Investing in challenging times

Avid Legal’s Bruno Bordignon shares some key considerations:

Start-up world is often counter-cyclical when it comes to the financial markets – let’s not forget many of the current cohort of successful starts-up were born out of the 2009 GFC.

So what makes them more attractive in challenging environments? Here are my thoughts:

(1) pain has a price – most start-ups evolve out of some pain point that they have found an innovative way to solve, however trying to get market traction and people valuing that “pain” in good market conditions is difficult. We see many great start-ups with killer solutions, but when faced with selling that solution are hit by organisations who would rather status quo (even if it costs more!) than solving their pain. Times like these force people to rethink the status quo.

(2) agility is priceless and even better creates time – the fact that start-ups have never been comfortable and always cash-poor means that they keep iterating on themselves and are agile in their approach to knowing their business and understanding their market. This gives them the opportunity to be smart with cash, and run small iterations (or tests) on the market in an efficient manner – being able to rapidly iterate in this way extends their runway and time – where larger businesses and competitors sometimes don’t have the luxury (with their locked in cost structures).

(3) control over destiny – often investors will revert back to investing more in start-ups in times of unstable financial markets as they feel that they have more control over their investment. Now we aren’t talking about veto rights at a board level, but knowing that they are involved in a start-up that they can directly impact and influence through their thinking – and being part trying of a team executing on a vision. When combined together with the right set of people can be immensely powerful. There are plenty of investors out there right now looking to have a direct impact on start-ups lives – in more halcyon times, it is often difficult to get the full attention of investors, so now is the time for start-ups to truly tap into smart money.

While all of the above represents a significant opportunity to start-ups, challenges still remain. The key ones from my perspective are:

(1) team attrition – behind every great start-up there is a great team, and retaining that team will be critical. In recent discussions with Phil McCaw he was already cognisant of the “flight to safety” reaction experienced by start-up teams where people are tempted to go back to a perceived safer corporate job. Start-ups will need to work on ways on keeping their team tight and revisit how much they have allocated in ESOP as part of looking at ways to retain that talent.

(2) being heard – with all of the noise in the market around COVID-19, most corporates tend to be focussed on the immediate problem and not some of the solutions waiting to emerge. Getting to get to the right people within organisations to sell has always been difficult, and now if you manage that, getting that persons attention will be the next challenge. Perhaps the sometimes unconventional sales approach of start-ups might just win out here!

(3) telling the story – with so much disruption in markets, it can also sometimes be difficult for start-ups to articulate their proposition – too many opportunities can be as much as a curse as too few. Start-ups now more than ever will need laser focus on their story, purpose and proposition – this is not just limited to customers, but also to investors. Start-ups will need to be using every piece of data on their business (and their market) and demonstrate the learnings from their iterations to show how they will emerge as a lead player in their market.

While cash is always king, we have seen from previous experience in the 2009 GFC that investment runs counter-cyclical and there will be investors looking for a home for their cash. Expect to see a return to syndication, and people sharing a lot more for the collective good – this can’t be a bad thing, right? So let us all practice more random acts of kindness and work together to seize the opportunities ahead!

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