Until recently the prospect of economic downturn was little more than speculation. GDP rose last quarter and employment continues to grow. But looking forward, the outlook is worsening: figures from the International Monetary Fund do not predict a recession, but its UK economic growth forecast of 1.9 per cent for 2008 and 2009 is the lowest since the early ‘90s. In light of such gloom, growth-hungry business owners might wonder what the future holds, and so might investors.
Anticipation of tougher times ahead could spur businesses into seeking investment sooner rather than later. They may feel pressured into securing investment deals before the tide goes out, or anxious to secure finance to weather potentially turbulent times ahead. Credit problems - making it more difficult and costly to borrow - may also lead more businesses towards considering investment finance as a viable option. In the face of a more competitive landscape, businesses might find themselves working much harder to find and negotiate satisfactory investment deals.
Reduced confidence in the wider economic climate does not necessarily equate to less confidence - or less money - from investors. Low-value sources of finance such as friends and family funding may dwindle as individuals shy away from high-risk investments. But managed sources of finance - such as Business Angels and Venture Capital - are less likely to be deterred by economic downturns. Just like any other business they aim to make money, whatever the climate. If anything, an economic downturn could to play to investors’ advantage. They may need to pick and choose more wisely, seeking investments in ‘recession-proof’ markets, or work harder to negotiate better deals. But investors know how to secure good investments in good businesses, so turbulent times may represent less of headache and more of an opportunity to grab a bargain.
At what cost businesses find finance is therefore a crucial question. Just because they can, investors will question business models, critique business plans and more than ever make businesses work harder for investment deals. When seeking investment finance, evaluating current and projected business performance and value are crucial tasks for business owners, even more so during uncertain economic times. Businesses must be sure of their own value - being realistic but confident. It may be easier to settle for less during uneasy and competitive times, but a sense of realism and confidence in current and projected value ensures a strong negotiating point for businesses looking to broker strong deals.
The marketplace a business operates in - and its business model - are two additional factors affecting the perceived value of a company during uncertain economic conditions. Some marketplaces are less susceptible to economic turbulence, such as reductions in consumer spending or rising operating costs. Recession vulnerable business will clearly struggle in times of economic certainty - but businesses operating in ‘recession-proof’ markets could actually become more compelling investments.
Talking about specific markets and business models at a recent Business Link jointly-sponsored event entitled ‘Access to Media Finance’, several investors commented on how a recession could impact investment decisions. Investors reiterated the feeling that valuations might need to be reconsidered, but that ‘more disruptive’ business models are likely to remain strong despite economic fears. The general feeling was that:
“Disruptive businesses are recession proof. Something that’s really going to change the way markets work; the velocity may be a little slower, it may be a little harder to get the cash upfront, but if you’re literally changing the way business is done, it will work in a recession as well as in a big time.”
Alex Hoye, Go-Industry and Seedcamp
So, what could an economic downturn really mean for investors and business owners seeking investment? Investors are likely to seize on the opportunity to challenge company valuations and focus on securing investments in so-called ‘recession-proof’ businesses. They will work a more competitive environment to their advantage, ensuring investment deals are sound and future-proof. As a result, business owners will need to work and fight harder for good investment deals; work harder to justify their value and potential, and fight to ensure that they don’t under-sell themselves because of negative economic conditions.
But remember: investors - whatever the economic climate - are looking for good entrepreneurs with good business models. Even though more disruptive or recession-proof businesses may be more desirable, it does not mean that those falling outside that picture will be left in the cold:
“When the tide goes out, it thins the ranks and really focusses on good entrepreneurs with good business models.”
Alex Hoye, Go-Industry and Seedcamp
Fundamentally, talk of an economic slowdown does nothing more than make this observation more true. Good people running good businesses are going to survive less than favourable economic conditions - and they are going to find the investment they need. The landscape may be more competitive, but that just means business owners will need to fight harder for investment. Confidence (not arrogance) is key: being sure about valuations and performance metrics is vital. Even more so than usual.
The process of getting ‘investment ready’ is more important now than ever. The marketplace for investment finance is still there, but with uncertain economic times ahead, it is likely to become lean and mean - it’s up to you to lay the groundwork that ensures that your business, your proposition, and your potential are so strong that they don’t get left in the cold. The tide may go out, but as one investor put it: that just serves to indicate who remembered to wear their swimmers. In other words, be prepared.
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