Podcast
Podcast
- 14 May 2020
- Managing the Future of Work
Covid-19 Dispatch: Barry Schuler
Joe Fuller: Welcome to the Managing the Future of Work podcast from Harvard Business School. I’m Harvard Business School professor and visiting fellow at the American Enterprise Institute, Joe Fuller. This episode is one of the series of special dispatches on the sweeping effects of Covid-19 on our economy, society, and the future of work. In addition to our regular podcast episodes, we will be bringing you shorter and more frequent interviews with business leaders, policy makers, and leading scholars on the coronavirus. Venture capital’s Barry Schuler is a partner at tech investment firm, DFJ Growth, which counts Tumblr and Twitter among its investments. The former chairman of America Online, Barry focuses on emerging technology startups in areas like visual computing, big data, genomics, and robotics. He’s also chairman of New Tech Network, a K–12 education nonprofit which promotes project-based instruction. Barry joins me to discuss the Covid pandemic’s impact on startups, emerging companies, and the media and technology sector. Welcome to the Future of Work podcast, Barry.
Barry Schuler: Thank you for the invitation. Happy to be here.
Fuller: Barry, there’s a lot of speculation that the Covid crisis is going to lead to a widespread culling of startups and emerging companies, that there’s going to be pressure on their financing, pressure on their revenue. What’s your view?
Schuler: Well, my view is that we are dealing with a fairly complex situation right now, because part of it looks and feels like a normal crash—downcycles, which we see every 10 years or so—but it is complicated by the health, the public health, aspect of this as well. And on one hand, we do see the beginning of what happens when there’s a reset in investment and pricing and the money in the market. And that looks pretty normal for the beginning of a downturn. But it is complicated by how do you operate in this work-from-home environment? And it’s adding a new and interesting twist to the whole situation.
Fuller: In previous downturns, we’ve often seen what’s sometimes described as a “flight to quality”—that workers who’ve got in-demand skills feel they may have dodged a bullet, and they’d be safer in a big company. And, of course, there’s been a trend where companies have been trying to escape the grasp and the geographic reach of these tech behemoths, like Facebook and Google and Apple. Do you have any fears about that type of flight-to-quality phenomenon, or are you observing anything like that to date?
Schuler: Well, it’s interesting, because generally, yes, when there’s a downturn and money becomes more scarce … and look, we are coming off of an amazing decade of incredible growth, certainly for the venture category, which is a very niche investment category, a lot of money coming into the space, competing for deals. It used to be a rare and hard thing to get financed. It was more rare in the last 10 years for you to not be able to get financed. And so what we believe you’ll see, and we’re starting to see, is the amount of capital shrinks. Generally, the newer money into the market goes away. The people who have investors who have survived these and understand how to operate along with the entrepreneurs—the more experienced ones who had good plans for downturns—you know, if all of those equal, yes, those are the quality players, there absolutely will be a flight to quality. It’s already starting. But again, there are other nuances to this particular situation than others we have faced in the past.
Fuller: Barry, you’ve been around both technology, media, and investments for a long time. This shock is really different, quite different, from anything else we’ve experienced—a classic recession or a sectoral downturn. How do you coach a company through a downturn like this? When you’re talking to portfolio companies, what are you trying to accomplish? What are the themes you want to make sure you relate to them? And what are the toughest issues that they’re facing?
