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The Bernoulli Economy

One big confounder during this COVID-19 pandemic is why some businesses are doing so well while tens of millions of people are unemployed. The answer is simple: while consumer spending overall is down, and down a lot for travel, entertainment, and restaurants (still off by fifty percent as of late June), spending online is up by fifty percent. Spending on collaboration software for remote work is also up.

(A very important parenthetical: absent the massive, multi-trillion dollar fiscal stimulus that has put money in people’s pockets, as well as the monetary stimulus that has lowered interest rates dramatically—the 10-year Treasury rate sits at 0.63 percent compared with 2 percent a year ago—businesses and stock prices might be in a very different place today.)

Back to what’s happening: the Bernoulli Principle—described in 1738 by Swiss mathematician Daniel Bernoulli—states that if a fluid is constricted by a narrower pipe, its speed must increase.

This is what we are seeing in the economy: overall, there is less consumer spending (less money flowing through the pipe).

However, much of that remaining money is being channeled through a narrower pipe (online channels), which results in an acceleration.

Our companies posted solid—in some cases spectacular—results during the first quarter. Here is a short sampling:

  • Atlassian experienced growth of 125 percent in sign-ups for the free tier of its products.

  • Slack typically adds around 5,000 paid customers every quarter. In Q1, the company added 12,000 paid customers.

  • Shopify’s new store creation grew by 63 percent between March 13 and April 24. Sales volumes were so high, the company saw Black Friday-levels of traffic every single day.

  • Square was hurt in its seller ecosystem (lots of shut-down restaurants and coffee shops) but its Cash App ecosystem exploded: the number of customers with direct deposit grew from 3 million to 14 million, and in March the app added the largest number ever of new active customers.

  • Twilio had a 25 percent increase in average daily signups and began seeing real traction for its cloud-based call center offering, Twilio Flex.

  • Amazon experienced huge spikes in Amazon Web Services usage from videoconferencing, gaming, remote learning, and entertainment customers. In retail, the company faced such overwhelming demand, it had to hire an additional 175,000 employees and expand grocery delivery capacity by more than 60 percent. It even had to temporarily change its shopping app to reduce customer purchases. One line from the earnings call summarized it well: “The challenge is really on everything besides the top line.”

The pandemic has undoubtedly accelerated in-place trends: this is a recurring theme echoed by nearly all our companies. “Digital transformation”—codewords used by corporations that mean “we need to finally move our business processes off-premises and into the cloud or our competitors will bury us”—has been brought forward by a few years. Ecommerce penetration as a percentage of retail sales has gone up from around 15 percent to 30 percent.

Importantly, the catchment area for talent and sales has dramatically increased. In the early days of the pandemic, my biggest worry was that enterprise software companies relying on in-person conferences and meetings for sales would be inordinately hurt by the shutdown.

The reality has been the exact opposite: most companies report a shortening of sales cycles and those that have hosted virtual events (in lieu of their usual conferences) have seen an increase in attendance, sometimes double or more. The pandemic has normalized casual interactions—frequently on Zoom and interrupted by kids and pets—and this has expanded the possible modes and frequencies of connections.

The same is true of talent acquisition: rather than confine new hires to the expensive and competitive Bay Area market, the pandemic has leveled the playing field for talent. If you’re going to hire remotely, you might as well do so from a much wider pool.

Atlassian reported that March was its strongest month of hiring in history, and that they took advantage of layoffs from other tech companies. Slack is at the point where 12 percent of all employees have now been hired after the pandemic; these are folks Slack never met in person. Indeed, Slack’s recent $750 million convertible debt offering was conducted entirely in Slack’s Shared Channels with the various banks and law firms, and its recent acquisition of Rimeto (a corporate directory business) was also conducted entirely remotely.

This normalization of remote work—where previously social conventions would dictate lengthy and expensive business travel, hotel stays and closing dinners—is to a large degree here to stay. So is the convenience of shopping from your mobile phone while sitting on the couch or walking the dog.

[Note: This post is adapted from our Q1 2020 letter to investors, published on July 20.]


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