Having lived through the fall-out of the last financial crisis, a key investment criteria for us at Blossom is investing in companies that we believe will be “recession proof.”

However, when Covid hit, we realised that this criteria didn’t necessarily extend to being “corona proof.” It’s easy to understand the impact of a recession, but seemingly impossible to navigate the sudden and unpredictable behaviour changes that could last, potentially indefinitely. 

Over the past six months, we’ve realised that companies who performed well during Covid did so because of sound fundamentals built prior. Those who struggled have (largely) done so because of systemic issues that were prevalent before. Covid simply laid them bare.

Reflecting on these learnings, we believe a better way of thinking about companies being “recession proof” would actually be “crisis proof” — an ability for a company to navigate any storm; socio, economic and beyond. We think that boils down to six investment criteria: 

1. Market tailwinds are critical

Covid doesn’t appear to be stopping any major industry shifts in their tracks. In fact, it’s accelerated trends, both positive and negative. Physical activity was moving online, digital transformation was underway, capital expenditure in heavy industry had been stagnant for years and oil had been substituted by carbon-based fuels for longer than demand fell during Covid.

It wasn’t fortuitous that some companies were perfectly positioned for these tailwinds of growth. Companies like Shopify, Square or Zoom knew the direction of travel long ago — that in-person meetings are oftentimes inconvenient and costly, that the mom-and-pop retailer could reach a greater audience online or cash would be unnecessary in a digital economy. Perhaps instead of thinking that these companies “got lucky” because of Covid, we should rather consider that it’s precisely because these companies exist that governments could ask us to work from home and socially distance. The response to Covid was fuelling the fire they had already created.

Conversely, those companies who have been abruptly exposed have tried to use Covid as a scapegoat. But you only have to look at public market valuations to see that investors aren’t fooled so easily. Companies who have understood the evolution of their industry, like T-Mobile or Home Depot (where profits soared 25% during the second quarter), have recovered any post-Covid losses by understanding exactly what their customers needed during lockdown — be that DIY tools or more data — and being able to supply it. 

So where does that leave hard-hit companies like travel technology company Amadeus or cinema operator AMC Entertainment? They may soon be forced to admit that Covid isn’t the reason why revenue isn’t returning one, two or even five years from now. Their industries were facing structural changes long before the crisis. 

Covid has highlighted the importance of understanding why a company needs to exist today, five years from now and in a decade.

It’s just as critical for a company starting out today to be able to articulate this clearly as it is for a mature company. And the answer can’t be “Covid”. Covid might highlight new problems or opportunities, but they must be understood in the broader industry context. That’s the only way to position the company for longer-term growth than these Covid tailwinds will offer. 

2. Products should be “must have” vs “nice to have”

Covid has shown that the frequency with which users interacted is more important than the socio-economic environment in which the company is operating.

While humans are adaptable to environments (just look how we quickly acclimatised to a new “normal” in lockdown), our genetic make-up means we’re still wired to behave a certain way. Lack of social opportunity does little to dampen our enthusiasm for socialising.

Products or services that we come to depend on, for utility or physical or mental wellbeing, don’t change in three, six, or 12 months. But dependency is key. Take Match.com — when lockdown hit, the company lost nearly half its value. Investors thought the app was only useful for in-person interactions but it turned out that wasn’t the case. Match.com became one of the places people went to for social interactions — they wanted to use it, even when there was no possibility of a physical date. 

Understanding that it’s extremely hard to break daily utility has enabled us to figure out what was passing trend versus not and helped us to build conviction on shifts we saw early that would be here to stay, regardless of the “normal” we return to.

3. Companies need customer love

Dependency has its benefits, but it has to be coupled with customer love if it’s to earn the rewards. Covid has prompted a long overdue review of spending, on the part of consumers and corporates. Discretionary spend has expired. Tools or software that have survived the fall of the knife have all been ones who the customer has fought for.

Building a strong relationship with customers is as important when it’s your first user as your millionth.

Some companies have used Covid as an opportunity to get closer to their users than ever before — offering support, helping problem solve and hearing product feedback — and will benefit from this long-term.

Truly winning customer love requires more than these short bursts of attention, however. It’s a mindset — customers are one’s partners and prioritising them and listening to them is a core value that has to endure.

4. Cash is king

We were surprised how many reactive posts went out in March telling companies to conserve cash and how many companies, large and small, were forced into a fundraise.

Cash preservation and management shouldn’t be practices reserved for times of crisis.

Having sustainable unit economics, an appropriately sized team to drive growth and burn that’s controllable is a winning formula in good times and bad.

Those companies that already practised these good habits won big time. They had cash on the balance sheet and could double down on growth — hiring, marketing, sales. At a time when competitors were pulling back or distracted by fires, this gave huge windows of opportunity for those who were prepared.

5. Team is everything

Covid has been a stark reminder that existential risks threaten a company constantly. Global pandemics, volcanic ash, war — a company cannot control all externalities. A good CEO does not worry about what could happen, but builds an organisation that can deal with, or even thrives on, uncertainty and unpredictability.

For an early-stage company, the single, most important job of the founder is to build a world-class team and culture. It’s also to understand that the company cannot slow down as it grows. Industry positioning is important, but so is building an agile organisation that can move quickly.

Organisations have to innovate to stay relevant and to stay alive.

During these months, CEOs around the globe have faced some of the toughest decisions concerning their workforce. Redundancies, furloughs, relocations — they’ve had to act and communicate quickly and thoughtfully. Decisions made now will have repercussions for years to come. It’s been a good reminder that building trust, loyalty and respect starts on day one.

6. Crisis proof is the new recession proof

We are confident that a founder and company can exhibit all these qualities early on in their journey. And so we’re changing our sixth investment criteria from “recession proof” to “crisis proof”. It’s a way of building and thinking that we believe will set the company up for success long-term, no matter what “normal” we return to or what disaster comes next.

Ophelia Brown is founding partner of VC firm Blossom Capital.

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