new. It's just that now there is huge media spotlight and the tools that we have with cameras, phones, body cams, it's much more visible, but it's nothing new. But one of the hopefully positive things that comes out of it is that because there's visibility there, it lends itself to all different industries. So not just kind of the civilian, you know, the issues there, but also in corporate America, in venture entrepreneurship, and show like where the dollars are going and who writes those checks and that it is underrepresented for sure. 


Christine [00:14:01] And what needs to change to help not just increase that access, but also take advantage of finding some great companies that are going to get overlooked because they don't look like the typical founder. And that's something that I think is, certainly for us, with 500, that's something that we are looking at very closely in terms of like, what are some great founders that we don't want to miss out on—whether it's their race, geography for sure, language, gender. And I think that's definitely, for a lot of venture capital, something that they've probably always realized. But hopefully all of this has made them kind of really open up their eyes in terms of just like, simply just great, great deal flow and great talent. 


Kinsey [00:14:50] I am optimistic as well that awareness is a good thing, and although these problems have existed and persisted for so many generations even, that now we are paying a little more attention. And my hope is that we continue to pay more attention. I want to pivot for a second here to talk about this sort of dichotomy that exists, at least in my perception of small businesses. Small businesses are typically hit hard and hit first by a recession. 


Kinsey [00:15:15] But at the same time, we're saying that so often these startups can really grow and innovate and benefit from a recession even. How do we get those two back together? How do we reconcile the difference between small businesses being hurt in a recession but small businesses that are startups not being hurt? What makes the biggest difference there? 


Christine [00:15:33] I think that for small businesses, like when you think about kind of the non-startups, like you think of small businesses like retail, mom-and-pop shops. Of course, those make up a pretty significant amount of businesses in the U.S. and probably all around. And they are certainly being hit very hard, a lot of them due to all of the lockdown and shelter in place. And they, maybe not being set up to handle quick changes, whether it is in restaurant business or food business or hospitality. 


Christine [00:16:05] Or across the street from where I live, there's a dance studio and dry cleaning business and they're all having to respond to the fact that people aren't coming in or there isn't a strong need for the business right now or just think they can't operate because of shelter-in-place restrictions. So I think in terms of technology, there's a lot of ways in which technology can help, at least with a lot of these small businesses. And I think there's a fundamental gap between those types of prototypical small businesses and then there's startups which are, most of the time, largely like tech first and maybe software first. 


Christine [00:16:42] But I think that there's a lot of ways in which that—I don't even know if you call it a gap that's bridged—but it just shows that there's a lot of support that isn't there for these small businesses from potentially the government or certain policies. And they are being hit hard. Startups maybe fall into a different camp in terms of the overhead that they have or their funding sources. But it doesn't really apply for small businesses. It's more for companies that are aspiring to be venture-backed companies. 


Christine [00:17:18] But I do think that it definitely has—you know, knowing people who run small businesses, whether it's restaurants or other types of shops, they definitely really are struggling in terms of resources and funding. And just the sheer fact that they just don't have business right now. 


Kinsey [00:17:34] Right. 


Christine [00:17:35] Everything is all interconnected as well, I think, as we're seeing with just how different countries respond to COVID and other issues going on. 


Kinsey [00:17:43] Yeah. And so much of the struggle for small businesses right now is so highly specific to this exact recession [chuckles] and this moment in history. 


Christine [00:17:50] Exactly. 


Kinsey [00:17:51] That we have very little precedent for something like we're experiencing right now—a complete shutdown. That you can't—you simply cannot go to the ballet class. It's not that you don't have the money to go; even if you have the money, it's not safe to go. 


Christine [00:18:03] Yeah. 


Kinsey [00:18:03] So is there any way that we can use lessons from past recessions to inform where we kind of go next in the startup community from this COVID-induced recession? Do we have any context? 


Christine [00:18:14] Yeah. With previous recessions, I think one of the things that is quite different with this recession, obviously, is the nature in the cause of those recessions. So I don't believe that the fact that this is really induced by a global pandemic and is a world health crisis, it's obviously that wasn't the case in 2008 and in 2000 and so on. 


