Forcing functions & other miscellany

Sajith Pai's Newsletter #2020-01

COVID-19 as a forcing function

I attended a virtual edtech summit recently; an online version of a global summit that happens in the U.S. this time every year, but had to be cancelled due to COVID-19. 

One of the panels had edtech ‘startup’ founders and CXOs. Of course, these were all well-funded global startups. And they were having the best growth periods of their existence. 

• The CEO of Proctorio, an online proctoring firm was at 6x volume (online exams proctored) this month over the same period last year. 

• The product head at Turnitin, an anti-plagiarism software co, was seeing 3-4x the number of people in their regular onboarding webinars

• The CEO of Coursera saw 4x enrollments in March as universities scrambled to use Coursera for campus to get their students online.

Screengrab below from Coursera CEO Jeff Maggioncalda’s talk during the ASU GSV Virtual Summit, 1 Apr 2020)

Years gained

The moderator, Rob Hutter of Learn Capital, an edtech-focused VC firm, then did something interesting. He asked them to define the impact on their businesses not in terms of growth but in terms of years gained, thanks to COVID. When were they projecting to reach these numbers, or when would they have expected some of the customers who signed up now, to have originally approached them? 

Most of them answered that they had gained about 3-5 yrs thanks to COVID. The lockdown, and closure of colleges and schools had accelerated the move to online, a kind of forcing function that otherwise wouldn’t have spurred digital adoption. A telling anecdote was the Turnitin CPO sharing how the AP exam was finally going digital from the previous entirely analog paper based exam which it stuck to because of inertia. If it hadnt been for COVID’s forcing function, they would have stuck to it this year too.

It isn’t just the U.S. In India too, edtech is on a tear. The metrics of the edtech companies in our portfolio range anywhere from 2x to 5x.

Reverse forcing functions

However, forcing functions work the other way too. COVID’s forcing function is crippling the newspaper industry, be it abroad or in India. 

Due to fears that the virus could spread, many households in India are pausing subscriptions. Households which want it are not able to get it because newspaper vendors have stopped distributing it (due to fears of catching the virus) or are not able to get it delivered as vendors have temporarily migrated back to their villages. Due to the reduced distribution, and the lower economic tempo, ads have dropped precipitously.

My friends in the Times Group, India’s leading print publisher tell me that ad revenue which is usually 90% of the overall revenue is less than a crore now. I remember when I left it to join Blume, it was around Rs 12-15crs / day. 

If COVID saw edtech gaining 3-5 years, then for the newspaper industry it is 3-5 yrs (or more) lost. That is 5+ years of profit that some were looking to eke out. After all, even dinosaur media has a long half-life. And when you know the industry you are in is declining, you can focus on squeezing margins out of the value chain by cutting acquisition costs, reducing investments of any kind and steadily increasing prices (provided you have pricing power). This is the script that tobacco and newspapers followed. Both have got sharply impacted by COVID.

Conclusion

This framework of forcing functions and years gained or lost thanks to it, came up again in a podcast that I listened to recently. 

Patrick O’Shaughnessy hosts the ‘Invest Like the Best’ podcast, a fairly popular investing podcast. He had Gavin Baker, the founder & Chief Investment Officer of Atreides Management, a growth PE investor focused on tech and consumer plays shared how COVID’s forcing function helps large omnichannel retailers such as Walmart, Target, Costco accelerate their ecommerce learning curves.

In Gavin’s words: “What I am beginning to think about is that these omni-channel retailers like Walmart, Target, Costco, maybe even Kroger are going to be the biggest beneficiaries of this. They're going all in on e-commerce…they are building years of e-commerce experience / muscle / knowhow in months. I'm sure they're going to do 12 to 18 months of e-commerce capex in months, if not in quarters. “

Podcast

Highlights of the O’Shaughnessy-Baker podcast here.

Some interesting thoughts including the metaverse, how tiny UI/UX differences can have huge business impact, and why recurring revenue may not be entirely recurring. Certainly worth a listen.

Reading

(1) What attending a ‘Furry’ convention is like. Furries are people with some kind of attraction, some cases sexual, with anthropomorphic animals - some childhood toy figures, some imaginary. Link.

(2) One interesting finding from the glut of COVID-19 stories from the U.S. has been on how both shortages (toilet paper) and dumping of excess supply (vegetables, milk) arises from the fact that there are two different supply chains, each with with its own packaging and distribution infrastructure, and how it is next to impossible to move stuff quickly from one supply chain to the other.

Understanding toilet paper shortages - story by Will Oremus

Why U.S. farmers are dumping milk and vegetables - story by David Yaffe-Bellany & Michael Corkery

(3) Quanta is one of my favourite online publications. It is one of a bunch of online magazines - Nautilus, Aeon are two others that come to mind - all nonprofits that have terrific writing and coverage of science, math and philosophy.  The reason I perhaps enjoy Quanta is not because I understand the topics - I really dont get much of higher order math or physics! - but because the writing is imbued with curiosity, passion and joy. You get a sense that these writers are having the time of their lives, writing about topics that give them joy, and are even getting paid for it. Wow!

Two recent pieces from Quanta I enjoyed reading -

• How mathematicians work (together) - a bunch of elite topologists get together in a remote and austere research centre in Germany to spend a few days discussing math problems and working together on them. 

• Donald Knuth is one of the all-time greats in Computer Science. He has been spending the last few years writing what is to be at least a 8-volume set titled ‘The Art of Computer Programming. I enjoy anything I get to read about Donald Knuth because he is one of the true obsessives.