What Should Startups And VCs Build? How To Make Money In Post-COVID-19 Times

It certainly feels strange to read articles on how to make money during these COVID-19 times, especially now – when the world is in a state of turmoil. Quite contrary to capitalist principles, the pandemic seems to have brought humans together in empathy. Unity after tragedy is taking effect, helping us focus more on one another rather than on our personal selves. In this case, we can credit ourselves for choosing life over money.

This is a hard time for all of us. We must re-evaluate our businesses, investments, the status quo, and even our core values while preparing to crawl out of shelter-in-place directives to a new reality. What should we focus our energy on during this major transition period? As Marc Andreessen recently noted, “It’s time to build.” However, his statement sparks a set of questions, such as, “What should we be building?” 

Below, I share my thoughts on what is relevant for startups and VCs in the tech, real estate, and blockchain industries:

As a former real estate developer, I created real-world, tangible assets. I could see happy people living in my buildings, a clear indication that my efforts were worth the result.

In my current role as a software developer, things are more complicated. I must evaluate the fundamentals and the importance of my creations. This is not relevant to just me. The entire tech community must evaluate its contributions. Are the projects we are building becoming part of the core infrastructure of the future, or are they simply window dressings (or “icing on the cake”)? In the past, fundamental technologies such as e-signatures and e-notaries have not been recognized as essential “pills” but rather as know-how that is akin to “vitamins,” at least in the real estate industry. 

Everyone understood the inevitable uniqueness of the emerging innovative tech branches, but nobody wanted to wait for governments and industries to make the shift toward this direction. Today, years later, we see DocuSign (founded by Tom Gonser) and Notarize (a five-year-old company founded by Pat Kinsel) among the top-performing stocks. These firms are finally getting the attention that they deserve.

The pandemic forces old-fashioned industries such as real estate to adopt new technologies. It also forces overhyped emerging tech such as blockchain and AI to be re-evaluated and shifted toward incentivizing startups to “buidl” useful apps that are relevant for the future.

Changes Imposed By COVID-19 On The Real Estate Industry

The real estate market and proptech companies are in an ambivalent situation: the market is alive but uncertain, and the demand for more digital transactions is surging. Some business models, such as iBuyer platforms, are not viable for operating during crises (you can learn more in my Forbes article); iBuyer companies, such as Opendoor (founded by entrepreneurs including Eric Wu and Keith Rabois), are now just beginning to resume their operations. Business models that do survive the hostile pandemic environment will ultimately find themselves in much better shape than ever.

Fortunately, the U.S. real estate industry reached a level of digitalization that allowed the market to prevent itself from coming to a complete halt during the pandemic. 

When it comes to furthering digitalization, there are enormous opportunities for entrepreneurs, existing tech-driven companies, and investors. My company, as a part of the real estate digital ecosystem, felt the demand for property deal transactions to take place firsthand and exclusively online, similar to Notarize.com (which is leading in its niche by offering notary public services 24/7 in an entirely digital way). Other industry participants are offering virtual tours, improvements of self-made pictures and virtual staging such as BoxBrownie.com, and other digital services. However, complete digitalization of the real estate space is only the first step. To fully meet the needs of consumers, modern-day companies will also need to face and tackle other challenges.

One such challenge is affordability. It is crucially important that tech products are affordable for consumers, taking into account current financial and economic uncertainties. This rule is especially true when it comes to recurrent payments, such as commitments to SaaS subscriptions.

Last but not least, a much greater challenge is bringing up the overall health of the real estate market. It is obvious that if a housing crisis develops and sales stop, software products will not be in demand until the market bounces back. There are currently signs of a housing crisis in some areas, such as NYC’s Manhattan and SoCal. Other areas, including China, are showing rapid recoveries in the post-COVID-19 market space.

We have yet to see COVID-19’s full impact on the real estate industry. In one of his recent tweets, Redfin CEO Glenn Kelman predicts stability:

“Prices aren’t dropping now. Supply is down 25% YoY. Buying demand is nearing pre-pandemic levels. Urban condos & vacation homes are hard to sell. Other homes aren’t. Mortgage forbearance, & the drop in working-class home-ownership, have precluded the immediate foreclosures of ‘08.”

A Shift Toward Useful Apps In The Blockchain Space

I also expect to see further changes in the emerging technologies fields, such as blockchain technology. Last year, the burden of federal regulations imposed on Facebook prevented the company from launching its new digital currency alongside the network supporting it. Recently, Telegram became contractually obligated to pay its investors back 72% of their investments for missing the Telegram network launch.

The reality is that we do not need more protocols and more networks; we need products. Facebook can build a digital wallet, experimenting first with existing stablecoins and/or bitcoin. Such exposure to the masses would help to bring real innovation to the world. The same applies to Telegram (although, I believe that Pavel Durov, the founder of Telegram, will further deliver great products).

The ugly truth is that inventors and VCs in the blockchain space are hunting for overhyped newborns that can potentially make 10x ROIs within several years. This leaves me with the impression that nobody cares about the real uses of the underlying technologies. Many first-layer networks, such as EOS, Algorand, NEO, and Tezos, received so much capital that they created funds to fund applications on top of their networks. Oddly enough, almost no impactful apps have been launched from these new networks. One reason could be that the focus of the aforementioned funds falls on the second-layer application rather than on the actual product design for end users.

