For the last couple of weeks, I have been researching and thinking hard on what the implications of the COVID-19 pandemic could be. Here is my view on the situation.
Will the coronavirus continue spreading? It seems highly likely that the virus would continue spreading around the world. You can check out this video that clearly explain the exponential growth principle behind the virus. Countries with few cases might see significant increases soon. Countries with large number of infected people, might see the trend accelerates.
Why is this concerning? Based on published figures, the COVID-19 seems to have a mortality rate around 1%-3%, which is at least 10x higher than the flu. This is not evenly distributed as mortality is much higher for people older than 60 or with previous medical problems (respiratory, cardiac, diabetes, etc.). Children seem to be spared from severe cases or death.
A 1% to 3% death rate is a terrible human tragedy, but why the situation seems so dire? Because there is another 5%-10% of infected people that need hospitalization, and some require intensive care in order to survive. If you run the numbers, once you get to a relatively small number of infections, the volume of severe and critical cases starts collapsing the health systems, and then the mortality rate increases significantly. Serious cases that do not get proper treatment, increase their probability of ending in death. The collapse is caused by city/countries running out of intensive care and regular hospitals beds to attend patients and over stretching of doctors and nurses. Another consequence of the surge in patients is that some doctors/nurses get infected themselves, forcing them to quarantine and not being able to work. The remaining health personal has an even heavy workload then and cannot attend patients properly. You can read more about this dynamic in this great post.
What happens next? In order to stop the exponential growth, many governments will be forced to implement strong measures to reduce social contact. The level of these measures could go from total lockdown of the population in affected cities and regions – what China did – to partial lockdowns – like Italy and South Korea are doing. Other countries are banning or quarantining arriving travelers until they are proven healthy.
In many cities and countries, large public gatherings have been banned or strongly recommended against. Many places are starting to close schools for weeks. Universities are switching to online education instead of presential at campus. Many multinationals have prohibited all non-critical travel and many – like Google, Amazon, Facebook, JP Morgan – are asking most employees to work remotely, prioritizing the wellbeing of their workforces.
What are the consequences of these measures? Locking down regions undoubtedly will have an impact on consumer and business demand. As people cannot go out or are afraid of doing so, consumer consumption, especially discretionary spending – the non-essential products that people can delay buying – will suffer significantly. You can see this already happening in the travel sector, where demand has been reduced from 30% to 80% depending on the region and the type of travel. Would you travel on a cruise in the next months after seeing three cruises infected and being quarantined?
Equity markets are already taking a beating. A liquidity crunch could also happen, reducing access to credit for individuals and businesses.
What should I do personally?
- Take care of yourself and your families by following the recommended health measures. You can see WHO’s recommendations here.
- Reduce your social contacts, which helps everybody by slowing down the spread of the virus.
- If possible, prepare for an economic slowdown or a recession.
- And please stop saying that this is just a flu, if you were doing it.
What should I do as an entrepreneur? I strongly recommended to our startups the following measures:
- Team wellbeing: please make sure you have the right preparations for the wellbeing of your team members (and their families) as the virus reaches the cities where your operations are located. It is key to communicate extensively to your organization the recommended health measures.
- Business continuity: Earlier last week, I already shared some recommendations on how to prepare for the arrival of the epidemic and prepare for remote work and crisis management. Social distancing is key for slowing down the spread of the virus, so all of us should be doing it. I recommend that even if your team is located in areas with none or very low known infections yet (like most countries in Latin America), you start testing remote work to be prepared. The safe bet is to assume the pandemic is going to reach your city and you will be forced to work remotely. The team of Sirena – one of our portfolio companies – put together some guidelines on how to go fully remote here.
- Rethink sales and revenue expectations: plan that your clients – consumers initially in affected areas, and businesses later – might reduce their demand or delay acquisitions. Travel and meeting restrictions could also impact closing sales and deals. Recurring revenues and long-term contracts should fare better than one-time sales.
- Preserve cash: we think it is time that you develop plans for reducing your cash expense (cut excess expenses, reduce marketing plans, delay new hiring, etc.) in preparation for a potential fall of your expected revenues.
- Think creatively about funding: Based on the dotcom and subprime crisis of 2000/02 and 2008/09, we expect to see investment funds and other investors slow down or delay new investments until the volatility and uncertainty recedes. If you are fundraising or planning to do it soon, do not expect that historic fundraising trends and timings would continue as business as usual. Also, the compression in multiples for publicly listed companies would likely impact private transactions and fundraising. Explore non-traditional funding alternatives.
Is the future so negative? I do not think the world is in a doomsday scenario and there is upside in the current scenarios. For sure a vaccine will be developed. If that happens soon, the pandemic will be controlled, and demand and markets could recover quickly. Also, as social distancing measures are implemented, the spread will slow down. China and South Korea are showing that can be done effectively.
The impact to the economy is still uncertain but governments are starting to implement programs to help cushion the blow. Many of those would likely work.
Like in previous crisis, companies that act quickly to a challenging environment have the best chances of surviving and come through stronger than before.