Schuler: It is all about cash runway. And the first thing, for example, we did with our portfolio—and our other peers around Sand Hill Road, other VCs around the country who’ve been through this know you start early. We started in February basically getting our portfolio what we would call “recession ready,” identify the ones that looked like they needed to raise capital this year, and figure out if they were going to have difficulty raising money, knowing that it will be a much tougher environment. We all look at our reserves. We keep reserves to do inside rounds. We want to make sure every one of us that’s inside of a company that we have enough reserve capital and maybe move some around to support those good companies that may be stuck running out of cash during this period of time. But we’re also going to work with them to … generally what you would do is you would work with the entrepreneur leader of the company to understand they have to cut their expenses—they have to resize their business—to be able to weather this storm. For young entrepreneurs—never been through this before, or never seen it—to do that before they see the actual disaster in front of their face takes a lot of coaching. And some get it, some are resistant. But in the end, those who have—and we like to say 18 to 24 months of cash reserves and have sized their company appropriately—they will be able to ride it out and maybe take advantage of other opportunities, like consolidation as weaker players, market consolidation, as weaker players fall out. The difference in this one is, unlike dot-com crash, where the epicenter was the tech industry, or you go to the financial crisis in ’08 and ’09, where the epicenter was the financial sector, this is everybody. This is the whole world. Instead of being quick to the trigger to eliminate heads and just kind of dump them off to unemployment, we’ve taken great care with our companies to try and ensure that we’re preserving as many jobs as possible during this, because the burden on the federal government, I mean, the dominoes that could fall if this gets out of hand, are severe. So, again, in this case, of course, if you try and keep people on board but the company goes under, that hasn’t solved anything, either. It is a fine line of trying to manage those variables.
Fuller: What about on the personal side? I mean, I think some of the messages you were just conveying—about the need to marshal cash, cut expenses, understand that this is going to be a bit of a siege—those are pretty tough messages to deliver, and even tougher to hear for an entrepreneur who’s passionate about what they’re doing, and probably six months ago had had a very optimistic view of the future. When you’re dealing with these entrepreneurs, these founders, as human beings, what are you trying to convey to them? How are you trying to keep them motivated and from suffering for some of the type of depression that I think I have been occasionally, and some of our listeners probably have.
Schuler: I think it’s a really important topic that you bring up. And the relationship between a venture investor and the person they choose to back as leader of the company and their team, it’s interesting one, because we are a minority investors. We’re not like private equity players, who take control of the company. And so our relationship is always advise and consent. And a good investor is going to attempt to develop a relationship, both as a director of the company, but as a coach and a mentor. And I had exactly this conversation with an entrepreneur I’m very close to, a first timer, has done very well. He’s taking this hard. And separate from all the discussions about cutting, I called him up one night, “How are you doing? I know what this is like. I’ve been through this at your age.” And what I try to do to make it relatable is bring up how I felt when I had to lay off my first 100 people and thought it was going to be the end of the world. Go through the mistakes I made, because like every entrepreneur, I didn’t really see it. I didn’t move quickly enough, and I ended up creating a situation that put the company at peril. But all you can do is do it in a coach-like fashion and hope that it resonates. And if it’s authentic, it generally does.
Fuller: What would you tell yourself of that age when you had to live it—and any of us who has ever had to preside over layoffs knows it’s one of the profoundly miserable experiences in one’s life—but what would you tell yourself of 20 years ago to do and think?
Schuler: What I would tell myself is not be so arrogant, and listen to the old people who are trying to tell me what to do. I think part of the nature of entrepreneurship is, a good entrepreneur suspends disbelief and doesn’t want to hear negative things, but puts their head down. And when you tell them, “Look, if you don’t do this, bad things are going to happen,” the way that the young, optimistic entrepreneur hears that is, “Yeah, that happens to all the other dumb guys. I’m not one of them. My idea is brilliant, and I’m much smarter, and that doesn’t really apply to me.” Until it does. Until you realize your amazing optimism and brilliance does not except you from the laws of business physics. And that’s where experience comes in. But in entrepreneurship, institutional knowledge that gets passed on from generation to generation doesn’t necessarily stick as well as in, say, science or whatever, because of that hopeless optimism you need to have to survive as an entrepreneur.
Fuller: As someone who’s now definitely in the “old guy” category, I particularly like your notion that entrepreneurs, young and ambitious as they are, have listened to the voice of experience, although this is such a strange and unprecedented downturn that I think sometimes experience might actually lead people in some of the wrong directions. How are you talking to your portfolio companies about being poised to recover? Or is that even on the table yet?
