Pandemic Tests Big Tech Firms, Slows VC Money for Startups

This week, big tech companies such as IBM and Intel will report quarterly earnings, followed by Apple, Facebook, Alphabet, Amazon and Microsoft next week. Some companies — such as Amazon, Intel, Micron Technology and Microsoft — are doing well, even growing, whereas Facebook and Alphabet deal with a dramatic plunge in advertising. Even Apple issued a “rare profit warning.” The pandemic is hitting startups particularly hard, as venture capital money dries up and they are forced to lay off staff.

The Wall Street Journal reports that, for investors, “expectations are high as big tech stocks have broadly outperformed the wider market.” According to FactSet, Amazon’s sales “are expected to jump 22 percent” due to retail sales and “its role as the world’s largest cloud-computing provider.”

Although Microsoft warned of supply-chain disruptions due to the coronavirus, it’s still expected to post 11 percent sales growth this quarter, with “softness in its PC segment … likely … offset by growth in its Azure cloud services.” Analysts predict Intel’s sales will rise 16 percent, with IBM sales declining 2.9 percent.

ComScore reported that, “visits to Amazon’s website have risen more than 30 percent year-over-year in March.” Zoom has exploded from 10 million users a day at the end of 2019 to 200 million this month, and Microsoft’s Teams service logged a single-day record of 2.7 billion minutes on March 31.

Facebook said messaging has skyrocketed 50 percent in countries “hit hard by the virus.” But Facebook as well as Google also reported sharp declines in advertising, and Goldman Sachs “downgraded Apple’s stock to a ‘sell’ rating last week.” Tech companies have burnished their reputations by their responses to the pandemic crisis.

“Given their quick and impactful response, I think the pendulum swings back a bit toward neutral or positive,” said Sanford C. Bernstein analyst Mark Shmulik.

Elsewhere, WSJ reports that, “last year, investors poured $136 billion into U.S. startups, according to PitchBook, just short of 2018’s record $141 billion.” Startups were almost solely focused on growth, so “the coronavirus crash is a profound jolt for startup founders accustomed to a sea of cash.” With that money drying up, it says, startup founders “have to … make tough decisions to conserve” what they’ve got, while the two million people employed by VC firms (per PitchBook) and the “millions of gig economy workers attached to large tech companies such as Uber” face hard times.

It’s possible that “the pullback could be temporary,” and another boom could arise post-pandemic. But “getting to the other side means cutting payroll, slashing marketing budgets to $0, eliminating perks, asking vendors to extend payment terms and scratching for additional capital.”

At startup HopSkipDrive, which takes kids to school and activities, founder Joanna McFarland “fired about 15 percent of her corporate employees and eliminated all advertising … [and] put expansion plans on ice.” She noted that most startup founders had the philosophy that “if you throw enough capital at it, you eventually figure it out.”

“When you have an overabundance of capital, you don’t have to prioritize as ruthlessly,” she said. “They have to make really hard decisions right now.”