Christine [00:18:36] So there's a lot more that companies, as well as countries, are finding themselves to be unprepared for, that, like you said, maybe don't directly have anything to do with the economy, but it's more because of COVID-19 and the fact that it's a new virus. There's a lot that we haven't learned and just how much it's impacting—not just one country or a region—it's impacting the entire globe. Our team also, as a global firm, we've certainly seen different crises happen in certain markets. But this is really the first time that this is for everybody, that this is happening everywhere. 


Christine [00:19:12] And you just start to realize just how interconnected everything is, whether it relates to travel and just how much globalization. A positive note has been important certainly for us and for a lot of industries. But just that all those dependencies, like things that happen in one market are inevitably going to impact others. So I think that, in terms of lessons learned, I think it just shows that there's a lot of [laughter]—I feel like there's a lot of things that we're probably still learning in terms of this particular crisis. I mean, one thing that does come to mind is just that there's a lot of ways in which I think we can be better prepared just in terms of public health. 


Christine [00:19:55] But then as it relates to economies, one of the things that we have seen in our own portfolio is that all of this has shown a light on companies that were managing their cash well and others who were not so. And I think that is actually probably pretty, I don't know, agnostic to a recession in terms of the cause. Like, if things are tight, whether it's pandemic-induced or not, companies that do have that cash in the bank and have a healthy runway, and they're keeping an eye on it. They're luckily going to be able to withstand that a bit better than companies that were not or highly leveraged. 


Christine [00:20:32] And we see that right now. Every investor is seeing that with their own portfolio in terms of triaging their companies, kind of understanding those who are struggling, who maybe already were struggling, those who maybe were doing well. But this is just unprecedented. Their industries have been obliterated. And we have definitely seen that too. And then on the positive side, companies that are maybe even unexpectedly doing really well because of the conditions of safe—everyone's sheltering at home. There's a huge demand and they're just trying to keep up with that. I feel like we're gonna continue to learn a lot [laughs] in the next few months and in the next year with all of this. 


Kinsey [00:21:13] It's also, I think, an interesting point here that it doesn't necessarily matter what causes the recession, but so often these recessions serve as a way of weeding out the weaker business models. That you end up with stronger, more resilient businesses that survive. And I want to talk about what that means for the kind of innovation that we get coming out of this COVID-induced recession in just a second. But quick break to hear from our partner. — 


Kinsey [00:21:39] And now back to the conversation with Christine Tsai. So, Christine, we have talked a lot about the unique aspects of this particular moment in economic history. Certainly unprecedented is a word that comes to mind often. But I'm curious what that means for the kinds of companies that we see coming out of this. When we talk about the Great Recession, 2008, 2009, the two big ones are Uber and Airbnb. These are companies that empowered people to use things they already had to make a little money on the side. They really gave way to the gig economy that certainly existed before. 


Kinsey [00:22:11] But this just really blew it up in a major way. What kind of repercussions do you expect us to see coming out of this COVID recession? Are we going to see any particular sector really take off or have some sort of big boom like we did with Uber and Airbnb? Is there a way to know that yet? 


Christine [00:22:27] So we see with certain sectors, they're falling into a couple categories. One is around what we're calling the accelerated future. So these are companies that are seeing [indistinct] companies or sectors that are seen benefiting from kind of the tailwinds of COVID. You think about education, remote work, healthcare, logistics, and supply chain. 


Christine [00:22:49] These are certainly areas that there's starting to be quite a bit of demand for solutions that are being built in these sectors, such as like remote patient monitoring. Online education is big. There's a lot that I see, as a parent with kids and the tools that schools have or don't have yet, as well as just higher education and career opportunities. So there's a lot that's happening there. And then the other category that we look at is what we refer to kind of as the new normal. So these are industries that were already struggling, weren't seeing the type of growth as other industries, but COVID has unfortunately decelerated that—not decelerated, sorry—accelerated that decline. 


Christine [00:23:33] So these fall into sectors that are looking to really be reinvented and kind of redefined. And we see this with hospitality, hospitality and travel. Those are two industries that have been very much hit hard. But also, there's a lot of struggle there in terms of just kind of technological solutions to help them get back on their feet or deal with this crisis. And so I think in terms of those bigger categories—that in terms of companies that we'll see coming out of this—I do think a lot of them do fall into that accelerated future. 