The doors for hype and speculation are wide open. However, our focus should not bypass the core human principles of improving the quality of people’s lives. We should be focusing on products that can make a change tomorrow or next year, not just the products that can make a change 10 to 20 years down the road from now. The focus should be on how one investment or technology can make the lives of people better and of higher quality, especially when we witness how fragile our world is when confronted with a devastating pandemic.

Fortunately, blockchain technology is coming back to the conversation, due to governmental privacy control dynamics in many countries and numerous conspiracy theories resulting from the pandemic. Members of society are concerned about the sharing and storage of their own data, limited choices, and imposed controls by governments over a vast number of layers of daily life. However, with the help of decentralized protocols for votes and the storing and sharing of data, the issue is fortunately solvable. 

People who are fighting for change at the state level can improve the way that governance works today. These key individuals can start learning about and working on consensus mechanisms that blockchain technology is capable of offering; this is a space in which there are currently skilled engineers but not enough leaders with soft skills.

What Changes Do We Need In Venture Capital? 

Andreessen encourages us to build. There are various interpretations of his encouragement: from focusing on physical infrastructure and buildings to continuing developing software tools. What we are building often depends on venture capitalists like Andreesen, who are betting on the future that they foresee. Depending on the decisions of these VCs, the journeys of many inventors and entrepreneurs will be affected for the years to come.

The venture capital industry, which has been driving innovation alongside entrepreneurs, can improve. As of now, it is broken in many aspects. Startups are being taught to be short-minded, to overhype, and to deliver revenue. Some of these companies burn cash within one year just to get to the next round of investment (as we have witnessed with WeWork). Thus, the businesses may prioritize fundraising and unhealthy metrics over true innovation and value creation. In my previous article on proptech, I gave an example of how the current framework between startups and VCs force proptech companies to turn themselves into brokerages, lenders, or title companies instead of firms that focus on fundamental innovation.

The system is broken because raising a successful series A round depends solely on finding one lead investor. Everyone else comes along after the one lead is onboarded, due to the hype amongst investors. Oftentimes, the due diligence that is conducted neglects the experts’ feedback, team’s achievements and focuses on verifying demand amongst other investors, rather than focusing on engineers, consumers, or industry experts. (I often witness this pattern in Silicon Valley and, in particular, in the crypto space.)

The ICO period, the pros together with the cons, gave us hope regarding problems related to the traditional venture capital model. With ICOs’ inventive crowdfunding opportunities, startup founders were no longer dependent on an extremely narrow pool of institutional investors. The token sale approach represented the democratization of access to private equity. However, the major problem with the ICO model was that it was too immature and opportunistic; it had a lack of limitations and a lack of control over valuations, exchanges, and the sizes of capital that were raised by founders.

There should be a middle ground in place, where founders can negotiate and work with multiple investors (and not just one lead) to win investments. One option could be fixing the capital size so that it covers a longer runway; however, the funds would need to be delivered in tranches that depend on the achievement of certain milestones. This, in my opinion, would work better than having just nine to twelve months of capital for the runway, before the founder would need to get involved in six months of fundraising to ensure the growth of the company for the next twelve months. In fact, a similar idea was proposed by Vitalik Buterin, who introduced a solution that would help to revolutionize the ICO process and ultimately tackle the current flaws and imperfections of the ERC20 standards.

Andreessen Horowitz demonstrated the first signs of willingness to change the venture capital industry. The important thing to note is that the aforementioned firm is a believer in blockchain tech; in fact, founders Marc Andreessen and Ben Horowitz were also two of the earliest and strongest believers in the Internet. The company recently announced its second crypto fund and a team led by Chris Dixon and Kathie Huan, as well as the addition of new member Ariana Simpson. Furthermore, a16z changed the structure of its fund, allowing the company to now bet on riskier investments.

It is crucially important that we re-evaluate what we fund and what we build. We must focus on making 9x in three years, rather than 3x in one year. Inventors should invent. Builders should build. The funding loop should increase in length for startups that aim to make fundamental changes; there should be more milestones and more complex, deliverables-based financing. 

I will believe that change is happening when hard-working builders like James Ehrlich, a Stanford-based entrepreneur focusing on resilient habitats, get extensive financing; when scientists get more attention from VCs, when startups in modular construction and construction analytics like TraceAir receive more media and investor attention, and when companies like Notarize obtain valuations similar to that of the “not-so-useful” Juicero. These companies probably now have the attention and demand that they deserve, thanks to the pandemic. However, this was not the case a year or two ago (I have been following the progress of these teams).

It might sound like naive idealism, but I am a true believer that entrepreneurship is not just about making money. It has a higher purpose: creating value, building tangible products, and delivering on innovations that humanity needs. Over the long term, investors and founders should capitalize on creating value, rather than on creating hype and betting on speculation. Money is an effect, not a cause. Building useful products will not only make society happier and safer; it will also make money for everyone involved. We just need to figure out how to fix the system to make it focus on “usefulness.”

— to www.forbes.com

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