Much has been written and said about the frigid state of both bank and venture capital funding for growing businesses in the current global market. But how are angel investors and their investee companies coping? Prominent Australian angel investor Jordan Green provides this handy shapshot and some advice for investors and entrepreneurs alike.
For Angels:
Angels predominantly invest in early-stage companies committed to high growth over a period of three to six years. Early-stage investing is inherently counter-cyclical. In other words, when times are hard and the ‘market’ is depressed, early-stage investors are eager and active. Witness the marked activity of those quality VC firms around the world who already have their investment funds. VCs who do not have their funds probably won’t be raising new funds any time soon.
In downturns, valuations are lower and the quality of entrepreneurs is often higher because the market is not cluttered with ‘me too’ guys and gals attracted by the successes that appear in the early days of the upturn in the cycle. Those very successes are the ones nurtured by investors who invested during the downturn.
It usually takes two to three years to build a business to the point where it is best equipped and positioned to take advantage of an upturn in the market. Further, a business developed and refined during lean times is more likely to be an efficient, responsive operation able to optimise margins and adapt rapidly to market change.
At the personal level, angels have a choice about where to place their funds. In down markets the decision to put their discretionary funds in the hands of brokers and bankers who live off transaction fees is less appealing. The decision to invest in angel deals is a vote of confidence in themselves and their ability to use their own skills, experience and networks to build and harvest value.
For portfolio companies:
From the entrepreneur’s perspective, money is never easy. In the years ahead, raising investment capital will be even more challenging. Around the world early-stage investors (Angels and VC) are advising their portfolio CEOs to batten down the hatches and plan for a prolonged period of self-sufficiency.
As always for young businesses, cash is king. So unless a company has over 12 months of cash reserves, it should raise funding as soon as possible and raise as much as possible.
If a company’s market position is weak and/or the target customer segment is severely impacted, then cash requirements will be going up. In those cases, aggressively examine and pursue M&A opportunities. Remember, everybody will have lower valuations and now might be the perfect opportunity to combine with one or two competitors to ensure that, together, there are resources to weather the crisis and to ensure critical mass (including funding, customers, rolodex power, market share, cash, synergy, etc.). Or consider getting closer to corporate partners as investors, or even as acquirers.
Hopefully, entrepreneurs already know how much cash they have, their expenditure at the current “burn rate” and when they will run out of cash. They need to cut costs, even if it means staff reductions, fewer features and lower general expenses. This is equivalent to raising an internal round through cost reductions to buy more time before the need to raise money again. Losing staff is hard and often emotional, but consider services for their higher capital efficiency.
Re-evaluate development plans, customer acquisition timelines and revenue milestones to achieve more with less. Sounds like blood out of a stone to most entrepreneurs but this is essential to survival. The lesson learned from the Tech Wreck and other downturns is that the winners are those left standing.
First to market means bearing the brunt of market education and other front runner costs that demand deep pockets. Speed to market remains critical but, aim to be the last one standing.
For the Community:
High-growth SMEs are a key driver of our economy. These businesses drive product and service innovation, thus lowering costs for customers while driving their own growth of revenues, staff and profits.
Small, agile businesses backed by experienced, successful business people can rapidly address the changing needs of the distressed markets. While large firms struggle to adapt through mass lay-offs and other unproductive cost-cutting efforts, they become more aggressive acquirers of innovative technologies and services that improve their productivity. The interplay of angel-backed businesses can sustain, or introduce key capabilities for the competitive advantage of Australia.
A vital, active angel community applying its resources to fostering, mentoring and funding commercially successful innovation, while working in partnership with inspired government leadership and initiatives, can underpin the rapid evolution of Australian business. It is essential to protect and improve our lifestyle, our culture and our security.
Jordan Green is a serial entrepreneur, venture capitalist and angel investor. He is a founding director of the Australian Association of Angel Investors Limited, the founder of Melbourne Angels and an adviser and mentor to entrepreneurs, angels and other investors. For information about angel investing or to find an angel group in your area, contact Jordan [at] aaai.net.au.
Photo: Piermario