Christine [00:24:06] So the way that people learn, the way that people work, the way that people can access kind of basic healthcare services. Certainly fintech—there's a lot of innovation that has been happening within fintech, which also has been accelerated during this time. I sense that, at least what we're seeing, still, I think, to be seen, but I think there are gonna be a lot of great companies that come out of those areas, because when you think about the changes that are happening with this recession, largely because of COVID, there's a lot of assessment on what of these are going to be fundamental shifts in behavior as well as is anything going to go back to normal. 


Christine [00:24:47] I think now that we're, what, five months in, it feels like it's been five years. But, now that we're a few months in, it's really clear to me that there is no going back to normal. There's no going back to pre-COVID—that time doesn't exist—but going back to maybe similar volumes of business or something like that. I think that's maybe that's kind of where the focus is. But I do sense that there's going to be—because there already are going to be very big shifts in how people work and how people consume—a lot of the big industries or the big companies that will come out of that will fall into that accelerated future category. 


Kinsey [00:25:22] Yeah, absolutely. It makes me wonder if it's fair, though, to say, writ large, that a recession is a great time to be an entrepreneur, to start a business, [Christine laughs] when so much of what we've talked about in these examples hinges on either the absence or the availability of technology in that particular moment in time. Is it fair to make that blanket statement if all of this is sort of situational? 


Christine [00:25:45] There's a lot of opining on this because there is a lot of uncertainty, of course, in the market and there's uncertainty in general. It's hard to see that light at the end of the tunnel, so, of course, in times like these, there's going to be a lot of thoughts on is this a good time to start a company or not? Are people still writing checks? What is going to happen? It certainly makes for a more lively discussion, but it depends on how you answer it. 


Christine [00:26:11] So I think, before you could say look at the past, Uber, Airbnb, some companies in our portfolio like Credit Karma and Twilio, those were all founded during the last recession. They're great companies. Look at them. So, as a result, that shows that it's a great time to start a company. Now, of course, it's a very tough time to start a company as well. There's a lot of reasons. The odds are always against you when you're an entrepreneur. And to make matters worse, you're dealing with a recession, a global pandemic. 


Christine [00:26:43] Here in the Bay Area in California, most recently wildfires. It's like this year there's no shortage of challenges and things going on. So you could look at it from that perspective and say, it's a really tough time to start a company, both in terms of just the distractions and capital in the market. And it's just being, in general, like a really tough time. But, I think, like I've mentioned before, like starting companies, it's always going to be a good time and it's always going to be a bad time. 


Christine [00:27:10] Actually, largely, people will probably say it's always a bad time [laughter] to start a company because the risks are huge. But, of course, if you succeed, the upside is very significant. But, beyond the financial upside, just the impact that you can have, whether it's on jobs or changing people's lives and just changing maybe the way that people fundamentally consume or do business, is inspiring. It can be huge. 


Kinsey [00:27:37] Right. 


Christine [00:27:37] And we certainly have seen that with those companies that came out of the recession previously. And, of course, companies that weren't founded during those recessions, they were founded in the years following. So I think that's something. If there's a silver lining, kind of like what you were mentioning earlier, that definitely is a silver lining. And it does keep our jobs as venture investors exciting. 


Kinsey [00:27:58] Exciting, for sure. But do you think that we focus too much on the successes and we don't talk about the fact that for every Uber, there have got to be dozens of companies that didn't make it, that died shortly after being founded? 


Christine [00:28:11] Oh, definitely. The failure rate is very high, of course. We talk about those successes and seemingly overnight successes, but exactly like you said, for every Uber, every Twilio, every Airbnb, there's a whole host of companies that don't ever get anywhere near that point. We see this a lot at the early stages because we're funding companies, typically like early product, it's still the founding team. So the expectation is, at least from the VC perspective, that there are going to be a lot of companies that don't make it. They may fail early. They may fail later. 


