Part one of two-part series: “Solutions for a Roller Coaster Marketplace”
OK, it’s been a wild ride, right? Uncertainties regarding Wall Street and funding are setting off alarm bells. But if you’re looking for capital, there are reasons to hope, according to leading consultant Joey Tamer.
Ms. Tamer acknowledges that the wildly gyrating stock market and withdrawals of initial public offerings are top-of-mind concerns.
“…the change in IPO activity may be the most significant,” she writes in a blog post, “Will stock market chaos create venture capital downturn?”
“Venture capitalists are excited by a predictable exit market, either strong M&A (mergers and acquisition) activity or several powerful IPOs coming in the near future,” she writes. “If they believe they must wait for these liquidity events, or cannot predict when these will be active, the VCs will become more conservative in their choices, and protect their portfolios.”
Ms. Tamer is imminently qualified to comment. As a trusted source on this business portal, she’s a strategic consultant to entrepreneurs in software, internet, technology, and tech/media.
Having experienced five downturns, she recalls the trends from the last two recessions – patterns, which could repeat now.
She says the patterns include:
- Deals that were not completed at that time rarely were completed.
- VCs took, justifiably, defensive measures to ensure that their existing portfolio companies had enough capital to move forward on their growth cycle. The VCs allocated much of their existing Funds to those investments already secured. This left much less for “venturing” into new risks. And the VC’s return on investment (ROI) on their portfolios was threatened, and that ROI is the basis of the VCs being able to raise their next Fund and so to survive.
- VCs became more conservative in the risks they would take. On my various VC panels in the tech industry (Digital Hollywood, CES, and others), they admitted (this was 2008 and early 2009) they were “broadening their early stage searches” to include those startups that had revenue and market traction. This criteria became a standard, leaving seed and Series A capital more and more to angel investors and angel groups.
- Deal terms became more aggressive against the entrepreneur, to protect the VCs from potential downside.
- Years of limited capital drove entrepreneurs to bootstrap their companies (since there weren’t jobs for them anyway) and get their companies into a much safer stage once the capital began to flow again.
Ms. Tamer cautions “the cycles of boom and bust are coming too close together.”
Specifically, she warns:
- After the downturn of 2000/2001, the VCs didn’t get truly active again until 2004.
- The next bust was 2008, with investment beginning again in 2010, and more actively in 2011.
- Three to four years of an active investing cycle is not enough time for entrepreneurs to recover from these downturns, especially if the uptick in investing lasts only 3 years going further. This cycle stresses the VCs and their new Funds as well.
- VCs are handling portfolios with an exit cycle of 6-8 years from funding. Entrepreneurs may launch and get traction in 3 years after funding (which means 4-5 years after they begin the company), but they are rarely scaling until year 4 post-funding.
- Notice the age of the potential IPOs — up to 8-10 years to build value and find a good IPO window (perhaps now closed again).
But as a knowledgeable veteran strategist, she knows fear leading to procrastination is unproductive for entrepreneurs.
I agree and often use two acronyms in illustrating the dangers of yielding to FEAR:
- “Frantic effort to avoid responsibility”
- “False evidence appearing real”
So, Ms. Tamer offers these strategies:
- Keep building your companies, your technologies, your breakthroughs. Who knows what will happen next week or next month?
- Consider alternative forms of funding — private funding for an idea re-conceived for this new economic reality; strategic funding from a win/win bigger company that needs what you have; licensing and strategic revenue and no equity or debt funding at all;
- Consider a different take on your product or service idea, or your target market sector, or your market timing, and create a company that builds wealth for you independent of the vagaries of the stock market and other people’s ideas about capital, risk and what is real. This is my favorite kind of company to build.
See 6 Values for Financial Protection for part 2 of this two-part series: “Solutions for a Roller Coaster Marketplace.”
Ms. Tamer’s Web site and blog: www.joeytamer.com.
(Note: I highly recommend Ms. Tamer. She and I are longtime members of Consultants West, a roundtable of veteran consultants and authors, www.consultantswest.com.)
From the Coach’s Corner, be sure to read Ms. Tamer’s opinions on other topics:
- 10 Characteristics of a Successful CEO
- Surviving Economic & Industry Downturns
- What Should You Divulge When Asking for Investment Capital?
- Eight Strategies to Consider Before Starting A Tech Business
“Do the thing we fear, and death of fear is certain.”
-Ralph Waldo Emerson
Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.