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The DL - An inside view into Pacific Northwest Tech

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Welcome to The DL, a weekly newsletter about tech, startups, and investing in the Pacific Northwest.
 
March 9 · Issue #38 · View online
The DL
Welcome to The DL, a weekly newsletter about tech, startups, and investing in the Pacific Northwest.

This week’s issue has an analysis of how coronavirus is affecting different sectors of the stock market, a local entrepreneur’s Kickstarter, a hot take on employee equity, and a goldmine of nerdy, fascinating questions.

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How are software investors weighing the impact of coronavirus?
Over the last few weeks, the S&P 500 dropped over 10%, with the largest one-day declines in nearly a decade. You’ve probably seen lots of articles about individual stocks that have been heavily impacted by coronavirus like Carnival Cruise Lines (-50% YTD) and Zoom (+65% YTD), but here are some category-level observations on what investors are buying and selling.

S&P 500 Performance by Sector
During the large drops on February 27 and 28, the various S&P 500 sectors moved together pretty closely, but last week, some sectors began to recover while others declined further:
  • The energy sector has been struggling since January, but as travel and economic activity slow, the demand for energy is dropping dramatically, and most of this demand will not be “made up” later
  • Meanwhile, consumer staples (Walmart, P&G, Coca-Cola, Costco) are only down 4.7%. Sales for these companies have been pulled forward (e.g., people hoarding toilet paper), but over time there should be a consistent, predictable level of demand for these types of products
SaaS Stock Performance by Category
Zooming in on the technology sector, SaaS companies were down an average of 11.7% from February 20 to March 6, matching the S&P 500’s return. However, there are several interesting takeaways when you take a closer look at the data:
  • Of course, the biggest “winners” in SaaS right now are the collaboration companies (Zoom, Slack, Atlassian, Smartsheet, Dropbox). Zoom, for example, added more users in the first eight weeks of this year than all of 2019
  • Payments companies (Square, Shopify, Paypal, Zuora) are down 16% because they are dependent on economic activity and transaction revenue, much of which comes from small businesses that will be more affected by coronavirus than larger companies
  • The other two categories that have underperformed the SaaS average are data/analytics and security, both segments that often require complex, in-person sales and implementation work, which will be heavily impacted by limiting travel and face-to-face meetings
SaaS Stock Performance by Cash Position
Finally, in times of uncertainty, companies need to ensure they can survive and adapt, which means having enough cash on hand to pay for operating expenses like payroll, rent, and infrastructure.
  • The chart above shows the performance of SaaS stocks by how much cash they have relative to their operating expenses (SG&A expense + R&D expense), assuming no cash flow from revenue or financing
  • Companies with less than 1 year of cash on hand are down 14%, while companies with 2+ years of cash are only down 8%, suggesting investors are putting a premium on strong cash positions

Most of the time, individuals are pretty dumb (see: r/WallStreetBets), so it’s fascinating to see how over time, markets respond relatively rationally to new information.
Looking at data from last week, we can already see that investors are favoring companies with certain attributes, and as we learn more about coronavirus over the next few weeks, we will continue moving away from short-term volatility to seeing how investors are weighing the long-term impact of coronavirus on specific categories and companies.

Kickstart a local entrepreneur!
Fun and evil gameplay!
Fun and evil gameplay!
Have you been waiting to get in on the ground floor for the hottest new card game of 2020? Well here’s your chance!
My friend just launched a Kickstarter for a new card game called The Imposter Kings last week. It’s really good - awesome gameplay, beautiful art, and a killer promo video - check it out!

🔥 take of the week
One thing I love (hate?) about tech Twitter is everyone LOVES the idea of being “contrarian,” but when someone actually brings up a contrarian idea, people FLIP OUT.
Last week, Jason Fried (CEO and founder of Basecamp), tweeted that giving startup employees equity benefits “owners” way more than employees, so startups shouldn’t give employees equity. Some people chimed in to agree, but way more people chimed in to disagree.
What do you think? Hit reply, and let me know!

Other stuff Dan's talking about
Questions - An insanely nerdy and fascinating list of questions from Patrick Collison (CEO of Stripe). My favorite one is the strangely smooth growth of US GDP - maybe coronavirus really doesn’t matter at all
🏥 Life Care - KUOW published a good investigation on the days leading up to the COVID-19 outbreak at Life Care. Also, in case you’re interested, here are a website and doc detailing every company’s response to COVID-19
📵 Bad guys - SPOILER ALERT (if you like mystery movies). Apparently, Apple lets productions companies use Apple products in movies and TV shows, but they don’t let villains use iPhones. So what about Thanos? 🤔
😴 My Pillow - What a crazy story. The guy who runs those My Pillow ads on the radio is actually a former crack-addict who went clean in 2009 and since then has grown My Pillow to $280M+ revenue and 1500 employees

Please hit reply! (Or subscribe or forward!)
About me: I work as an investor at Madrona Venture Group, a Seattle-based venture capital firm that has been early partners with companies like Amazon, Smartsheet, Apptio, and Redfin.

If you have thoughts, questions, or comments, hit reply!

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