Brexit, Brexit, Brexit. If there’s one thing we can be sure of, it’s that we can’t be sure of anything.
The Brexit process lumbers on and we now have to deal with the Halloween extension. The clock continues ticking, though perhaps it would be good for our squabbling MPs if Big Ben’s gongs hadn’t been silenced by the revamp. They need a loud, regular reminder of the new approaching deadline. Let’s assume that we get a ‘good’ Brexit we still need to ask whether we’ll find ourselves having to deal with a recession. If we find history repeating itself what are the implications for scale-up businesses and investors?
We might feel that now is a time for caution, put away our wallets and close the vaults. However, revisiting the recession of 2008 gives a different perspective.
Rearview mirror clarity
After the Credit Crunch, the UK was in full recession by early 2008. The chances of raising equity finance in this environment seemed extremely slim (or impossible).
We’d been helping businesses raise finance since 2004 and I remember sitting with an entrepreneur who needed a cash injection. I advised him to wait. Our investors had gone quiet; the market was quiet. Two months later, I ate my words. After the initial shock, angel investors recovered and while investment was harder and slower to come by, it was still there.
In fact, many investors believe that times of economic downturn are exactly the right time to invest. Explains Joshua Kennon, writing for The Balance, ‘a recession can be the best possible time to begin investing because asset prices often fall hard, meaning you can pick up stocks, bonds, mutual funds, real estate, private businesses, and more for far less than you could just a few years prior’.
Recession: winning or losing?
From 2008 to 2011, 314,000 start-ups launched in the UK. A 2014 survey of 3,500 plus business owners across Europe showed that businesses founded during the recession were more profitable than those launched in more stable times. ‘The dogged entrepreneurs behind these businesses’, commented Bronek Masojada, CEO of Hiscox, ‘are more likely to say that the economic environment has made them more likely to succeed. This is true grit’.
2018: No sign of a slow-down for start-ups
Despite worries that Brexit would immediately herald a new economic downturn and weaken private investment into UK start-ups, the data show otherwise.
Beyond the numbers, tech advances in the last decade mean London has become a leading tech hub. Since 2016 the city alone has attracted over £5bn in venture capital funding, more than France, Germany and Sweden combined and three times more than any other European country.
Despite our feeling that now is not the right time to raise funds, the available evidence says the opposite. The positive news comes with some caveats. I spoke to industry experts and several of our angel investors to get their advice on approaching fundraising in times of economic uncertainty. The advice is:
- Have patience
Savvy entrepreneurs know that seeking equity investment is a lengthy process – think of it as a marathon in good times, an ultra-marathon in an economic downturn. Technology has now enabled scaleups to have far more control over their fundraising activities; one way is to keep their funding rounds open for as long as needed. With a climate of greater caution, this is the best way to find the optimum start-up/investor ‘fit’. There are others benefits too; a longer round allows a company to capitalise on any unforeseen successes, such as publicity, a new contract or simply some attractive ‘buzz’.
- Look at a variety of sources
With all investors being more cautious it is important to woo investment from a variety of sources. According to Alec Lynch, CEO, DesignCrowd.com, ‘when the economy falters, angel investors in particular look to move their money out of the stock market and may be willing to fund you if your prospects are promising’.
To be effective, entrepreneurs must have all their documentation ready and adapted for each audience. What is important to your business network in making an investment decision may not be the same thing for angel investors. Having a fundraising platform that allows you to restrict document views on an individual basis is really useful for getting the right message to the right potential investors.
- Focus on investor relations
It is crucial that businesses communicate honestly and regularly with their investors. Whether it’s through an investor relations portal on a digital platform or having a dedicated staff member to keep them happy, it’s a vital factor in any start-up’s or scaleup’s road to success.
Provide your shareholders with regular updates on business performance: they can celebrate the good and guide you through any trouble spots. Importantly, happy investors make repeat investors.
- Develop an international strategy
Having a presence in multiple markets allows you to spread risk. Should sales slump domestically, sales in foreign markets unaffected by Brexit can bolster revenues. Clearly international expansion is a long-term project and often requires significant capital, so those businesses who currently have no international operations may want to form strategic partnerships in the first instance.
Investment from abroad is the second point to consider when looking at internationalisation. With more caution potentially coming from local investors, international represents a large and important opportunity. China is the best Brexit-proof example.
- Make sure your valuation is realistic
Downturns affect the public stock markets first and the private follows. Therefore, it is crucial to have a realistic, conservative even valuation.
Todd Hicks, writing for Forbes said, “I have seen investors walk away because the signalled expectations were too far from the price and terms they were prepared to offer.’ He goes onto say ‘…a company that signals confidence and an expectation that is slightly aggressive – but basically realistic – can lead a new investor to make a better first offer. It’s vital to get at least one offer and very important to get more than one. This is the strongest reason to keep expectations reasonable at the start.”
There’s no real evidence that deal flow or angel appetite is reducing. Despite all the uncertainty the data suggests that the fundraising landscape is as healthy as ever. Our portfolio companies are still very attractive to our network of sophisticated investors. With the right tools digital or otherwise, now is a good time for businesses to scale, regardless of a good, bad, soft, hard or quite simply any Brexit scenario.