Schuler: Oh yeah, it is a big topic. And to your point about this being different and that that can lead you to some incorrect conclusions, I agree with that. We need to be really careful, because in this case, there is no historical data you can look at that has any relevance. So, therefore, the only way you can manage through this is by sensitivity analysis. You have to take any credible scenario that you might see happening, model it, and just be ready. Just have your mind prepared for the various ways this might play out. And as you see, as you’re looking for a signal, and as it is playing out, it’s better to have the plans ready—or ones that are close and adjustable—than start from scratch, because you have to be nimble. Now back to your point: There’s a couple of things, ways we’re counseling our companies about coming back. The first one is to understand there’s no green flag that’s going to be waved, and we all get to come out of hibernation, and we go back to the way it was mid-December 2019. We will be living with this virus for quite some time. You can argue whether it’s a year, 18 months, two years, it doesn’t matter. It’s quite some time. At the same time, we do need to get back to work. We do need to get the economy functioning at some level, because the government does not have unlimited capacity to backstop the economy at this level. So what that means is, we’re going into a period where it’s all about risk mitigation. And what we’re counseling our portfolio companies to think about is, they have to look at their office space. It’s going to need to be reconfigured. Various states are working on their guidelines for, let’s call it “social distancing on location.” How do you reopen an office? How much space do you need to have per butt in seat? How do you open a restaurant? How do you open a retail? What do you do to create a safe environment? And understand that your current floor space plans probably support only 40 to 50 percent, maybe less, because many tech offices have gone to that highly dense Chinese-style office configuration, where there are long benches and people are sitting shoulder to shoulder. That’s gone. That’s going away. People are going to need a lot of room. How traffic moves. And so what that also means is work from home is going to be a part of the picture, probably both in the office and in education, for some time. And so we’re asking our CEOs to start thinking about what does that mean? And how will you reconfigure the office once they start expanding what essential personnel are? And all of that thought process is going on right now, because some of that work may take four, eight weeks to do, and you don’t want to wait. You want to do this in parallel. You want to have the thought exercise done so that when the time comes that you can start firing up people on location again, you’re ready to go.
Fuller: You’ve been around media and technology for pretty much your entire career. Do you have specific thoughts about how all of this is going to affect those sectors?
Schuler: Yes. And, look, I have to point out, having been running around in the ’90s trying to get the internet fired up, if you look at the work of the tech sector, despite all the recent criticism of big tech and—a topic for another day—but if you look at everything the tech sector has done in the last 25 years, I shutter to think what would happen if this pandemic had happened in 1990. We would be in a world of hurt. But the things that are supporting work from home—the ability to stay connected, things we take for granted, what it took—all the fiber—to build out the internet, then the data centers, then the cloud SaaS applications, then the ability to stream video in real time—all of the things that are allowing this current environment to function and companies to be able to work well and pretty seamlessly going to a work-from-home environment is really due to all of that work the tech sector has done for the last couple of decades. And the companies that are thriving today are the ones that have really been in the forefront of making their businesses fully digital, by embracing cloud SaaS architecture so people can go from anywhere. And, fundamentally, what’s playing out right now are a bunch of trends that were already in the works. This trend of working from home and more distributed offices was already getting started in the past few years, really due to the need to branch out from the major tech centers for personnel. We’ve had 100 percent employment in the Bay Area, a very difficult job market, so companies are opening offices in other locations and becoming more distributed. The idea of distance learning and online learning has been around for a long time. And there have been some stabs at it in the last 10 years by a variety of companies. And—yeah—kind of there, but nascent, not getting a lot of traction. All of a sudden, the companies that can support distance learning, telemedicine, art or Zoom, they’re all having a moment because where they may have been a nice-to-have five years ago, now they’re a have-to-have. 3D printing, another space. If you look at what’s going on in, all of a sudden, these hospitals with huge shortages—first the swabs for the NP [nasopharyngeal] tests, for various parts that are disposables—they are now coming to understand, wow, we can print those right in our hospital on a daily basis. That distributed manufacturing theme has been around for over a decade now, and now all of a sudden you’re seeing right place, right time. Of course, we’re seeing streaming and gaming, and they’re all doing well in this environment. And so tech … if you look at the history of tech, and you overlay it on top of the cycles of the economy, the economy is always cycling around tech, but the pace of innovation never, ever slows down. You go to the ’08–’09 downturn, Obama chose to focus on clean tech and stimulate clean tech. And what did we get out of that? We got grid parity with solar, we got people understanding that renewable sources of energy can happen, and we got Tesla, along with some other great companies. And I think we’ll see that happen now as well.
