We are writing this letter from offices that, until March, we had assumed we would always work from. Almost everything else we assumed, we have had to revisit too. We are going to try, in this letter, to say what we have learned, what we have not, and what we are no longer confident we know.

On the First Six Weeks

From the second week of March to the third week of April, our work was almost entirely defensive. We spoke to every portfolio company. We extended runway, where we could, by writing bridge checks at terms that prioritized survival over economics. We were wrong about the duration of the disruption — we expected eighteen months and got back to something like normal commercial activity in six. We were not wrong about the priority. The companies whose runway we extended are, almost without exception, healthier today than the companies in adjacent portfolios that we did not have to support.

The bridge checks we wrote in March and April were, by year-end paper performance, our best vintage of the past decade. The terms we negotiated reflected the worst-case scenarios our framework was modeling at the time; the actual outcomes have been, in retrospect, much better. We will not make a habit of writing checks against worst-case scenarios — the practice is structurally too punitive in normal markets — but we will, in future crises, remember that the founders' willingness to accept those terms reflects how serious they considered the situation, and that their willingness is itself a useful diligence signal.

The most useful conversation we had in those six weeks was a partners' call in late March in which we agreed, plainly, to spend the second quarter behaving as if 2020 would not produce a recovery. The framework was clarifying; we were not exposed to the temptation to call the bottom early, which several of our peer firms attempted and several of which were wrong about. The bottom, when it came in equities, came faster than we had any right to predict. The bottom, in our portfolio companies' operating performance, came in mid-April; the recoveries began before the year-end and varied widely by sector.

On the Companies That Adapted Faster Than We Did

Several of our portfolio companies, in the second quarter, made operational decisions that were ahead of where our framework was. They moved faster to remote work, faster to redeploy product roadmaps toward what their customers needed in the new environment, faster to compress their cost structures in a way that made them anti-fragile rather than merely smaller. We learned more from them this year than they learned from us.

The pattern of who adapted fastest was not predictable from the founders' biographies. Founders we had considered conservative made aggressive product moves; founders we had considered aggressive made conservative ones. The variable that mattered, on review, was not disposition but proximity to customers. Founders who were in continuous contact with their customers in the first three weeks of the disruption updated their operating plans on the basis of customer behavior; founders who were not in continuous contact updated on the basis of public news, which lagged. We are now actively encouraging customer-proximity practices across our portfolio that we had previously left to founder discretion.

On the Acceleration That Was Real

Categories of consumer and enterprise software that had been growing at twenty percent annually compressed three years of adoption into seven months. The acceleration was real. The companies positioned to capture it were, in our portfolio, the ones whose products solved problems the customer would have continued to have even if the pandemic had not occurred. The pandemic compressed the timeline; it did not invent the demand.

The deepest acceleration, in our reading, occurred in three categories: enterprise software for distributed work, consumer software for at-home commerce, and certain categories of healthcare software whose adoption had been delayed by regulatory and institutional friction. The first two are well-covered in the venture press; the third is under-covered. We have made meaningful commitments in healthcare software this year on the thesis that several decades of institutional resistance to digital adoption was overcome in three months by necessity, and that the resistance will not fully reassert itself even after normalization. We may be wrong. The investments are sized to reflect our uncertainty.

On the Acceleration That Was Not

Several categories that appeared, during the second and third quarters, to have undergone secular acceleration — certain food-delivery models, certain fitness models, certain remote-work products — appear in retrospect to have absorbed an unsustainable share of pandemic-era spend. We do not have exposure to most of them. We have exposure to one of them, and we have been quietly reducing our weighting since the third quarter.

The diagnostic question we have been applying is whether the year's growth, for a given company, was driven by the customer's response to a temporary constraint or by the customer's discovery of a durable solution. The two look identical in the in-quarter numbers; they diverge dramatically across the eighteen months following the constraint's removal. We are not yet certain we are applying the diagnostic correctly. The 2022 letter will be a useful check.

On What We Are Now Building For

The most consequential portfolio decision we made this year was to increase our weighting toward companies whose core product would be more valuable in five years if the pandemic had never occurred. This sounds counterintuitive in a year defined by the pandemic. It was, we believe, the correct counterweight to the temptation to over-fund companies whose performance was structurally inflated by the year itself.

The companies we are most excited about, deployed against the year's pricing, are companies whose growth in 2020 was modest but whose products are addressing problems that will compound across the decade. They are unfashionable in the in-year narrative. They will not be unfashionable in the eventual outcomes.

A Closing Note

What we have learned this year is more humbling than we want to admit. What we have not learned, we suspect, will not be apparent until 2025. We are taking notes.

The Partners
Winzheng Family Investment Fund · December 2020