The global recession is starting to bight hard. But recessions present great opportunities for innovation. Anecdotally and somewhat surprisingly (for us) the companies we’ve invested in have been experiencing an uptick in inquires over the last 6-months. This appears to have been stimulated by a far greater willingness from businesses to consider change. Anything that can help reduce costs or stimulate demand are now being more willingly considered. So, that’s good.
However, capital markets are drying up and early stage investors need to consider long and hard the wisdom of investing in start-ups that have large on-going capital requirements – in this environment. The view we’re taking at the moment is to “shy away” from opportunities that we see will need more than $5m in capital to commercialise them. The reason being that the risks associated in raising this capital have increased significantly over the last 6-months. We want to see businesses that could be realistically bought to market without requiring a big hit from a large US Venture Capital firm.
The path-to-break-even is also extremely important in this environment. Cash is king and demonstrating a path to early cash flow generation will be a real plus in the eyes of any early stage investor. To manage risk we are look long and hard at whether companies have options for generating enough early stage sales to become self-sufficient (maybe not hitting the high growth points we earlier would have hoped for) but providing the opportunity to ride out the storm and be positioned for growth when the world starts to right itself. FYI, my current view is that we’re in this for atleast another three years….i hope i’m wrong and it’s shorter.
In summary three things to think about:
- How does your business / opportunity provide value, to who, in a recession?
- Be conservative on your overall cash requirements – don’t set a plan to raise the same amount of money as Facebook or Twitter?
- Plot a potential path to break-even….ASAP
