This is also true for the venture capital market. The upward phase of the current cycle began in 2017 with SoftBank’s Vision Fund worth US$100 billion, introducing an environment with a due diligence optional, large rounds of funding and non-venture capital investors with deep pockets who were seen as a quick, and often easy, source of money. What has kept the “party” going so far has been loose monetary policy and cheap capital. Interest rates have now risen globally and valuations in public equity markets have readjusted, especially for loss-making companies that were established with the support of venture capitalists such as Peloton (- 91%), Teladoc (-91%) and Uber (-61%), among others.
Despite the geographic disparities, major venture capital markets in China, India and Southeast Asia also benefited from cheap capital and experienced booming portfolios. Asian venture capital markets are following US trends and a downward phase has already begun.
How should venture capitalists react?
- Sort through the existing portfolio. Do not invest in companies whose business plans are not already fully funded. Today, most venture capitalists hold portfolio companies that need capital only to meet their short-term obligations. With limited capital, fund managers will have to choose which companies they want to support, so it’s best to fund a smaller number of companies that have a chance of surviving.
- Access to capital is both a shield and a sword. The most effective way for portfolio companies to raise funds today is through an in-house funding round. Companies that have a cap table (table of ceilings) with better funded investors have a considerable advantage and should consider assertive operational and tactical measures in order to gain market share at the expense of their competitors. When the market conditions are favorable, the valuation should be exchanged for committed and deep-pocketed core investors.
- Know the numbers. The vision, opportunity, or next big idea is not a substitute for studying and understanding cash conversion cycles and relationships with business finance providers. You won’t be able to sort out if you don’t understand return on investment or how to navigate a financial statement.
- Do not ignore the origin of new investments. Opportunities increase both in size and attractiveness when things are not as good as the current conjuncture. Stick to industries where you have an established network and experience. Think of companies that cater to the proverb “last dollar spent” and consumer goods companies that provide basic necessities.
- Getting back to basics when it comes to business models. Managers are well advised to take a lucid approach to projects and initiatives with negative returns, which is especially relevant for companies with high customer acquisition costs.
- Prepare to rationalize. Be a partner of your CEOs; be there to take responsibility when your CEO fires his former colleagues. This is where you earn your 2% AUM and your 20% profit.
In the current environment, the best partners will bring added value that will not be visible through social media. In recent years, the trickiest portfolio management decisions have involved high-level issues, such as whether to settle for a 2x net outflow for a trade buyer or a potential of 5x or 10x “until infinity”. Today, venture capitalists will have to make tough choices to determine which cash-strapped companies deserve the chance to meet the fund’s announced return target – and even with trusted partners. and long term that will be likely to challenge you.
Written by
Bert KwanHead of Private Equity, Silverhorn
Roger PrinzCIO, Silverhorn
Photo : https://mma.prnewswire.com/media/1866380/Silverhorn_1.jpg
SOURCE Silverhorn
–