Fuller: Barry, let’s cast your eyes a little beyond the tech-media space. Where are you thinking interesting investment opportunities are going to emerge as a consequence of this trend beyond media and technology?
Schuler: Venture investing is a long-term investment, and so we are always thinking, not about where’s all the action today, but what are the themes that are going to matter five and 10 years from now and invest into those spaces. And we always look at the notion of downcycles and upcycles as a reality of every business. And for us as investors at DFJ Growth, we tend to avoid categories that have strong cyclic impact. Others, you know, that is an investable theme for them. But for us, we like the big stuff. We like electric cars and rocket ships. We’re in all of Elan’s [Musk] companies. We like the big ideas. And there’s an awful lot going on, and some of it’s being displayed right now. We do think that this Fourth Industrial Revolution and automation of factories will continue to be an important theme. We do think the cloud SaaS revolution paired with AI—there’s an awful lot of work going on in AI and its ability, for example, to … you know, just good machine learning will be able to identify patterns out of all the data emerging in a crisis like this to help decision support—not to replace humans, but to give them patterns that come out of that big data in a way that is more actionable. And we think that’s going to be a pervasive area that impacts every company, institution, to function well. You look at the genomics revolution, what’s going on in medicine, taking that genomic data, the ability now to rapidly sequence cancer tumors and have targeted therapies, sequence viruses that come along. And we think, ultimately, you’ll see distributed manufacturing applied to things like vaccines. Part of the reason it takes a vaccine so long to come out is it is a very lengthy manufacturing process, old, incubating in eggs, chicken eggs, to get millions of doses out there. Within the next decade, you should be able to print those proteins in the same way that we print plastic—synthesize them in small devices that also could be in hospitals and pharmacies. And, therefore, the supply chain part that slows things down and is very vulnerable because it’s so centralized is much more protected by decentralization. Those are just a few. There’s many, many. We could spend the next half hour going through the themes. But it is a very exciting time, despite the horror and difficulty and pain that we’re going through. So when we do put on our futures hat as investors, venture investors, these are the best times for us, because there’s less competition, companies’ pricings are more rational. And for those of us who are in venture investing for the long term, this is a pretty good time to operate.
Fuller: Well, Barry, I suppose there’s a silver lining to every crisis, and you’ve certainly made that future sound appealing, just so long as we live through the present to experience it.
Schuler: That is for sure. And I do think that, in these times, we are a very creative, innovative society. If there’s one thing about us, we may not like manufacturing, we may not like farm work, but we are awfully great at innovation and have been the world’s leader in innovation. And you can see it lighting up everywhere. It’s a little bit harder right now, because there’s not a coordinated federal response, but if you start surveying institutions, private companies—even the ones that are shut down and have resources, you know, like labs, et cetera—are all rallying to get through this. And it’s going to be a long haul. There’s going to be tough choices to be made. But there is no question in my mind, I am optimistic we will rise to the occasion and get this behind us and be a better and stronger society for it.
Fuller: Well, Barry, thanks for joining us on this Covid dispatch from the Managing the Future of Work podcast from Harvard Business School.
Schuler: Thank you very much for having me.
Fuller: Thank you for listening to this special episode of the Managing the Future of Work podcast. To find out more about our project on the future of work and for more information on the coronavirus’s impact, visit our website at hbs.edu/managing-the-future-of-work and sign up for our newsletter.