Early on during the pandemic, I heard a common refrain: This time, unlike in 2008, Main Street was getting stung first and foremost—meaning consumers would initially face the brunt of the downturn.
It seems as if the fallout was less than what many had feared. Certainly the unemployment rate has risen dramatically: The figure stood around 11.1% as of June. But while some consumer-facing startups have suffered from the pandemic, consumer spending has actually shown increases. However, uncertainty looms over the rest of the year.
To dig into this, Term Sheet spoke with Rick Yang, general partner at New Enterprise Associates and head of the firm’s consumer investing practice.
Yang has made notable bets: He currently sits on the board of fintech company Plaid, which Visa announced plans to acquire for $5.3 billion, as well as MasterClass, which sells classes taught by successful and famous people. Other names include Robinhood, Lyric, and Opendoor. Most recently, Yang helped form Connect Ventures, a joint venture between NEA and Hollywood talent agency Creative Artists Agency.
We hopped on the phone to chat about what he is seeing in the consumer space and why, even though deal activity appears to be bouncing back, he’s still operating conservatively.
Here’s our conversation, lightly edited for clarity.
Give me an overview of what happened to your portfolio as the coronavirus ramped up.
A lot of venture firms did the same thing as us in the April and March time frame, which was locking down and figuring out how we scenario plan for something that is very unknowable. There are a handful of companies that were very hard hit by the pandemic and what has happened with consumers. Our companies that were more indexed towards more physical locations or were in the travel or hospitality space were deeply affected. I would say the vast majority of our portfolio, though, has a certain acceleration in their business and there was certainly a lot more consumer engagement and awareness that led to better revenue in some cases.
So for MasterClass, even as revenue is rising, it’s not business as usual for the company. What has that been like?
We closed a strong round with a nice balance sheet (Editor’s note: The company raised $100 million in Series E funding announced in May). But it doesn’t mean they’re going to go out and spend all that money right now. The company is growing really well through a pandemic. On the flipside, production for any sort of content right now is pretty tight in the U.S., [and it’s hard to] find places to shoot classes. So we have to balance out the scenario: If we were looking to produce x number of classes this year, that might actually be 50% of that now. And what does that mean for our business? It’s really hard to predict what that means over the next six months. So you have to always be ready to jump on the opportunity to shoot a class or bring out a new instructor.
Overall, I think people are going to be more conservative on how they spend on things. So typically our venture-backed businesses spend ahead of where they think they are going to be, given their growth curve, and in some cases you are not able to do that. So it’s about how we build flexibility into our businesses and how we build flexibility into our spending models to make sure we can adjust to things. If things recover faster than we’d thought, we’d love to allocate those resources quicker. If things don’t, we want to make sure we’re not overburdened with costs.
There seems to be a disconnect between the unemployment rate and what we’re hearing among consumer tech startups. What is happening?
I do think there is a disconnect there, and we do think there is a little bit of a lag there in terms of the real economic impact. From an economic standpoint, we haven’t really seen what the real effects are given the federal and local and governmental stimulus. We don’t know what it will be, but we are taking a pretty cautious view of it, and so we want to make sure our companies are thinking about it and we are planning pretty conservatively.
What are some of the consumer-facing investor trends you’ve been thinking about more with the coronavirus?
One of the trends we are seeing accelerating is the rise of the side hustle. Previously, the side hustle was a complement in some cases. Now it is becoming a main source of income. So now we think about what are those things that pop up that can sustain someone’s livelihood when they may have lost a job as part of the pandemic.
Traditionally, you think of companies like Uber. But they’ve taken a big hit from a ridesharing perspective with COVID-19. So then we think of delivery and last-mile services such as Instacart, Uber Eats, and DoorDash.
We’re also finding ways to invest in the rise of the creator class. There’s always been a huge tailwind, especially among younger demographics who want to be creators, and that is almost a viable career path now. And I think what we see is that there is a huge rise in the creative class where you can reasonably be a creator without being super famous, but you can monetize through different platforms like Patreon, Substack, Instagram or TikTok. So I think that is something that is really interesting and ties into this idea of, maybe instead of taking a summer to work a retail job, maybe spending a summer and trying to sell some short stories or get some patrons on Patreon. It’s the modern lemonade stand.
We’re looking at that whole stack to find ways of investing, from social platforms to creator tools, and I’ve been spending a lot of time in fintech to understand the benefits and payments flows. Those are some of the things that we think about.
Connect Ventures’ first investment was in Spire Animation Studios. What was the thinking behind investing in a company like that at a time when there is huge disruption in Hollywood productions?
The Spire investment is coming together at a time when there are a ton of new companies spending on content. And historically, animated content, which is very popular, has also been very tedious and costly to produce. But there’s been an evolution in the tech infrastructure for creating that content: To do it in a more efficient and high-velocity way, you can borrow from existing pipelines for animation studios, with what is happening in the visual effects world and gaming and game engines—and if you combine all that together, you can build something quite interesting when it comes to building full-featured animation films with the same story and emotion but that pulls from existing successful folks.
Then combine that with a third accelerating trend specific to this pandemic: There are a lot of kids and families that want to consume content.
We made the investment in Spire before COVID-19 hit, but all of these trends were already happening. And the team really liked that NEA was thinking about how we make things more efficient and how we scale software and tech. The team also really liked CAA’s work in the entertainment space and with distributing content.
The investing process is already changing as a result of the coronavirus. How has due diligence changed, especially after something like WeWork?
There have been a number of high profile cases, with WeWork and Theranos being among these. There are certainly a lot of cautionary tales—especially now when you’ve potentially never met in person and you don’t get to visit an office and see what the vibe is like. There’s certainly more scrutiny placed on due diligence.[In terms of due diligence in the coronavirus]: It’s a lot of Zooms. We always do reference checks, but now it’s even more reference checks and finding as many backchannels as you can on people, and trying not to get bullied into timelines for funding rounds because it is still a competitive market out there.
It’s not just because of WeWork or Theranos. The world is a little bit of a different place with cancel culture and with so much being online—you want to do as much homework as you can.
Anne Sraders curated today’s Term Sheet.
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