Financial melt-down – the landscape is changing
Well, the last few weeks have been somewhat eye-opening and stomach churning, watching investment portfolio values swing all over the shop. The big challenge in the current environment is “where do you hide / are there safe havens for money at the moment?”. Global share prices are all over the place. Bond portfolios are being hammered as traditionally “safe” companies struggle to refinance. Personally, i don’t think we will see the end of this for at least 6-month yet. So what’s this mean for investment into early stage or growth companies? Here’s my take:
Venture Capital – if VCs haven’t raised money prior to the latest shambles then i don’t rate their chances over the next 24-months. Institutions have been the main backers of VCs in New Zealand and my bet is that they will take a very conservative view on the allocation of new money to VCs. So outlook for NZ VC community = gloomy.
Private Equity – there’s a number of PE funds in NZ and Aust that were well cashed up prior to recent events. The challenge for the PE industry is that it has relied on cheap debt to fund acquisitions. Accessing this is going to be problematic for some time. I think opportunities will still exist in the lower value end of the market (<$100m) but we’ve seen the last of the mega deals for a while. With limited leverage pressure will come on valuations. NZ Outlook = deals will get tougher, valuations will fall.
Angel Investment – Angel Investors, are still cashed up, but will be worried about the value of their share and bond portfolios. This could make them more conservative. Angel Groups will probably by the key source of early stage / growth capital in New Zealand for the next two years. However, until we see a clear direction from the markets Angel Investors may start to close their wallets for a while.
What’s this mean for entrepreneurs? Your best source of early stage finance is still going to be the Angel Networks but you will need to be better prepared than ever. Key issues your going to have to consider include:
- How will a global slow down impact the growth of your business? It would be reasonable to assume that products or services positioned in the “discretionary” part of the market could struggle to get traction over the next couple of years. That said its a big world and NZ is a small place so opportunities will stll exist. You will need to demonstrate clearly what makes your proposition unique and what will make consumers / businesses compelled to buy / use it.
- If you require follow-on funding (after an Angel round) where do you think you will get it from? The NZ VC space is contracting, you will need to do some homework to identify the potential sources for follow-on funding. At least show that you are thinking about this. Angels are not experts on this subject and need to be lead by you, the entrepreneur. Make sure that you budget adequately to hunt beyond NZ for your next round of funding.
That said, the current turmoil will potential provide a window for market exploration and product development. If your a year away from going to market now is not a bad time to put your head down and get your business positioned right.