Christine [00:28:51] And failure can mean a lot of different things in terms of maybe the company actually shut down or it's not necessarily going to be the kind of venture type of exit, like the Uber type of exit or what not. I do think that that's definitely a known. In terms of whether it's discussed or not, I guess it depends probably on which circles [laughs] or which audience, because certainly it's something that for founders—and we see this actually in a lot of different markets—that it actually maybe discourages them from starting a company. 


Christine [00:29:26] Because within a certain culture or geography, entrepreneurship and failing is not seen as a badge of honor the way it might be in Silicon Valley, where it's probably a bit more embraced or, you know, it's still hard to talk about, I'm sure. But it's not seen as like you can never get a job again or people won't fund you again. Now, that's changed a lot in the last 10 years, as we've been investing globally in that time. But it is still a factor, for sure. So I think the more that that can be normalized, as well as just the challenges of being an entrepreneur, hopefully that'll continue to change as well. 


Kinsey [00:30:01] Right. Such a compelling perspective that it is not always sexy, failed startup like it is in the United States, elsewhere in the world. It varies greatly from place to place. So I want to talk more about your experience, specifically investing in times like these times. We're gonna do that in just a second, but really quickly, first, a word from our sponsor. — 


Kinsey [00:30:25] And now back to the conversation with Christine Tsai. Christine, let's say, you know, we've talked a lot here at length about what it's like to be a founder, to be an entrepreneur or to start a business, to try to innovate and solve for some big pain point during a recession. Why it happens, when it happens. Let's talk about the investor perspective. What does a time like right now make you think when you're trying to find the right companies and people to invest in? 


Christine [00:30:49] I would say that for us, it actually has not really changed the underlying investment thesis or our overarching strategy for companies. What has changed, and is something that should be the case I think for any investor, is really understanding where the opportunities are in terms of specific sectors or where we're sourcing founders. And certainly for us, that has evolved over the years to kind of keep up with the market, of course. 


Christine [00:31:22] I think any investor will say, when they look at their earlier funds as well as earlier in time, like maybe five years ago, 10 years ago, of course there are going to be certain sectors that are maybe gaining steam, more emerging, and potentially more of an opportunity to start to invest into. There are some that have become quite established, that there might be different perspectives on markets that are overcrowded or maybe not even just personally interesting to the team, or we don't feel like we have the expertise. 


Christine [00:31:53] But I do think that, with this year, certainly the sectors that we've seen either seeing acceleration or deceleration, conveniently for us, I think, they were industries that we actually had been investing into, maybe in varying degrees, but we potentially might want to dial those up more or dial them down, depending on which ones they are. But I would say that for, and this may be the case for a number of VCs, that the underlying investment thesis probably doesn't change. You're going to want to find great teams, great founders. Your portfolio construction may remain pretty consistent, but it's really kind of the top layer of maybe what sectors or what kind of problems these founders are solving that may evolve with the times. 


Kinsey [00:32:38] So the thesis should stay constant throughout the entire economic cycle. But I have to wonder whether or not the actual operations change. So do they—when you think about boom, bust, recession, expansion—does your actual day-to-day, boots on the ground, you go to work and what you do? Does that change in those different parts of the economic cycle? 


Christine [00:33:00] I think it does. Of course it changes, because it changes for everybody. I mean, even just how we work and how we operate. You'll find a lot of chatter with investors about how their diligencing in deals when you can't meet in person. So that's a perfect example of how things have changed dramatically in this environment. Now for earlier-stage investors, and certainly for 500, it's not a huge shift in that we have done a lot of these meetings with founders virtually because we invest in different geographies, in different cities. 


Christine [00:33:31] So there had been—certainly investing in companies without having met them physically in person is not new for us. But I think as you go up the food chain in terms of investors that write larger checks, maybe later-stage, that's a bit more of an adjustment in terms of kind of wrapping their head around, say, writing a $10 million investment if you never met the team in person because you can't. So I think the way that we meet companies, way we invest, it certainly has been an adjustment for probably, you know, even from the earliest stage all the way to the super-late-stage investors. 


