What will happen if we fail to agree a deal by the ever-extending Brexit deadline? Even if the UK gets a ‘good’ Brexit, will we hurtle into recession? Will history repeat itself and what will this mean for scale-up businesses and the investment community?
While our instincts might tell us that now is a good time to sew up our wallets with an industrial grade thread, looking back at the great slump of 2008 shows us that our instincts might be very wrong.
2008: My hindsight is 20/20
Following the 2007 Credit Crunch, the UK was in full recession by early 2008. The chances of raising equity finance in that environment seemed slim to none. We’d been helping businesses raise finance since 2004 and I remember sitting with an entrepreneur who needed a cash injection, advising him to wait. Our investors had gone quiet; the market was quiet. Two months later, I ate my words. After the initial shock, angel investors recovered and while investment was harder and slower to come by, it was still there.
Recession winners and losers
From 2008 to 2011, 314,000 start-ups launched in the UK. A 2014 survey of 3,500 plus business owners across Europe showed that businesses founded during the recession were more profitable than those launched in more stable times. ‘The dogged entrepreneurs behind these businesses’, commented Bronek Masojada, CEO of Hiscox, ‘are more likely to say that the economic environment has made them more likely to succeed. This is true grit’.
2018: No sign of a slow-down for start-ups
Despite worries that Brexit would immediately herald a new economic downturn and weaken private investment into UK start-ups, the data show otherwise.
Beyond the numbers, tech advances in the last decade mean London has become a leading tech hub. Since 2016 the city alone has attracted over £5bn in venture capital funding, more than France, Germany and Sweden combined.
While our instincts may say now is not the right time to raise funds, the available evidence says the opposite. The positive news comes with some caveats. I spoke to industry experts and several of our angel investors to get their advice on approaching fundraising in times of economic uncertainty. The top tips are:
- Be patient
Seeking equity investment is a lengthy process. Technology has enabled scaleups to have far more control over their fundraising activities; one way is to keep their funding rounds open for as long as necessary. With a climate of greater caution, this is the best way to find the optimum investor ‘fit’. There are other benefits: a longer round allows a company to capitalise on unforeseen successes, such a new contract or some attractive ‘buzz’.
- Seek investment from a variety of sources
With all investors being more cautious it is important to woo investment from a variety of sources. According to Alec Lynch, CEO, DesignCrowd.Com, ‘when the economy falters, angel investors in particular look to move their money out of the stock market and may be willing to fund you if your prospects are promising’.
To be effective, entrepreneurs must have all their documentation ready and adapted for each audience. What is important to your business network in making an investment decision may not be the same thing for angel investors. Having a fundraising platform that allows you to restrict document views on an individual basis is really useful for getting the right message to the right potential investors.
- Make investor relations a focus for the business
It is crucial that businesses communicate honestly and regularly with their investors. Whether it’s through an investor relations portal on a digital platform or having a dedicated staff member to keep them happy, it’s a vital factor in any start-up’s or scale-up’s road to success.
Provide your shareholders with regular updates on business performance: they can celebrate the good and guide you through any trouble spots. Importantly, happy investors make repeat investors.
- Have a strong international strategy
Having a presence in multiple markets allows you to spread risk. Should sales slump domestically, sales in foreign markets unaffected by Brexit can bolster revenues. Clearly international expansion is a long-term project and often requires significant capital, so those businesses who currently have no international operations may want to form strategic partnerships in the first instance.
Investment from abroad is the second point to consider when looking at internationalisation. With more caution potentially coming from local investors, international represents a large and important opportunity. China is the best Brexit-proof example.
- Make sure your valuation is rock solid
Downturns affect the public stock markets first and the private follows. Therefore, it is crucial to have a realistic – conservative even – valuation.
Todd Hicks, writing for Forbes says. ‘I have seen investors walk away because the signalled expectations were too far from the price and terms they were prepared to offer. On the other hand, a company that signals confidence and an expectation that is slightly aggressive – but basically realistic – can lead a new investor to make a better first offer. It’s vital to get at least one offer and very important to get more than one. This is the strongest reason to keep expectations reasonable at the start’.
Get ready to fundraise
There’s no real evidence that deal flow or angel appetite is reducing. ‘The hope is that Brexit creates an opportunity for SMEs, as they can be nimble and manoeuvre quicker than bigger companies which may give them an advantage’, says Mark Brownridge, DG of the EIS Association. ‘One thing is for sure, we are going to need them more than ever to provide the UK economy with the growth and positive effect that we are likely to miss out on due to the Brexit process’.
Despite all the uncertainty the data suggest that the fundraising landscape is healthy. With the right digital or other tools, now is a good time for businesses to scale, regardless of a good, bad, soft, hard or any Brexit scenario.