A short presentation I gave last night to a business audience at Creative Lancashire.
Here is a list of relevant links I provided for the audience.
Thursday, 20 November 2008
Wednesday, 12 November 2008
How "recession-proof" is your business?
The most popular boast now from entrepreneurs seeking funding is that their business is, to some degree, "recession proof". Whilst it will be some time before we know the magnitude and implications of the economic situation, we can attempt to help our portfolio companies understand how vulnerable they may be.
Fred Wilson had an excellent post on the strength of his portfolio using something he dubbed The Survival Matrix. I thought I'd extend this a little by putting together a kind of recession-proofness-test that draws in some of the other issues. Please take the precise numbers with a big "pinch of salt": I am not planning on defending any of the weightings or rankings. I'd welcome any debate about what's included, but my purpose is to highlight issues and help give people a feel for where they stand.
When I tried this test on a few portfolio companies it certainly showed a wide disparity. At the lowest 45 points and the highest 109 points out of a theoretical maximum of around 220. My view is that companies upto perhaps 50/60 points really need to think hard and urgently about making what might be quite big departures from plan. Whereas around "100 points" perhaps a slightly more considered view makes more sense even if the actions taken are still pretty firm. I can't imagine many VC-backed companies will get anywhere close to 200!
I hope this test helps a little for companies to focus on just how much and how urgently their plans need to adapt. I'm doing a presentation around this stuff at our portfolio seminar this morning which I'll post up too.
You can find the calculator here.
RisingStars Portfolio Seminar- A constructive look at technology companies in the recession
Jonathan Diggines our CEO opened the event with a view of the state of the economy generally: hard to make this part positive looking, but Jonathan pointed out that there's no reason to think that tech sector will be worse effected, and some reason to think it might be better than most.
Julian Viggars looked then at our portfolio in more detail, and about technology generally. It was great to hear a summary of some of the great progress in terms of further fundraising and commercial progress drawn together. He produced some interesting comments from some of the top-tier tech companies: Cisco, SAP, Google. The key thing was a big disparity between how different sectors saw the outlook.
Stuart McKnight, the Managing Director of Ascendant Corporate Finance, after the obligatory quick plug, provided lots of current data on the state of the tech financing market. With 282 live technology investors who did deals in 2007 over £0.5m last year. With 2/3rds of deals being 2nd round or later, then that left only 78 first rounds above £0.5m. By the end of Q3 2008 it looked like the rate of capital investment was slightly faster than 2007, with very little sign of any negative change in the first 3 quarters of the year at least. Stuart's view is that the Limited Partnership structure means that is still plenty of reason for funds to keep on investing. Reckons the market will be at around £900m in 2009- up a bit from the current rate, with a continued rise in "cleantech" as a sector through that period with several new funds having closed. He said lovely things about Acal and their team, which is nice, but observed that the fundraising had been more challenging that anticipated because so many of these new funds are late stage and there's a gap beneath this level.
Stuart was concerned that there was a shift away from small scale investing, with a drop in the proportion of deals in the £200k-£1m range. He thinks that companies are finding seed funding, but hitting a gap at the first proper VC round. He speculated that maybe the recession will push some of the VC's to decrease deal size, pushing down total value faster than volume.
Looking at regional patterns, I was surprised that the Thames valley, including Oxford, was a really small area, less than half that of the Northern region. So far London is the only region where volume and value have started to show a downturn. Stuart thinks that 2009 will be strongly indicated by the impact on Q4 2008. He knows of four funds that have said they have no intention of investing in the quarter, claiming that they want to hang on to cash to support portfolio.
Stuart summed up with a great set of conclusions- more and better of the usual good stuff likely to be required by companies seeking finance. He sees that the best stuff will still raise money, but that you need to expect everything to be a bit slower and tighter in the next 12 months. You need to expect to double the work on fundraising- maybe 40-50 VC's approached, 20 or so first meetings, and spreading your net wider than might once have been required.
Richard Young told the seminar about his experiences of the last recession, and reflected on how one of our companies, Blue Prism, is adapting to the new reality in Enterprise Software by adapting their customer messaging and propositions.
They are conserving cash and looking to exploit their fast ROI as a differentiation in a cost-orientated market.
I liked Richard's comments that in the last recession, "it was noticeable that you knew when it was over because it was when people stopped talking about when it would end"!
My turn next, and I covered the stuff in my last post about how to think about the scale and rapidity with which early-stage companies should be reacting. If you have a look at that post there's a calculator where you can work out just how vulnerable your company might be.
We finished off with a lively debate on the impact and reactions that tech companies will feel over the next year.
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