Christine [00:34:05] So I think that's definitely a change. In terms of the day-to-day operations, of course, we're all depending on how firms work with each other. That's certainly a change—not being able to travel as freely, especially as a global firm, seeing our colleagues. But we tell our companies to be nimble and agile. Investors have to follow suit as well in terms of being able to adapt. 


Kinsey [00:34:27] Yeah, for sure. What about the early stages of a recession versus the late stages of a recession? Do you still have money to spend right now because we are only a couple of months into a recession? And would that change if this recession lasted for a much longer time? 


Christine [00:34:42] It's a good question because at least for, you know, very specifically for venture capital, I think oftentimes, when you look at, say, the limited partners who tend to back funds, a lot of them have been through a number of recessions. It doesn't necessarily change their deployment or allocation. There might be some adjustments early on in the recession as they're trying to assess what's going on. So depending on the impact to their portfolios, they might have suddenly discovered this year that they, despite their overall portfolio allocation, they were suddenly appearing to have been overindexed in private markets versus public markets because the public markets were exploding. 


Christine [00:35:20] But our experience, and what I've seen, is that for a lot of the LPs, they are long-term thinking. They also see the opportunity in terms of investing into funds that are active during a recession or investing during these times. So in terms of capital available, of course that's going to have probably more of an impact on potentially newer managers, emerging managers who haven't raised multiple funds, and that's a challenge. But I think that in terms of the long term for venture investors, investing, continuing to raise funds either in the earlier part of a recession or kind of towards the mid- to end of a recession, I think that will obviously continue. 


Christine [00:36:04] I mean, with 500, we started the firm in 2010, so kind of on the heels of that 2008 recession. And then, as we funded companies, continued to raise funds throughout the years, and 10 years later, hopefully what we'll see with this environment is that there'll continue to be LP capital flowing into the new funds, and particularly early-stage funds. So I think that firms will continue to invest into great companies. And hopefully that doesn't change, of course, because as we've seen from other recessions, there's a lot of opportunity in these times. 


Kinsey [00:36:39] Yeah. So, Christine, we've touched on a lot here from the founder perspective to the investor perspective to the COVID-specific recession perspective. I want to ask a question that I asked earlier on, though. With all this in mind, is right now a good time to be an entrepreneur, in your view? 


Christine [00:36:56] I think it's a great time to be an entrepreneur. Of course, I'm saying this with a bit of bias as an investor, because I'd like to meet great companies, but I do think it's a great time. Just when you think about why you're starting a company, hopefully you're not starting it just because it's something to do or because other people are doing it. Some of the best founders we've backed are doing this because it's their life's work to really solve a particular mission or particular customer challenge. 


Christine [00:37:23] And they would do that, whether it's now or even potentially worse times or better times, like it's something that they would do, independent of what's going on the market. Now, I think one thing to consider is that for founders, everyone comes from different backgrounds and has different means to be able to take that leap. So I would say it's not something that's for the faint of heart, of course, and there's considerations for founders who may not necessarily have that cushion. 


Christine [00:37:51] This kind of goes back to the different types of founders that we can back. And, particularly with underrepresented founders, not everyone can just quit their job and start something from a garage, [laughs] kind of the typical founder. [Kinsey chuckles] But I would say all in all, though, I'm excited about companies that are being started during this time and again, biased, but I would say it is a good time to start a company. 


Kinsey [00:38:19] All right. Well, thank you so much, Christine. This has been an incredibly informative conversation. I really love that we were able to use past experiences and past recessions to take a little bit more of a future-minded look at what comes next for the startup world and learn that it is, in fact, a great time to be an entrepreneur. So thank you so much for coming on Business Casual. I really appreciate the time. 


Christine [00:38:40] Thank you so much, Kinsey. It was fun. 


Kinsey [00:38:50] Thank you so much for listening to this episode of Business Casual. I know it's people like you, who are listening to this show, who are the people building the future. I hope that listening to this week's episode and reading last weekend's column get you excited about everything you can accomplish. So, once you finish this episode, close your podcast app, maybe toss us a review. 


Kinsey [00:39:10] Then go do something with that idea that I know you have been sitting on. Don't talk about it. Be about it. And I'll see you next time. [sound of a ding]