Monday, June 27, 2016

Brexit – What’s a MN (or any other) Start-up To Do?

I sit here in Minnesota pondering the effects of Brexit on our start-up community. It’s really a broader question of “What effect do macroeconomic factors have upon start-ups?”

It’s tempting to say the power of a good idea will drive success under any economic condition. My optimistic entrepreneurial side says, “Brexit is too far away to matter”. The little “Dale Downer” on my opposite shoulder says otherwise.

There is an excellent discussion here (see 2nd post down the page by Paul Cohn) on the phases of venture capital investment and the effects macroeconomics play on venture investing during these phases. The effect is NOT zero.

Can anyone spot the '08/'09 recession in venture offering valuations?

For an early stage start-up, the most current need, behind customers, is often the availability of fresh capital. You may be able to find investors with a long-term view and belief that the economic bad news is temporary and therefore of no real impact to a growth venture.  The most aggressive investors may even see a “buy low” opportunity.  That assumes however they have “dry powder”/cash on hand to invest. This is where the real problems arise as markets get jittery. At today’s lowered valuations, who wants to (or can) trade out another asset to buy a piece of your business?

The punchline is…things just got a bit harder for start-ups everywhere (especially in the UK). Smart money’s been spooked a bit by Brexit. There are new unknowns for investors. Risk is not in vogue today and long term investors who can look beyond the short term turmoil in the markets may not be, or have the potential to be, as liquid as they were pre-Brexit.

If you’re not getting the business results or market reaction you expected when you first launched your venture, and your cash stash is getting thin, it might be time to:
  1. Pour extra thought into a serious “pivot” (see, or
  2. Think about how you can lengthen your runway by managing your costs, or
  3. Find some new activity that can shore up your cash flow in the short term   

Knocking “Dale Downer” off my shoulder, I believe Brexit’s effects on most start-ups will be minor. For those who are actively running a start-up today, you’re likely to do nothing different today then you did last Thursday. Above all else, remember the fundamentals of selling a startup’s promise are the “honey and lemon” for this “cold”:

They include:
  • Having a strong value proposition for clearly identified customers and knowing that they are still in a buying mood
  •  Targeting a sector with significant unmet needs. Sectors that benefit from the current low interest rate environment are an added plus. Areas currently getting press as good bets for investors: Technology, Consumer Discretionary and Healthcare. For some more specific technologies where sentiment is positive, this list is a year old, but still has some appealing themes.
  • Execute, execute, execute. Businesses that deliver on what they say in a turbulent environment are more likely to be seen by investors as being insulated from the market’s effects.