The following article stems from conversations with Chris Yang at UCLA EMBA’s investor panel in April of 2020.
Chris Yang is an experienced tech executive and an active angel investor. He is currently a member of the event and outreach committee at Tech Coast Angels (TCA), an early-stage funding resource based in Southern California. In 2019, TCA invested in 52 deals totaling $17 million. Through TCA’s fund, Chris recently invested in Grolens, a commercial cultivation software company, and Fitplan, a personal trainer app company. He is also in the process of finalizing a series-C deal with Razberi, a cybersecurity company, and closing a bridge round with Nevados, a renewable energy company. In addition, Chris works as a part-time faculty member at UCLA Extension and is a member of Forbes’ technology council, through which he contributes articles on technology development and entrepreneurship.
Question 1: How has your outlook on investment opportunities and strategies changed during the pandemic, especially after observing that major opportunities exist around remote working infrastructures, and medical supplies and equipment?
Chris: As we enter uncharted territory, I am paying closer attention to business model innovation and groundbreaking, disruptive technologies related to medical equipment and remote working infrastructures. Consumers’ patterns and behaviors are changing, so these disruptors stand to thrive in this uncertain environment.
To illustrate this point, angel and seed deal-making proved their resilience during the 2007–2009 recession. In fact, some of today’s most successful companies formed during periods of economic recession. During the 2008 financial crisis in particular, specific companies that are now household names, such as WhatsApp, Slack, GitHub, Airbnb, Stripe, Uber, and Pinterest, benefitted from the subsequent economic expansion.
Question 2: Given our current environment with shortages in medical supplies and equipment in a global pandemic, what advice or resources do you have for startups that are pursuing opportunities in medical equipment, specifically around ventilators, considering modifications to the current FDA approval process to be more streamlined?
Chris: Corporate social responsibility is already a staple in many organizations from small businesses to large corporations. Although early-stage companies may struggle to ration personnel or finances for these purposes, most large enterprises are willing and able to assist the wider community.
Major companies could make a considerable short-term difference by leveraging their existing infrastructures to provide medical supplies and equipment, including ventilators and masks. At this time, it would be difficult for new entrants to enter these spaces, at least in the short term, because larger players fill these needs.
Question 3: Given the probable fact that we are in a recession, heading straight into one, or even perhaps a depression, what would be an alternative asset class would be desirable for an investment?
Chris: The VC and PE landscape differs slightly from that of angel investors. VCs, are likely to see a decline in venture transactions over the next year as new deals face increased scrutiny. Valuations will face similar circumstances because VCs will want to conserve capital for the most promising portfolio companies during this time. A public health crisis triggered the current recession. If a vaccine becomes available within the next 12–18 months, fiscal and monetary policies should continue to be adjusted and implemented to support the economy throughout this period. As an angel investor, I would continue to invest in undervalued equity, but I would avoid certain companies for which consumer confidence will not return completely even if a vaccine is developed.
For PE firms, the fundraising market is in decline because limited partners are worried about the economy. General partners will first look to secure current investments instead of sourcing new deals. We are also likely to see a slowdown in exit activities as valuation deteriorates. This dearth of exits will affect middle-aged funds in particular, as well as those at the end of their contractual lives.
Over time, as the economy slowly recovers, we could see PE firms capitalize on falling stock prices and divert some of their investments to the public market.
Question 4: Would you presume that investing in stable cash flow positive generating businesses will still be attractive?
Chris: In any recession, stable, positive cash flows are vital for startups hoping to secure financing. As business activities cease, those businesses will struggle. Companies must therefore manage cash flows as best they can to avoid a costly down-round equity financing.
During the downturn, VCs will be much more selective about where to invest and which portfolio companies to support.
Question 5: Do you have experience investing in hardware consumer products? If so, how has that differed from investing in other types of companies such as software businesses?
Chris: Recently, I was involved in a series-C investment for a video surveillance cybersecurity company. That relationship showed me firsthand how hardware and software can combine to offer a unique value proposition that generates recurring revenue and creates higher barriers to entry to deter competitors.
Fitbit, for instance, offers a hardware-enabled service—a consumer electronic device that provides access to a premium guided health program subscription. Another good example is hardware as service, notably Square’s card reader, which is mobile credit card payment processing system. These models feature a tightly knit hardware, software, and service ecosystem that locks customers in and satisfies several needs at once. When looking at hardware companies, I consider how they can adapt to the increasing reliance on software and cloud technologies.
Question 6: It is common for investors to resist investing in hardware companies that would use that money on R&D, yet software companies often use investor money for developing their software. What would make an early stage hardware company an attractive investment target for you?
Chris: Traditionally, hardware companies are capital intensive. This, of course, makes hardware investment riskier than software investment. However, hardware companies may also need more help to meet those up-front cost thresholds. This presents an opportunity for investors to acquire quality deals in this space.
A hardware company seeking investments must prove its attractiveness by demonstrating high capital efficiency and a strong exit strategy.
Question 7: How are companies currently innovating to address reliance on Chinese contract manufacturing in the wake of the pandemic? Are they shifting production to other regions? Are supply chains being moved back to the US? What solutions are companies currently employing or considering?
Chris: Some studies show that the COVID-19 has affected the supply chain for approximately 75 percent of U.S. companies. China is a major market in the global supply chain, and because China was hit hard as the virus gained traction, this affected countries around the world. Although I expect China to maintain its influence in the supply chain, I also expect companies to diversify their sourcing to mitigate future risk. One such solution is to leverage sensors and IoT devices to monitor raw materials and goods in real-time and streamline problematic movements during emergencies. By moving toward a digital supply network, business executives and supply chain managers can navigate opportunities and threats in their lines of work. However, this change will not occur overnight; it is likely to be a slow but sure shift.
Question 8: How are you helping your current portfolio companies during the current liquidity crunch?
Chris: I anticipate that the deterioration of company valuation will affect debt financing. COVID-19 has significantly affected everything from education to economics. Many responses, particularly policy-related ones, are more like patchwork quilts than polished products. TCA has formally requested clarification of some of the language in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, as it is difficult to surmise which loans and grants our portfolio companies may be eligible for. Even where things are moving, we find bottlenecks. For this reason, TCA is also organizing a panel with experts from the banking and legal fields to cover the specifics of the newly passed CARES Act.
Government-backed SBA lending seems relevant to helping early-stage companies survive as revenue declines. Therefore, while investors may generally avoid certain industries or companies for a while, SBA lending might help keep many small businesses solvent.
Question 9: How bad is it going to get for retail? Will most companies rebound quickly, or will there be structural and behavioral changes following the pandemic? What do you think those changes will be?
Chris: Many retailers have had to close, either by choice or by law, but the extent of COVID-19’s impact on these stores depends on how soon we can control the virus. As states enact shelter-in-place orders, more people are forced to shop online, and with e-commerce proving viable, these new shopping habits will likely stick. Following the pandemic, I expect an accelerated shift toward e-commerce, particularly in the world of essential products. Large retailers will likely embrace the change and invest in technologies such as virtual and augmented reality to enhance experiential online shopping.