By Timothy Riemann
As we enter month 9 of the seemingly endless COVID Pandemic, I’m beginning to ponder the phrase “New Normal” and what it entails.
Nine months ago, the fear of an unknown and uncontrollable virus spread around the world. The effects COVID have been felt by every nation and every economic sector, causing disruptions beyond almost any imagination. This singular event has highlighted the blind spots in our ability to plan for the unknown.
By very definition, this virus has caused a “Black Swan” type of event beyond any calculation or previously thought magnitude.
As COVID’s spread halted governments and businesses, a void was formed for anyone that could see it for what it was. A void that was quickly filled by dynamic entrepreneurs to varying degrees of success.
For most large-scale organizations, the rapidly changing environment was just too much to handle. As an effect, many battled with internal processes unable to adapt quickly enough to keep up. Even at this late date, it will still take months, if not years, for many to recover. But there is hope on the horizon.
It is now time to begin thinking about the next step forward. The mitigation strategies tested over the last six months have born many fruits. From remote work policies and virtual meetings to rapid medical testing and digital supply chain management, things start to get back on track. And with that, the void that was open for market disrupters has begun to close.
The ‘too large to fail’ companies have weathered the storm and are reentering the market spaces that the virus forced them to leave. And this poses a problem for any small company that could expand in this time of need.
Over the next few months, smaller companies, like those traded in the OTC (Over the Counter exchange) may be pushed back out of their newly established market niches, unless they can adjust to forthcoming changes.
We are entering the post-event consolidation phase that many should have been planning for in advance. As this void starts to close, many companies will feel the need to remain relevant in the current market environment. Because of this, we may see the vast majority of market disruptors, like those in the OTC, start to divide into two camps; the single vertical companies and the multi-vertical companies.
Both groups of companies face a similar problem, adapt or fall back into obscurity. Their action will be of significant interest to investors over the next few months, and one wrong step could spell disaster.
However, options do exist to avert the impending troubled times. Theses options may fall into three general themes: consolidation, expansion, or seek a buyout. Each option comes with its own set of conditions as well as risks and rewards.
In vertical consolidation, most companies will most likely be the preferred action because either they operate in a single market or other verticals have preformed marginally over the last nine months. This consolidation may be accomplished by securing supplier rights such as patent ownership, exclusive distribution rights, or sole manufacture of a given product. However, this will also carry a lot of risks. Larger companies may have the capital to outbid for those distribution rights or may be able to manufacture small companies with similar products, causing a decline in unit prices. Even the security offered by patents may not be enough to ensure long-term success. This may cause some single vertical companies to attempt a shift to a multi-vertical model. Still, unless they are already heading in that direction, it may be a long time before they are competitive again.
For established multi-vertical companies, expansion may be the preferred future action. They already have the means to shift capital when needed and adjust their focus to pivot to the next big idea. Many will be able or already have consolidated gains from previous quarters from success markets sectors for application in other ventures. Companies with existing verticals in under preforming sectors may see a marked increase over the next few months as those sectors come out of hibernation, but this expansion could be a two-edged sword. Being too timid may cause some to miss out, while moving too fast may open many to potential collapse when another COVID wave comes rolling in. It will be essential to find a balance between these two outcomes.
For those that lack the means to consolidate or expand, only one option remains, seeking a buyout. Due to COVID, many larger companies were forced to exit sectors or operations that didn’t add materially to their bottom dollar. Theses larger companies will be forced to take a hard look at what will have less impact on the balance sheet, reestablish from internal recourses, or buy out smaller companies that took advantage of their absences. Entrepreneur faced with a buyout option will have to analyze their operations before accepting or denying an offer carefully. Being bought out may have more to do with a smaller companies leadership team than with its process within a given market. A larger company wouldn’t offer a buyout unless the smaller company were already disrupting the market to some extent. The question will be whether or not the disrupted market is worth taking over or not. Is the penetrating the disrupted market a necessity for the larger company to continue its success, or is it just a convince for future expansion? If necessary, then a buyout may be the first option, but if negotiations fail, it may be only a matter of time before the smaller company is pushed out.
On the other hand, accepting a buyout offer may have more to do with the entrepreneur generation than their company’s success. For many of the younger generation of entrepreneurs, the goal of starting a new business or company is to disrupt a given market as quickly as possible to become attractive to larger companies. The idea of rapid market disruption and then exit through a buyout fits well this goal; however, this may lead many to undervalue their company’s. Conversely, entrepreneurs from previous generations may overvalue their company’s effect on a disrupted market, and attempt to hold out against a buy out to long and lose their edge when a larger company chooses to mobilize their resources.
Regardless of how smaller companies chose to move forward over the next few months, investors will have many opportunities to profit.